One analyst said Mondelezs results were “below expectations”

One analyst said Mondelez's results were “below expectations”

Mondelez International has said it remains optimistic about the future of China and expects progressively improving sales from the region next year. While GDP growth in the country is slowing, analysts confirm the prospects for the savoury and sweet snacks market in China look relatively rosy. Michelle Russell reports.

The Cadbury and Oreo owner Mondelez International this week lowered its full-year sales guidance as it booked lower-than-expected revenues in the third quarter.

A "weak" biscuit performance in China, continued headwinds from coffee pricing and slower global category growth led to revenue growth below its expectations. As a result, Mondelez reduced its organic revenue growth outlook to around 4% for the full year.

Speaking on the firm's earnings call this week, CEO Irene Rosenfeld admitted Mondelez was, like many of its peers, facing some headwinds in China.

"In a global enterprise, there will certainly be challenges from time-to-time. But our job and our promise to shareholders, is to manage those challenges and deliver our commitments. We've addressed each of these issues. So as we look ahead, we really in optimistic about the power and the potential of our unique assets to deliver significant value to our shareholders."

There have been signs growth in the BRIC economies is cooling and economists in India recently cut their GDP forecasts on the back of weaker growth in China. Along with Mondelez, firms like Unilever, PepsiCo and Danone have all felt the effects in their developing regions.

Indeed, China's GDP growth has slowed from north of 9% in 2011 to around 7.5% this year.

Rosenfeld says the slowdown has affected consumption across most consumer goods, and for Mondelez's biscuit category, growth has dropped from 18% in 2012 to 3% in the first quarter.

"As we observed the short slowdown, we invested to stimulate category growth," Rosenfeld said. "Our incremental investments did not stimulate sustainable category growth. After an initial increase in Q2, the biscuit category was up only 2% in Q3. Second, as we shifted spending to our power brands, our second tier brands lost more share than expected. And our trade stock targets were appropriate for double-digit growth and became excessive when the categories slowed."

Euromonitor senior company analyst Ildiko Szalai acknowledges the "disappointment" for Mondelez in the third quarter.

"Mondelez is feeling its results are slow but I don't think this is something particularly to do with biscuits in China. Q3 is a weaker quarter for most companies and this is probably going to pull the ambitions for full-year results."

And of course it did. The Cadbury and Oreo owner lowered its full-year sales guidance.

But Szalai suggests there has been a noticeable slowdown in emerging market growth in the third quarter for a number of firms. However, for Mondelez, she says it is about more than just the slowdown in growth.

"With all food categories, when they first enter a market there is a novelty with international brands and they are highly priced compared to local snacks. Then they try to become staple as spending power grows. But where [consumers] traded from local and traditional snacks to biscuits, now they are doing it from biscuits to chocolate confectionery."

She suggests that the trading up to confectionery from biscuits has ultimately had an effect on the latter category. But she also believes currency has likely had an impact.

"Many companies are saying the [emerging] economics are slowing down, that there is a deceleration in growth and it is also down to currency exchange. Not just with Chinese currency, other SE Asian currencies too. As they strengthen against the dollar, these companies that report in dollars and euros, they will have to sell more to report the same amount in their reporting currency. The Chinese currency has strengthened a lot … so this may be affecting [Mondelez's] performance, in terms of revenue at least."

Delving deeper into the reasons for the weak China biscuit performance, Rosenfeld told analysts on the call that the firm's incremental investments did not stimulate sustainable category growth.

"After an initial increase in Q2, the biscuit category was up only 2% in Q3. Second, as we shifted spending to our power brands, our second tier brands lost more share than expected. And our trade stock targets were appropriate for double-digit growth and became excessive when the categories slowed."

Rosenfeld, however, says Mondelez has taken a number of actions to address the situation, such as "reducing and closely monitoring" trade stocks while shoring up the group's analytical capabilities to get "more and better data in real time".

"This will allow our newly appointed leadership to quickly address changes in the marketplace," Rosenfeld said.

And the marketplace does appear to offer good prospects for growth. According to Euromonitor, a constant value CAGR of 10% is predicted for sweet and savoury snacks by 2017. Along with the growing number of healthconscious consumers in China, products that offer a health and wellness positioning are expected to experience the most robust development, the analysts noted.

But while Mondelez is confident of a return to growth, it is not expecting this in the short-term.

"Looking ahead with an extensive multi-geared network of nearly 1,000 distributors, it will take some time to recalibrate trading inventories and regain biscuit momentum. So we expect biscuit revenue in China to remain soft in Q4 while progressively improving next year," Rosenfeld said. 

The group will also have to be aware of increasing competition from the likes of Want Want Group, which retained its lead in China’s sweet and savoury snacks category throughout 2012 with a 13% value share. This was help by the company's consistent investment in optimising its manufacturing system and business network expansion.

Hefei Huatai Food Co also witnessed strong share gains in 2012, rising from 6% in 2011 to 7%, thanks to its strong positioning in other sweet and savoury snacks such as seeds.

And then, of course, international players like PepsiCo will continue to pose a threat. PepsiCo China has launched a range of new sweet and savoury snacks products in the last two years, which have helped it to consolidate its competitiveness and strengthen its position.

Nonetheless, Szalai believes the portfolio of Mondelez and the innovation behind the firm is going to "cause a challenge for every other biscuit player". 

Looking at the firm's global performance, Janney analyst Jonathan Feeney had a less optimistic outlook for the group following its results. He noted Mondelez's third-quarter figures were "below expectations" at the sales, gross profit, and EBIT lines. He added that they will likely "remain a headwind at least through the end of the year".

Rosenfeld is, however, upbeat about the group's prospects, particularly, in China. "Despite these near-term headwinds, we remain optimistic about the future of China. From 2009 to 2012 organic revenue grew 25% annually. The economy and the biscuit category will recover and our gum business continues to grow nicely in a very robust category."