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August 8, 2013

On the money: Mondelez bullish as emerging economies slow

Mondelez International has insisted its investment plans - and the "strength" of its brands - will protect the snacks giant from signs of a slowdown in key emerging markets.

By Dean Best

Mondelez International has insisted its investment plans – and the “strength” of its brands – will protect the snacks giant from signs of a slowdown in key emerging markets.

The Cadbury and Oreo owner, formed in part on the premise it could exploit opportunities in emerging markets, saw sales growth there accelerate in the second quarter. The company reported “double-digit gains” in the BRIC markets.

The growth in emerging markets offset lower revenues in North America and Europe. However, speaking on a conference call yesterday to discuss the results, Mondelez said categories in some markets had slowed. Biscuit sales in China, for example, grew 6% in the first half of the year, compared to 18% in the first six months of 2012.

There have been signs growth in the BRIC economies is cooling. GDP in China slowed in the second quarter. Economists in India have cut their GDP forecasts on the back of weaker growth in China. Brazil’s central bank has cut its forecast for growth in the country this year, while Russia’s second-quarter GDP was slower than expected.

Analysts questioned Mondelez about its perspective on the outlook for emerging markets and how it expects to perform during the rest of the year.

“Just for perspective if you think about the BRIC markets for example, GDP has gone down from about 5% – year-to-date about 5% – it was about 6% the same time a year ago. Yet our revenue within those markets is up 13%. So there is not a direct correlation or should there be,” Mondelez chairman and CEO Irene Rosenfeld said. 

“There’s no question we have to work harder in the phase of some of these category slowdowns, but the strength of our brand the investments that we’re putting behind brand equity as well as route to market is what will carry us.”

She added: “[Emerging market categories] are still growing at three to four times the rate that we see in the developed markets. We’re still seeing the emerging markets for the most part are growing quite a bit faster than any of the developed markets.”

Mondelez yesterday reported a fall in half-year profits in part due to investing in sales and distribution in emerging markets. The company is investing in sales, marketing and advertising in the markets, as well as upping production capacity. Yesterday, Mondelez separately announced plans to build another chocolate plant in India, where it said it has had to battle “capacity constraints” in a market where demand for chocolate is growing at 20%. In June, Mondelez said it would build a biscuit plant, claimed to be the world’s biggest, in Mexico.

CFO David Brearton told analysts such investment is set to hit margins in 2013 but will benefit “both the top and bottom lines” next year.

“Rather than a 20 to 30 basis point impact we now expect these investments to more than double and temper margins to 50 to 70 points this year. That creates a bigger margin headwind in 2013, but that spending is now inner base, which means a much smaller incremental impact in 2014,” Brearton said.

“These programmes are all expected to generate returns well in excess of our cost to capital and deliver sustainable profitable growth. In China for example, we’re improving sales coverage in traditional trade outlets in tier one and tier two markets, as well as continuing to develop routes to market in tier three and four cities. We’re also increasing A&C to create brand awareness in these new outlets.

“In India we are expanding distribution in the south as well as stepping up A&C support. And in Russia we’re investing in sales capabilities that will improve our availability.”

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