Mondelez International has said China remains the “single, most important opportunity” for the group as it looks to ramp up expansion in emerging markets.
The global snacks and confectionery giant said today (29 May) it sees a “terrific opportunity” to build on its growing business in China.
The Cadbury and Oreo owner today outlined plans to increase investment in emerging markets. Chairman and CEO Irene Rosenfeld said “the race is on” in faster growing economies like China and insisted competition in such markets will “intensify”.
Rosenfeld told the Citi 2013 Global Consumer Conference in New York that Mondelez would use improved margins in mature markets like Europe and North America to fund its expansion in developing economies.
To boost margins, Mondelez is to close more facilities in Europe and shake up its supply chain in North America. It will also look to grow its “power brands” in these regions to improve the profitability of its local operations. The funds, Rosenfeld indicated, would be used to drive growth in markets like China.
Rosenfeld identified three opportunities in China. One would be to “keep ploughing money” into Oreo. Biscuits, she said, was the “essence” of Mondelez’s business in the country.
She added: “The second opportunity is geographic expansion. Most of our business is in tier one and two cities so we are taking that into tier three and four cities as we expand distribution. The third opportunity is white space. China is the second largest gum market so we see the opportunity over time to continue to expand some of our additional product categories into that market.”
Rosenfeld told the conference there were “significant” opportunities to boost margins in North America and Europe to help pay for its plans in emerging markets.
Mondelez is hoping the moves will expand group base operating income margin by 60-90 basis points annually over the next three years. A portion of these savings will be used to fund growth in emerging markets and for ongoing restructuring.
The snack firm said it plans to increase its investment in emerging markets by around US$100m this year, $200m in 2014 and up to $300m in 2015.
The investment, Rosenfeld said, will fall into “three buckets”. The company plans to boost marketing spend, add to its sales networks and capitalise on the “white space” opportunities, entering new markets with new categories.
“We are taking a very disciplined approach to these investments. We are not starting from scratch, we already have strong scale,” she said.
Asked whether Mondelez was looking at any potential M&A opportunities within the industry, Rosenfeld said the company was “comfortable” with the portfolio it has at the present time.
“We have strong share positions in each category we have so I don’t see the need for any significantly incremental M&A to reach our target. Some tuck-ins would provide access to route-to-market but other than reinvesting in the business these would be the way we would use our cash.”
In North America, the company is targeting a 500-basis-point improvement in operating income margin. It will do this through “reinventing” its supply chain network, introducing new production lines and repatriating production from co-manufacturers.
“We have a number of opportunities to reduce supply chain costs. Our North America network is showing its age due to under-investment … and our overheads are too high. Over the next two years we expect to reduce or eliminate these costs by capturing additional synergies between North America and Canada,” Rosenfeld told analysts.
She added: “We are looking at opportunities to optimise our manufacturing network and are closing a bakery in Toronto later this year. This combination and a reinvention of the North America supply chain will drive the majority of our 500 basis point margin expansion over the next five years.”
In Europe, Rosenfeld said Mondelez had worked on “a lot of the lower hanging fruit” to improve margins in Europe but had identified more ways to boost margins. Targeting an improvement of 250 basis points in operating income margin, the company is looking to streamline its supply chain and reduce overheads by integrating its operations in Central European countries into its “centralised category-led model”.
It is also in discussions to close more facilities in Europe in addition to previously announced closures in Austria and Spain.
While the Mondelez cheif executive was eager to highlight the progress made on margin expansion, a number of pundits have voiced concerns over the pace of improved profitability.
Indeed, in an investor note Barclays Capital analyst Andrew Lazar warned that the group’s efforts to boost margins could take some time to bear fruit: “These savings will likely take time to play out, as most of the overhead reductions have been tapped at this point, and network optimisation moves (i.e. plant closures and such) do take more time, particularly in the European theatre.”
He suggested that, with EBIT margins under pressure in Q2 and likely to “fall flat” for the full year, Mondelez will be under pressure to hit its sales guidance of 5-7% growth if it is to meet EPS expectations, unless further tax favourability comes into play.