China is central to Mondelez International’s growth strategy but it has not always been an easy ride for the snacks giant since its formation in October 2012. However, the US company is confident about its prospects in the country and signalled its optimism with the launch of European chocolate brand Milka in August. Dean Best spoke to Stephen Maher, the president of Mondelez’s business in China, to find out more.
It is almost four years since Mondelez International, the US business behind brands including Cadbury chocolate, Oreo biscuits and Trident gum, was formed, with investors encouraged to back the newly-formed snacks giant, in part due to what the company and its management saw as its strength in emerging markets.
Since those days of heady anticipation in the autumn of 2012, Mondelez, like most other consumer goods groups trying to build businesses in the emerging markets, has had to navigate some choppy trading conditions, not least in China, where the rapid economic growth the country enjoyed in the 1990s and 2000s has eased during this decade.
Mondelez’s performance in the emerging markets might not have been as stellar as some in the investment community might have hoped but the company continues to invest and, even while continuing to face challenges in countries like China, is upbeat about its longer-term prospects.
The company’s most high-profile initiative in recent months has been its decision to make a serious push into China’s chocolate market. Mondelez has launched European chocolate brand Milka into the Chinese market, a move that marks the group’s first significant foray into a sector where consumption levels lag more mature markets, where sales are under pressure and where others have come a little unstuck in recent quarters.
In China, Mondelez imports Cadbury products from the UK, Toblerone from Switzerland and Côte d’Or from Belgium through online retailers like Alibaba, efforts that, according to Euromonitor data published in July, has given the company 3% of the country’s chocolate market. However, the Milka now on sale in China is locally-produced and is Mondelez’s latest attempt to conquer so-called “white space” opportunities for the business around the world.
Stephen Maher, the president of Mondelez’s business in China, says the launch, which went live in August, was three years in the making, with the company working to develop a Milka recipe more tailored to the local palate and investing in distribution.
Speaking to just-food, Maher is reluctant to give too much away about the changes Mondelez made to the recipe for Milka but indicates one notable alteration. “Chinese consumers are not as prone to sweetness as, say, the Russians or the Europeans and the Americans are. They don’t like too sweet a product,” Maher says, noting Mondelez is using less sugar in the Chinese version of Milka.
However, other elements of Milka’s make-up have meant Mondelez has had to work hard in recent months on getting distribution in place to try to ensure curious Chinese consumers could buy the chocolate as it was intended.
“Milka is the finest mass-produced chocolate in the world, certainly in the Mondelez world,” Maher claims, “and it’s a very smooth and creamy flavour that literally melts in your mouth. That’s why the cold chain is so important because if you leave this out in the sun, it will melt.”
With the average temperature in a city like Shanghai around 35 °C (95 °F), Mondelez worked with its third-party distributors and retailers (both bricks-and-mortar and online) to get the supply chain in place, Maher says. “We needed to make sure that the third-party shipping company that picks up our chocolate has the refrigeration in the truck to keep it cool while moving from our warehouse to, say, a Walmart distribution centre. At a Walmart distribution center, their distribution, trucks and their stores have cold chain so that’s fairly seamless. However, as you move down and you get to local retailers, we have to help them start to provide cold chain within their warehousing. We have to tell them to put in a special cooling room, which has air conditioning so that they can keep the products in the right form and that the trucks that deliver the products to their stores have the refrigeration. It’s a real major transformation for us. It’s been an incredible journey for us in these past six months.”
In some ways, however, the journey starts now. According to Euromonitor, chocolate sales in China fell 3% last year and researchers at the UK-based analysis firm suggest sales could decline again in 2016. Mars, Euromonitor says, leads China’s chocolate market, with its market share standing at a commanding 40%, while Mondelez will also face competition from Ferrero, which has built a significant business in the country.
China’s chocolate market can be difficult to crack, as shown by Hershey’s recent travails in the country. Hershey’s 2013 investment in local business Shanghai Golden Monkey was designed to boost the company’s operations in the country but the performance of the asset has been below expectations. Last year, Hershey booked an impairment charge on Shanghai Golden Monkey, while having to downgrade its sales forecasts for the business part-way through the year.
In the first quarter of 2016, Hershey’s sales in China tumbled by around 35%. Hershey insisted it had expected its sales in China to fall during the period as the company lapped the slowdown that occurred after the 2015 Chinese New Year sell-in. When Hershey announced its results for the first quarter of 2016 in April, it revealed China’s chocolate category had seen sales fall 10% year-on-year, a faster rate than it had expected. That said, in July, when Hershey published its second-quarter numbers, it said the category had “sequentially improved” from the first three months of 2016. “The category was fractionally higher in June and we are cautiously optimistic that it gets better from here,” Hershey chairman and CEO J.P. Bilbrey told investors.
Whether these apparent green shoots in what is seasonally the lowest quarter for chocolate consumption in China turn into something longer lasting remains to be seen but it could be argued these are not fertile conditions in which to launch a major offensive. However, Maher is confident Mondelez can learn from its competitors, that Milka can take hold and even contribute to growth in the category.
“We are aggressively going after the segments the Chinese consumer really buys chocolate for. Over the past three years, we’ve done a lot of shopper and consumer insights. As we mapped those purchases, we realised there’s one big segment of the category that is completely underdeveloped and that’s the one that we’re going after, which is around sharing,” Maher says. “I also think the companies have not invested in driving this category to be more normal. If I go to the UK, you can buy chocolate almost anywhere. In China, it’s limited footprint so we believe, given our scale on biscuits, gum and the amount of outlets we reach – which is upwards of a million – that we have the credentials and the cost structure to be able to expand this category beyond where it’s being sold today, to make it more normal and to make it more available. In the stores chocolate is in, our studies are that less than 5% of consumers that walk into a hypermarket actually walk down the chocolate aisle. We’re doing activations in stores to actually draw them into the aisle.”
While Mondelez’s in-store merchandising in the launch period for Milka involves sampling (and the use of the purple cow that is the brand’s symbol), the company is not going down the route of offering deals on a new product. That, Maher says, is central to the way Mondelez plans to position Milka against its competitors in the months ahead.
“There are no price discounts to launch this product. We won’t do price discounting because then, all of a sudden, we send a signal to the Chinese consumer that maybe we’re not as good as we charge for,” Maher says. “We believe the category needs premium pricing. Volume is growing faster than pricing and the retailers need pricing.
“We will be premium priced to local competition, but there’s not a lot of local competition. You can imagine in a country where there’s less than 100 grams [eaten] per consumer, there’s not a big chocolate industry here. We’ll be premium-priced versus Hershey, Dove – versus the other major international chocolate companies. Ferrero, because they’re a very gifting range, they’ll be premium to us because it’s a different stratosphere that we’re competing in.”
Unsurprisingly in China – and for a company that has put e-commerce at the centre of its growth plans internationally, not just in that market – a plank of Mondelez’s strategy on Milka involves the online channel. Maher says “around 20 to 25%, depending on which research paper you read” of chocolate sold in China is sold online, adding: “We knew if we weren’t online, we would really struggle in reaching all the chocolate consumers.”
Mondelez’s work on distribution has also involved online players like Alibaba. “With the Milka launch, we’ve been able to work with them to get their cold chain ready to get to the consumer which is something they’ve really had to expand with our launch,” Maher says.
And the Mondelez executive suggests selling online in China can make the company’s marketing efforts more effective compared to traditional media. “In China, to register with an Alibaba, you have to use an ID card and they know exactly your age, your sex, whether you’re married, whether you’ve got children. They can see from the profiling so unlike when you do TV advertising, where you’re hitting a mass group, with Alibaba and Jingdong, with the joint business plan that we have with them, we’re able to actually target the exact target consumer – which obviously makes it far more efficient in our spending.”
Click here for part two of the interview with Stephen Maher, in which he discusses competition in China, Mondelez’s ambitions in the country’s e-commerce channel and the growing interest among consumers for healthier products.