Mondelez International is banking on its advertising, consumer and route-to-market investments paying off to revitalise volumes.
The snacks giant posted higher third-quarter sales and profits this week but there were some questions about its volume performance.
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On a reported basis, Mondelez's sales fell 17.8% to US$6.85bn in the three months to 30 September. However, the drop included a 13.6% hit from negative currency movements and the contribution last year from Mondelez's coffee business, which it has since put into a venture.
Organic sales rose 3.7% – but on the back of higher pricing, which was up 7.4%. Mondelez reported a negative 3.7% impact from volume and mix. The company cited two factors behind the fall in volumes: the response to moves to increase prices in Brazil and Russia as the country's currencies depreciated; and what chairman and CEO Irene Rosenfeld called "strategic decisions to improve revenue mix".
In a note to clients, Athlos Research analyst Jonathan Feeney pointed to two areas in which Mondelez saw sales trends fall back in the third quarter. Sales from the company's power brands (a range that includes Cadbury and Oreo) increased 5.1% in the quarter but that compared to a 6.6% rise in the second quarter. Notably, overall sales in Mondelez's developed markets dipped 0.5% in the third quarter, versus a 0.9% increase three months earlier.
Mondelez's revenues in Europe fell 1.6%, which Rosenfeld told analysts was due to moves to improve the company's revenue mix, including discontinuing low-margin chocolate lines. And Rosenfeld also pointed to the hot weather in Europe this summer.
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By GlobalData"Just for the luck of the draw, we had a big heat wave this summer in continental Europe, and that did have an impact on our chocolate business, so that as we were starting to see those gaps close and make the necessary investments, the impact of those investments just took a little bit longer than we anticipated. Net-net, we would expect that we should see continued revenue growth and share improvement as we make the investments focused in the key areas I've described and as we exit the year."
Feeney said only 30% of Mondelez's chocolate business was gaining or holding share, which was particularly affecting Mondelez's European operations, which account for 40% of the Milka maker's chocolate sales.
Mondelez did see revenue improve in North America, where sales were "up modestly" but the Trident maker continued to see "softness" in gum, Rosenfeld noted. Feeney said the comments on gum were surprising, given what he described as "accelerating category innovation".
In the face of some questions on the call, the Mondelez management team was insistent investments in what it calls "A&C" were paying dividends. During the period, Mondelez stepped up A&C spend by 50 basis points – more than 8.5% of revenue.
Reflecting on Mondelez's chocolate division in Europe, Rosenfeld said: "Chocolate market share … increased, from about 25% growing or holding in the first half to approximately 30% through September. While share performance remains below what we would like, much of this is due to our revenue mix improvements in Europe, including discontinuing low-margin chocolate product lines.
"The aggregate Q3 results mask some of the impact that our spending is having. Take chocolate in Europe, for example. We chose to delay some of that spending until September, rather than into the summer, because of the fact that we had an unusually hot summer. And therefore it's not a surprise that it is just starting to have an impact now. So I think if you start to look at our shares over the last four-week period, we're seeing a very strong response as the categories in a number of these markets are now growing.
"Going forward, we expect share performance to continue to improve, as price gaps narrow and as our A&C investments pay off."
CFO Brian Gladden added: "Based on recent results, our investments are beginning to pay off. We're seeing improvements in our growth and share performance in chocolate in both Europe and India, and in addition our biscuits revenue in North America has begun to accelerate behind our increased marketing support and innovation."
Rosenfeld signalled more investment would follow. "We're going to make steady investments in A&C, as we see the good returns coming from those investments. We're up significantly versus prior year, and we will be for the full year. But we have said that our target for the long term is approximately 10% of revenue, and slowly but surely we're making our way to those levels. But the good news is, we are starting to already see the impact of the investments as a means of backstopping pricing and continuing to build our brand equity. So it's up quite significantly. It will continue to grow, as we have the affordability and as we see strong returns."
She added: "We do expect vol/mix to improve sequentially in the second half."
