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Sunday 17 February 2019

Worth taking a bite out of growth-hungry Toblerone owner Mondelez


A worker performs quality control checks on Oreo biscuits on a factory production line Photo: Bloomberg
A worker performs quality control checks on Oreo biscuits on a factory production line Photo: Bloomberg

Aidan Donnelly

If you wanted to create a global biscuit and confectionery business, chances are you wouldn't start with a cigarette company, but strange as it may sound, the roots of Mondelez - the owner of brands such as Oreo, Chips Ahoy, Toblerone, Milka, and Cadbury - are exactly that.

In 2000, the US company Philip Morris - maker of, amongst other labels, Marlborough cigarettes - acquired the food company Nabisco and merged it with Philip Morris's own Kraft Food business. Seven years later, the management of Philip Morris decided to separate out all its food operations into a standalone Kraft Foods.

The newly independent food company wasted little time before it too hit the acquisition trail when in 2009, it paid more than 'a glass and a half' for the British chocolatier Cadbury, in a hostile bid that valued the company at £11.5bn. Kraft Foods split the company in two in 2011 - with Kraft Food Group focusing on the grocery side of the business, and Mondelez specialising in snacks and confectionery.

Since 2016, the management of Mondelez has focused on driving organic growth in the business. In addition to its strong geographic reach, Mondelez is a highly focused company with large exposures to high-growth global biscuits and confections - which represent more than 85pc of total company sales. The firm is a leading global producer of biscuits and candy in terms of dollar share, and is the second largest chocolate and gum producer.

Over time, consumption of biscuits and confections are likely to benefit from the rapid growth of the middle class in the developing markets, as increasing income levels are a key driver of the impulse-oriented snacking categories such as biscuits and confections.

While growth of its markets is a positive for the company, ultimately its key attribute is the quality of its brands. Mondelez owns several brands in its portfolio which generate more than $1bn dollars in annual sales including Oreo, Nabisco, LU biscuits, Milka, Cadbury, and Trident gum. Moreover, the firm has several other large brands with more than $500m in annual sales.

Having a global brand in a developing economy is crucial and nowhere is this more the case than in China. The company has been operating there for several years but only early last year did it roll out its chocolate offering. Given the fact that food safety is such an issue in China, Mondelez opted to use its Milka brand, playing up the idea of the purity of the Alpine milk contained in the product.

Tastes vary from region to region, so while the packaging may look like the global brand, changes are made in the formulation of their biscuit and chocolate products in order to suit local palates. Management are also very conscious of the health and wellbeing trend and address it in terms of smaller-sized bars or having lower sugar content or alternative sweeteners in their biscuits and confectionery.

The company recently appointed a new chief executive officer with a long career history in the consumer products industry and he will likely bring a new broom with him to rationalise the portfolio of brands the company has. The aim is to focus on what it calls its power brands and with this in mind, the new CEO has discussed a review of under-performing assets, including its $2bn chewing gum business (Trident, Dentyne, Chiclets). Selling this business would improve Mondelez's organic growth.


Aidan Donnelly is head of equities in Davy Private Clients. See disclosures


Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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