Business World

Tuesday 21 November 2017

Share watch: Change is key to brand giant's long-term growth

'Click to enlarge'
'Click to enlarge'

John Lynch

I have no doubt there will be a hundred MBA theses written over the next few years to explain the derivation of the name Mondelez International. It is a product of the post-recession scramble for consolidation when the biggest brands in the world were being housed under anonymous-sounding holding company names.

Mondelez got a burst of publicity in Ireland recently when involved in a bust-up with the workers in Cadburys. Up to then, only accountants dealing with the great snack food brands and students of the 'sugar-rush' could reasonably be expected to be familiar with this newest and biggest feature on the sweet counter.

And big it most surely is. In chocolate alone it includes many of the most familiar brands like Cadburys, Frys, Toblerone, Milka, and Terry's. Most of the snacky biscuit things that people like to eat - including Oreos, Tucs, and Ritz, Belvita and Peek Freans - are now listed in the vast Mondelez portfolio of goodies.

Its stats reflect this global scale. It has sales in excess of $27bn (€24bn), employs over 100,000, sells in 165 countries with manufacturing facilities in 60 countries. It has 58 brands, each generating revenues of more than $100m, and nine mega brands with sales of $1bn each.

To service this operation, the company has 260 distribution centres and depots worldwide, of which 90 are in the USA and 75 in Europe. The reason for the creation of Mondelez (which before its magical 2012 name-change and its merger with Cadburys was best known as Kraft) was to keep pace with Mars and Nestle.

At present, no single customer accounts for more than 10pc of company sales; its top 10 customers account for almost one quarter of its sales. Of some concern is the continued consolidation of supermarkets and distributors in its larger markets.

Should such consolidation continue, the risk for Mondelez is the ability for these larger customers to resist price increases, delist or reduce shelf-space for its products, or take longer payment terms. As a result, company strategy is to develop in emerging markets and to increase its e-commerce sales ten-fold to $1bn in the next four years. It has identified China, Brazil, Mexico, India and Russia as prime targets. Currently, sales in China are $1.2bn, mainly from bricks and mortar stores. But the company is deepening its relationship with the Chinese internet behemoth, Alibaba.

However, some countries identified, like Russia and Brazil, come with high risk and currency difficulties.

Since its spin-off group sales have declined to $27bn and operating profits slowing from $4.5bn to $4bn. Europe is the main contributor to group sales and profits, with over 46pc of total revenues, the US a distant 24pc. As the company has a significant portion of its business outside the US, it is exposed to currency headwinds.

Its share price of $44 is only slightly behind its high of $48, the highest since the spin-off. However, the company has been making interesting moves which may not be appreciated yet.

Two years ago, the firm agreed to combine its profitable coffee portfolio consisting of brands like Kenco, Tassimo and Jacobs coffee with the Dutch concern Douwe Egberts, of which it will have a 49pc shareholding in the new entity and a much-needed €4bn in cash. It also has joint ventures with Keurig Green Mountain and the Korean Dongsuh Foods.

The company also plans recovering $2.5bn by reducing its operating costs and has indicated that it will shift operations to lower labour-cost countries like Mexico; a move that's got under the hair of one Donald Trump.

Incidentally, students searching for 'Mondelez' in the dictionary won't find much. Mond means world and 'elez' is some marketing genius's way of trying to communicate the word delicious.

Change has been the norm for Mondelez and its equity position in the joint ventures means it has a good chance of achieving solid long-term revenue and profit growth; worth a punt.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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