Mondelēz struggles as snack category becomes more competitive

by Monica Watrous
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Irene Rosenfeld, chairman and chief executive officer of Mondelez International, said the company expects more challenges in the coming year.

DEERFIELD, ILL. — “Focus on what we can control” has become an oft-spoken mantra of many companies competing in a challenging marketplace. It is also the backbone of Mondelēz International’s business plan as the confectionery and snack company anticipates another difficult year.

Net earnings for the year ended Dec. 31, 2014, fell sharply to $2,184 million, equal to $1.29 per share on the common stock, down 44% from $3,915 million, or $2.21 per share, for fiscal 2013. Net revenues for the year sank 3% to $34,244 million from $35,299 million.

Weak consumer spending in key markets, intense competitive activity, significant commodity inflation and currency headwinds hampered performance, but pricing actions and cost reduction initiatives helped soften the blow.

“As we enter 2015, we will continue to focus on what we can control — reducing costs, pricing to protect profitability, and driving power brands and innovation platforms in key markets,” said Irene Rosenfeld, chairman and chief executive officer, during a Feb. 11 earnings call with financial analysts. “In addition, we are taking some specific actions to exit lower-margin revenues to improve our mix.”

Looking ahead, management expects to deliver organic revenue growth of at least 2% and solid margin expansion to drive strong earnings growth in constant currencies.

“We are taking the necessary steps to ensure the long-term health of our business,” Ms. Rosenfeld said. “We are pricing to protect profitability and aggressively reducing costs, so that we can continue to invest in our franchises to drive sustainable, top-tier returns for our shareholders.”

With the bulk of its business in emerging markets, the company estimates effects of the strengthening U.S. dollar will lower adjusted earnings per share by approximately 30c and reduce net revenue growth by approximately 11%.

“Eighty per cent of our revenue is derived from currencies not tied to the U.S. dollar,” said Brian Gladden, executive vice-president and chief financial officer. “This exposure to growth markets is typically a strength of our business model, and I believe it will be over the long term. However, most of these currencies have been devaluing versus the dollar over the last few months, resulting in a significant currency-translation headwind.”

Sluggish growth in the cookie category and increased competition in the cracker market led to modest growth for the year in North America, but executives expect acceleration in biscuit sales in early 2015.

For the full year, global category growth for snacks was up 3.9%, led by a strong performance of the Oreo brand.

“Globally, it grew high-single digits and exceeded $2.5 billion in sales, driven by new product innovations such as Oreo Thins in China, as well as new package formats, such as family size in the U.S.,” Ms. Rosenfeld said. “After its first full year in Brazil, Oreo has already achieved more than a 2.5 share; while in Europe, it continued to grow at a double-digit rate, up more than 25%.”

Innovation is "the lifeblood" of the business.

The belVita Breakfast Biscuits platform grew nearly 30%, topping $650 million in global revenues on the strength of such new products as a soft-baked line, which drove more than 50% growth for the brand in the United States, and belVita Crunchy in European markets.

“The innovation is still the lifeblood of our business; we remain very focused on that,” Ms. Rosenfeld said. “It was about 13% of our revenue. And we expect to see that we will continue to perform in that range, which we're quite comfortable with.

“It's one of the reasons that our power brands grew about 4% last year. And we're quite comfortable that we've got a pipeline for 2015 that will basically drive the underlying growth that we've laid out in our commitments.”

Global category growth for the company’s chocolate segment rose 3.7%, tempered by the impact of higher prices to offset cocoa and dairy inflation.

“We believe that all of our competitors will eventually raise prices, given that they are facing the same input cost pressures we are,” Ms. Rosenfeld said. “Ultimately, as the price dislocation moderates, innovation is key to regaining momentum in the chocolate category, and we've built solid platforms to accomplish that.”

For example, the company is expanding its Marvelous Creations candy-filled chocolate products to new markets such as Canada and Russia to drive incremental growth. The company also launched Cadbury Glow, a new premium chocolate brand in India, Singapore and Hong Kong.

The gum and candy category grew 2% for the year, as strength in candy offset continued category weakness in gum.

“Our revenue was down about 3% due to the implementation of a sugar tax in Mexico, where we have an 80% share, government restrictions on gum imports in Venezuela and the customer disputes in France,” Ms. Rosenfeld said. “However, we grew or held share in four of our top six gum markets, including the U.S., Japan, Brazil and China, driven by improved price pack architecture and a focus on freshness.”

For the fourth quarter, net earnings plummeted to $507 million, equal to 30c per share, down 71% from $1,766 million, or $1.01 per share, for the comparable period. Net revenues tumbled 6.9% to $8,830 million from $9,488 million for the year-ago quarter.

“We've built our revenue, we think, in a reasonable fashion, given the realities of the market,” Ms. Rosenfeld said. “And we've got clear visibility through the programming that will drive the margin expansion. So net/net, it is a challenging environment, but we are very focused on making sure that we've got in-hand what we can control to drive our commitments.”
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