BOCA RATON, FLA. — Mondelez International Inc. stands as “one of the few industry players positioned to deliver sustainable growth on the top and bottom line,” said Irene Rosenfeld, chairman and chief executive officer of Mondelez International Inc.
Speaking Feb. 16 before the Consumer Analyst Group of New York, Ms. Rosenfeld made the case for why the global snack foods giant is so situated, summarized progress toward aggressive financial objectives and steps the company is taking to capitalize on its opportunities. CAGNY 2016 was held at the Boca Raton Resort & Club in Boca Raton.
|Irene Rosenfeld, chairman and c.e.o.|
Viewed from numerous vantage points, Mondelez holds an advantaged position versus peers in the food industry, Ms. Rosenfeld said. Focused on the large, fast-growing snack category, she noted the company’s stable of iconic brands sold across an attractive geographic footprint. The company’s position is buttressed by what she described as “substantial barriers to entry” and “world-class talent.”
Even if growth in the global snacks markets has been tempered by macro forces, the category remains attractive, Ms. Rosenfeld said. Consumer preference for branded snacks translates into higher margins. Also boosting margins are the higher proportion of sales in immediate consumption channels and “the hot zone near the cash register,” she said.
Within this desirable market, Mondelez is No. 1 in biscuits in candy, tied for No. 1 in chocolate and No. 2 in gum. About 85% of the company’s revenues are derived from snacks.
Concern about a near-term slowdown in growth rates for emerging markets should not be overstated, Ms. Rosenfeld said. Despite macro headwinds, “they are still growing considerably faster than developed markets.” Currently accounting for 40% of Mondelez revenues, emerging markets “will continue to be our primary source of volume and revenue growth moving forward,” she said.
Overall, weaker economic expansion has slowed snack category growth globally to 4% in 2015, versus 6% or more in 2008-12.
While global economic turmoil clearly is having an effect on the business of Mondelez and others in the food industry, the company remains “focused on what we can control,” Ms. Rosenfeld said.
Recent steps taken to enhance the company’s marketplace position include combining the Mondelez coffee business with D.E Master Blenders to create Jacobs Douwe Egberts and two bolt-on acquisitions in snacks — Kendo biscuits in Vietnam and Enjoy Life Foods, a U.S.-based business focused on “free-from” snacks.
The 85% of Mondelez sales accounted for by snacks represents a 10-percentage point increase from 2014. Ms. Rosenfeld said a strategy of placing particular focus on power brands is paying off with growth for these products “twice as fast as the overall company.” Power brands currently account for 70% of revenue at Mondelez and enjoy operating margins 100 to 200 basis points higher than the company’s other brands. The elimination of less attractive stock-keeping units also is important in the company’s pursuit of improved margins and sustainable growth.
Trade support optimization represents an important avenue for margin expansion moving forward, Ms. Rosenfeld said. Like s.k.u. reductions, these moves tend to be a near-term headwind to revenue growth “but they are quickly accretive to our margins,” she said.
As an example, she cited moves in Germany to surrender low-margin volume at an important customer, driving double-digit sales declines and market-share losses.
“But today this business is considerably stronger,” she said. “We were able to raise prices across our entire chocolate portfolio to recover higher cocoa costs and use productivity to expand gross margins,” she said.
Mark Clouse, chief commercial officer, has been tasked with spearheading global trade optimization efforts, Ms. Rosenfeld said.
“Specifically, he will standardize our analytical approach and develop a global playbook to move quickly, while minimizing the impact on volume,” she said.
Despite a variety of headwinds, including significant challenges in Venezuela, the company performed well in 2015, Ms. Rosenfeld said. Gross margin expanded by 260 basis points and operating income margin by 150 basis points. Adjusted earnings per share rose by 13.5%.
Looking forward, Mondelez is focused on generating growth in emerging markets and enhanced margins in developed markets.
In emerging markets, even those in turmoil, margin protection is key to positioning Mondelez for growth moving forward.
“Conditions in Russia are highly volatile as a result of the sharp and rapid devaluation of the ruble since late 2014,” Ms. Rosenfeld said. “This devaluation, coupled with a significant increase in cocoa prices, caused us to implement three significant price increases last year. Once again, this enabled productivity to fall through and expand gross margin by about 300 basis points. At the same time, we increased A and C (advertising and communication) across our chocolate portfolio, especially behind power brands like Alpen Gold. As a result, we maintained our market share, despite the significant price increases.”
In developed markets, Mondelez is prone to short-term share declines when it takes pricing action to protect margins, Ms. Rosenfeld said. Still, over time, prudent advertising and communication has allowed for some high-quality volume-driven revenue growth supported by a solid margin structure, Ms. Rosenfeld said. Cost reductions are central to margin improvements, too.
An example of a success she cited is the company’s North American biscuit business, where the company enjoys a market share in excess of 45% for brands that include Oreo, Ritz, belVita, Chips Ahoy!, and Triscuit.“In the first half, we had capacity limitations as our new Salinas, Mexico, plant ramped up and we worked through product transitions,” Ms. Rosenfeld said. “So we held back on A and C, innovation, and key promotional programs until we were sure that we could fulfill demand. In the second half, when we were confident of supply, we accelerated revenue growth by increasing A and C behind strong innovations, like belVita Bites and Oreo Thins. In fact, we are very pleased that USA Today just named Oreo Thins the third most memorable new product of 2015, behind Windows 10 and the Apple watch. Importantly, North America’s revenue growth was high quality, driven by volume/mix. And thanks to our Salinas plant and our newly installed lines of the future in New Jersey and Virginia, we expanded gross margin by more than 100 basis points. We expect to see significantly more margin benefit in 2016 and beyond as we fully load this new capacity and we cycle our start-up costs.”