Mondelez (MDLZ, Financial) is a rapidly changing business. A key part of this is a restructure that will see it shift its focus towards regional, rather than global, growth ambitions. This will include a focus on local brands, which has already led to improving sales performance.
Investment in innovation could improve the company’s ability to successfully adapt to changing consumer tastes. Increasingly health-conscious consumers are demanding cleaner product labels, as well as lower sugar and fat content. With new R&D centers, evolving customer tastes could provide a growth catalyst for the business.
M&A activity could also help the company to maintain its relevance given a changing customer base. Its innovation hub may lead to a competitive advantage through the acquisition of smaller, but well-established, peers.
Having risen 1% in the last year versus a 4% fall for the S&P 500, the stock could generate improving returns.
Updated strategy
As part of a major restructuring, the company has implemented a locally oriented commercial structure. It now contains 13 business units within its existing regional framework, which each report into one of four regions. This is expected to improve the company’s marketing, sales and product development functions by reducing complexity and increasing flexibility. It is also changing its incentive structure to focus on volume and absolute profit dollar growth, while having a stronger direct link to local performance rather than global performance.
Mondelez is investing in a range of initiatives aimed at improving its operational performance and adaptability. For instance, it has launched initiatives in China in order to drive improved e-commerce performance with key partners. This contributed to a double-digit rise in online sales versus mid-single digit overall sales growth in the previous quarter. It is in the process of investing in developing a faster route to market in emerging economies such as India in order to adapt more quickly to changing consumer tastes.
Growth prospects
The company is changing its approach to marketing its variety of brands. While in the past it has taken a global approach through a focus on major brands such as Oreo and belVita, it now intends to obtain a more equitable balance between global and local brands. This approach has led to an improvement in overall growth, with organic net revenue rising 2.5% in the most recent quarter. It is also making incremental changes to marketing spend in specific segments in markets such as China, India and Russia in reaction to improving sales performance.
The recent acquisition of Tate’s Bake Shop has recorded double-digit sales growth as it continues to ramp up distribution in the U.S. Further M&A activity could be ahead for the company following the creation of its SnackFuture innovation hub. It is expected to aid Mondelez in unlocking future snacking opportunities through investing in smaller brands that have growth potential.
Possible risks
Consumers continue to become increasingly health conscious, which could pose a threat to the wider snack industry. In Europe, 22% of consumers are conscious of their sugar intake, while 20% of consumers are seeking to control their fat intake. In the U.K., 39% of consumers were concerned about their sugar consumption in 2010. By 2015 this figure had risen to 55%. Similar trends are taking place across the developed world, as well as in emerging markets. This could force companies focused on the snack segment, such as Mondelez, to invest in greater product innovation in order to maintain the appeal of their products.
Mondelez continues to invest in its research and development capabilities in order to boost the pace of product innovation. It opened a new R&D technical center in India in the most recent quarter, which is expected to drive innovation in chocolate and beverages. It also expanded its facilities in Poland in order to further its research capabilities in gum and candy. Recent product innovations such as Joyfills in Europe and Lickables in India have proven popular with consumers, while the continued release of new products is expected in the current fiscal year.
Verdict
Mondelez’s restructuring is set to create a simpler and more flexible business that could improve its sales, marketing and product development functions. Already, its switch to a localized marketing structure has boosted sales growth, while a refreshed incentive structure could act as a further growth catalyst.
Innovation is likely to be a key part of the company’s future, and could become an area where it enjoys a competitive advantage. It is investing in R&D centers as it seeks to adapt to changing consumer tastes across a range of key markets. M&A activity could aid it in this goal, with its innovation hub likely to lead to the purchase of smaller businesses with an established presence in key markets.
After outperforming the S&P 500 in the last year, the stock could offer further capital growth over the long term.