Mondelez (MDLZ, Financial)’s increasing efficiency and online-focused growth strategy could strengthen its competitive position. In addition, the snack food company is seeking to diversify its business through acquisitions, while it also adapts to changing consumer tastes.
The stock’s earnings growth potential suggests that it could deliver further capital gains following its 25% outperformance of the S&P 500 index in the last year.
Refreshed strategy
The company’s continuing investment in its e-commerce business could boost its financial performance. For example, its global e-commerce revenue increased 30% in the most recent quarter, with its partnerships with e-tailers in fast-growing markets such as China enabling it to gain market share.
Mondelez is making changes to its organizational structure in order to increase its adaptability and efficiency. For example, it has made significant changes to its operating structure in Europe. This has provided it with a more efficient business planning process that required 40% fewer meetings in the last quarter compared to the same period of the previous year. This is set to improve the company’s competitive advantage through reducing the time it takes to bring new products to market.
It is also seeking to eliminate unnecessary costs from its supply chain. For example, it is reducing waste in its U.S. manufacturing network in order to support long-term margin growth for the business. This is alongside the company’s investment in its distribution network, through which it is seeking to broaden its total addressable market in key growth countries such as India.
Acquisition potential
Mondelez’s acquisitions in the current year have expanded its appeal to a broader range of customers. It has acquired paleo-vegan chocolate company Hu and prebiotics company Uplift Foods since the start of fiscal 2019. These will diversify the company’s range of brands and enable it to capitalize on a growing trend among consumers toward healthier alternatives to traditional snacks.
Additionally, the company has taken a majority stake in refrigerated nutrition bars business Perfect Snacks. This company is on-trend with consumers, since it offers organic non-GMO protein-rich snacks that could enable it to capitalize on a desire among consumers for cleaner labels. Although Perfect Snacks will be run as a separate entity to Mondelez, it is set to benefit from an expanded distribution network. This could increase the size of Perfect Snacks’ total addressable market, while reducing its cost base and improving its efficiency.
Possible threats
Global health concerns could create increasingly challenging operating conditions for snack companies such as Mondelez. For example, since 1975 worldwide obesity rates have tripled, while the proportion of children who are classed as either overweight or obese has more than quadrupled over the same time period. Increased regulations may be applied to snack foods in order to make them less appealing to consumers. For instance, the U.K. introduced a sugar tax on carbonated beverages in 2018, which is designed to reduce consumption of products that could contribute to weight gain.
In response, Mondelez is investing in a sustainable snacking strategy that aims to educate its consumers on the potential risks of snacking. As part of this, the company has committed to displaying portion amounts and mindful snacking information on all of its packages globally by 2025. In addition, it has committed to purchasing all of its cocoa from sustainable sources and using 100% recyclable packaging by 2025. These steps could resonate with increasingly health-conscious consumers, while also highlighting to regulators that the snacking industry may not require major changes to taxation in order to influence consumer behavior.
Outlook
Mondelez is forecast to record a rise in earnings per share of 8% next year. It trades on a price-earnings ratio of 21. The company’s growth strategy is set to produce a more efficient business that is increasingly online-focused and able to adapt to changing consumer tastes. It could offer further capital growth potential following its 27% rise in the last year.
Disclosure: the author has no position in any stocks mentioned.
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