MDLZ's top 15 power brands are expected to drive 70% of their growth. These brands include Oreo, Chips Ahoy, Belvita, Cadbury, Toblerone, Trident and Stride. Over 45% of sales are in the fast growing emerging markets where snacking habits are increasing with growing wealth.
One smart cookie
Oreo is milk's favourite cookie. It is also one of the most liked brands on Facebook with 38 million likes. It is the number one food brand on Facebook. They have had plenty of social media success their Super bowl tweet you can still dunk in the dark received great coverage with 16,000 retweets. Their facebook page has taken off with Oreo commemorating key events/weeks like Gay Pride and Elvis week with their biscuits see below. This digital savvy has helped Oreo grow double digit for two years in a row in North America. Oreo is so popular that if we stacked each Oreo ever made the pile would reach the moon and back six times. Over 25 million Oreo's are eaten in the US it has also been a hit in China. Growth took off when they reduced the sweetness of the cream, introduced a wafer version and banana, peach and grape flavors.
Developing developing markets
MDLZ should benefit from the rising emerging middle class. While these markets are volatile they are growing at above industry rates which should grow for years to come. For example in India MDLZ cover only one million out of the 7 million outlets that sell confectionery. Oreo is the number one biscuit in China. Snacking is a late adoption category its a treat used to relax and enjoy. As consumers move into the middle class they increase their chocolate consumption by three times.
Can't touch these brands
MDLZ brands have such a great emotional connection to their consumers that they tend to be more immune from private label. MDLZ owns Vegemite which has proven to be too strong for private label clones. Apparently it is still consumed in 80% of Australian households. Even Aldi's fake version has not dented sales. Even with these great brands MDLZ is still innovative. Last year 17% of sales came from innovation of existing products nearly twice their historic average.
More snacks less coffee
Results since the spin off have disappointed investors but there are increasing signs of management focus. MDLZ recently spun off their coffee business to DE Master Blenders receiving $5 billion after tax and a 49% share in the combined company. The combination of the second and third largest coffee companies by sales will create an entity with 16% share of the coffee market.The market leader Nestle has 23% share. MDLZ will use the proceeds to pay down debt and buy back shares. This focus means revenues from snacking will increase from 75 to 85% of company revenues.
MDLZ should grow profits at a low double digit growth rate. It trades at a discount to its peers like Hershey but has better margin expansion potential. Its 12% margins are expected to expand to the 15-19% average enjoyed by peers. MDLZ also has Nelson Peltz's Trian Fund Management on board as an activist shareholder which should help management focus on execution. While its not something we expect MDLZ has also been seen as a takeover target for Pepsi. A merger between Pepsi's dominant chips business Lays and MDLZ's biscuits and chocolate would provide a good match and add even more scale. Nelson Peltz's Trian Fund Management has stakes in both.
Its way too hard to write a blog about this company without getting hungry that's a good sign for an investor!
Jason
Disclosure: Decisive has a long position in Mondelez (MDLZ) stock.
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
