Let Us Prey

Time for Mondelez to Eat or Be Eaten

Acquisitions are its surest path to growth -- and avoiding being taken over.
At Closing, February 21nd
43.62 USD
At Closing, February 21nd
67.47 USD

I imagine Dirk Van de Put had no illusions about what a tough job he was taking on when he became CEO of Mondelez International Inc. in November.

Consumers are increasingly filling their grocery carts with fresh food, an unhelpful trend for a company whose major brands include Oreos, Ritz and Sour Patch Kids.

But Van de Put's tenure doesn't have to be a solemn exercise in managing decline, if he can seize some key opportunities.   

The earnings report Mondelez released Wednesday highlighted progress on which to build. Profitability improved last year as the company trimmed costs and enhanced its supply chain, with full-year adjusted operating income margin expanding to 16.3 percent.

But the company's top-line growth is a little harder to applaud. It increased organic sales, a measure that excludes currency fluctuations and other factors, but at a slower pace than in recent years. (A June malware incident hurt 2017 results, but even without that negative impact, growth would not have been stronger than in 2016.) And therein lies Van de Put's challenge.


Mondelez's pace of sales growth has slowed

Source: Company reports

He can likely unlock some growth by turning more resources toward boosting the company's presence and customer loyalty in emerging markets. Mondelez is faring much better overseas than on its home turf:

Better At Away Games

Mondelez sales grew in all regions in 2017 except North America

Source: Company reports

That was, after all, much of the point of the company's split from Kraft Foods in 2012: letting the Mondelez collection of brands focus on international markets.

But this latest earnings report also underscored how urgent it is for Van de Put to turn his attention to perhaps his most important strategic weapon: dealmaking.

In an industry where every percentage point of sales growth is hard-fought and where costs have already been slashed to the bone, tacking more brands onto the Mondelez empire might be the surest path to profitable growth.

Clearly, many rivals have adopted this acquisitive mindset: Over at Kellogg Co., Steve Cahillane had been CEO for less than a week when the company announced a $600 million acquisition of RXBar, a protein-bar maker. Hershey Co. struck a deal worth about $1.6 billion in December to buy Amplify Snack Brands Inc.

Under previous CEO Irene Rosenfeld's leadership, it's clear Mondelez understood the potential power of growth by dealmaking. In 2016, it made a bid for Hershey Co., which the chocolate giant ultimately rebuffed.

But perhaps Van de Put can put his finger on a deal Mondelez can actually pull off. Given its debt load, Mondelez may be wise to go after smaller targets, rather than trying to spear a big fish like Hershey, Bloomberg Intelligence analyst Kenneth Shea notes.

Loaded Up

Given Mondelez's net debt leverage, it might be better off buying smaller brands and scaling them

Source: Bloomberg Intelligence

Anything Mondelez could do to bulk up would be helpful if it hopes to avoid becoming an acquisition target itself.

It would certainly be a soap opera-esque plot twist if Kraft Heinz Co. came after Mondelez -- after all, the Kraft Foods portion of that company and Mondelez were part of the same food behemoth until 2012. But Kraft Heinz showed it was willing to hunt big game last year when it tried to buy Unilever NV, so don't rule it out.

The food business is significantly different than when Kraft split into two, with a flurry of tie-ups changing the competitive set.

Joining Forces

There has been a frenzy of dealmaking in the packaged-food sector in recent years, and it's not likely to let up in 2018

Source: Bloomberg

Van de Put would be wise to fortify Mondelez with more brands to fight on this new terrain.  

--With assistance from Tara Lachapelle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Sarah Halzack in Washington at shalzack@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.