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Takeaways from Mondelez's Q2 2016 Update

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Mondelez continues to zealously pursue its CEO Irene Rosenfeld’s mantra – “focus on what we can control”. With that in mind, little has changed this quarter, as the company continued to heavily focus on cost-cutting strategies with the aim of expanding profit margins, with operating income margins up to 15.2%. This bottom line growth has not really been matched by top line performance, as organic net revenues were up by just 1.5%. To be fair, this is to be expected - Mondelez has suffered from a general slowdown in consumer demand for snacks across the globe, in particular in those countries that were once shining beacons of hope - China, Brazil and India – whilst Western markets continue to experience sclerosis.

Given this, Mondelez’s decision to choose now as the correct time to launch Milka in China is an interesting one. China’s chocolate market has been a glaring omission for the company – it has just a 3% market share in the country - so there is clear potential to grow there, gaining market share at the expense of Mars, which has a 40% share. That said, China saw a 3% decline in chocolate confectionery sales in 2015 – a decline that is expected to continue in 2016 – which means that the company could arguably be entering the market at the wrong time.

Viewed through another lens, Mondelez is now using its recently completed factory in India to move in a more concerted way into the Chinese market, and so the decision is a refreshingly long-term one by an often short-term focussed company. The decision to aim for a slightly more premium price point for Milka and utilising e-commerce to appeal to wealthier consumers makes sense, but Mondelez will see tough competition from Mars and Ferrero. Nevertheless, given its extremely low base in China, market share gains are likely.

Mondelez, then, continues to pursue an aggressive strategy to expand power brands, and continues its quest for the holy grail of top and bottom line expansion. At the same time, the company appears more forward-looking than many of its competitors in its commitment to e-commerce, expecting to achieve US$1 billion through the channel by 2020. This quarter highlighted the company’s ambitious attempts to manoeuvre into a position where it can take advantage of any upturn in growth – though when or if that will occur remains to be seen.

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