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Mondelez (MDLZ) Troubled by Elevated Costs, Acquisitions Aid

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Mondelez International, Inc. (MDLZ - Free Report) has been keen on expanding its business through acquisitions and alliances. Apart from this, strength in the emerging markets and pricing efforts have been working well for the company, which is battling cost inflation. Mondelez’s gum and candy business is also below the pre-pandemic levels. Let’s delve deeper.

Factors Working Well for Mondelez

Talking of alliances and buyouts, the company recently teamed up with MissFresh to introduce Oreo Zero on the latter’s popular online retail platform. Earlier, it announced a deal to buy Chipita S.A., which is a major producer of sweet and salty snacks in Central and Eastern Europe.  Prior to this, in 2021 itself, Mondelez took over a renowned sports performance and active nutrition brand — Grenade. Further, the company has acquired Australia-based food company — Gourmet Food Holdings — which operates in the premium biscuit and cracker category. Mondelez completed the acquisition of Hu Master Holdings, the parent company of Hu Products on Jan 4. The Hu, Grenade and Gourmet Food buyouts contributed to the company’s top-line growth in the second quarter of 2021. Earlier, the company acquired majority interest in Give & Go (in April 2020), which is a pioneer in fully-finished sweet baked goods.

Moving on, Mondelez remains encouraged by the underlying emerging market strength. In second-quarter 2021, revenues from the emerging markets increased 19.6% to $2,293 million, while the same jumped 16.5% on an organic basis. During the quarter, it saw double-digit growth in India, Brazil, Mexico and Russia as well as a high-single-digit improvement in China. The company is focused on boosting its presence in the emerging markets, as evident from the addition of 60,000 and 20,000 respective stores in China and India in the second quarter.

Concerning Factors

The restricted consumer mobility amid the pandemic had dented Mondelez’s gum & candy business. In the second quarter of 2021, however, the category registered robust growth as it saw favorable comparisons with the year-ago period’s major decline. Also, better mobility trends in the quarter aided growth. That said, the gum and candy business declined more than 7% on a two-year basis, reflecting a downside from the pre-pandemic level. While management expects better growth in the second half of 2021, it is still cautious about the dynamics of the gum category. Its guidance for 2021 doesn’t suggest a complete recovery to the pre-pandemic levels.

Apart from this, Mondelez’s margins in the second quarter were somewhat affected by the elevated raw-material costs and adverse product mix. Also, increased advertising and consumer promotions spend weighed on the adjusted operating income to an extent. Management envisions the commodity, logistics and labor costs to further flare up in the second half of 2021. While Mondelez is focused on managing these costs, it does anticipate some pressure points during the second half. A number of other food companies, Kellogg (K - Free Report) , Conagra Brands (CAG - Free Report) and TreeHouse Foods (THS - Free Report) , are encountering higher cost challenges.

Wrapping Up

Mondelez has been focused on undertaking saving and robust pricing actions. During second-quarter 2021, the company’s adjusted operating income margin expanded 30 basis points (bps) to 16.2%, courtesy of decreased manufacturing costs, better pricing and reduced overheads. Management, on its second-quarter earnings call, stated that it is focused on revenue growth management capacity, including simplification and pricing initiatives, mainly to combat commodity, logistics and labor cost inflation. However, it remains to be seen if these actions can completely offset the hurdles.