CEO and chairman Dirk Van de Put also attributed the gains during the first half of the year to Mondelez’s focus on volume-led growth and profit dollar, rather than cost and percentage margin, as well as the adoption of a “simplified local-first commercial model where decisions are made closer to the consumer.”
These strategic shifts are creating a “virtuous cycle” that Van de Put says Mondelez will continue to reinforce with its revenue growth management capabilities and by reinvesting in and reshaping the business to further focus on snacking to accelerate the business’ long-term growth rate.
The company’s future success, and that of Q2, is heavily influenced by the ongoing pandemic, which Van de Put explained continues to shape consumer behavior.
“Globally, we are some distance away from reaching a new normal and recovery is uneven, largely dependent on availability and adoption of vaccines. Comfort and mental well-being remain as important as they have been throughout the pandemic, and that is leading consumers to reach for the snack brands they know and love,” he said.
This in turn is helping to drive sustained growth in Mondelez’s core categories, including year-to-date a two-year average yearly growth rate of nearly 4% in the company’s biscuit category and almost 6% in chocolate.
At the same time many consumers continue to seek comfort at home, others are returning to offices, schools and in-person obligations as restrictions in some regions ease – elevating the need for variety, convenience, value and nutrition to support increasingly on-the-go lifestyles, Van de Put added.
Increased mobility also is helping the company’s gum and candy business to regain some of the losses it sustained during lockdowns over the last year.
“Cadbury, Milka Lacta and Toblerone all grew significantly during the quarter. Toblerone’s results reflect growth from improving mobility trends in world travel retail,” Van de Put said, while simultaneously acknowledging the business is still at only around 40% of 2018 levels.
Similarly, he said, Mondelez’s gum & candy business posted strong double-digit growth thanks to increased mobility.
“This business grew 28% during the quarter, but still declined over 7% on a two-year basis,” he said, adding, “we expect growth to be better for the second half of the year as mobility generally improves. Yet, we are still cautious about gum category dynamics, that is still at 80% of the 2019 levels and our full year outlook does not imply a full recover to pre-COVID.”
Shifts in the company’s gum & candy category likely are being closely watched by investors and competitors given earlier speculation that the gum business might go up for sale pending a full assessment of the business by Mondelez.
Eyeing “pressure points” Mondelez maintains profit forecast
Despite significant gains in the second quarter, including a 12.9% increase in gross profit that outpaced net revenues, Mondelez did not simultaneously raise its full-year profit forecast, to the chagrin of some investment analysts.
Rather, the company maintained its guidance as continues to eye with caution “pressure points” that likely will continue or potentially increase in the back half of the year.
Among the most notable headwinds is cost inflation, which is impacting the entire food sector and which are higher than Mondelez originally anticipated at the start of 2021, CFO Luca Zaramella told analysts during the company’s quarterly call.
“Logistics and freight costs is a pressure point already in Q2 … It is a phenomenon that we saw in North America, but it is not limited to North America. Ocean freight are really on the rise everywhere, and it is impossible pretty much to cover for a long period of time, and so we are facing pressure particularly in that area,” he explained. “There are also some packaging costs that are high, and in general commerce and co-pack are rising costs with us.”
While Mondelez expects inflationary costs related to commodities, logistics and labor to be incrementally higher in the second half of the year, Zaramella said the company is managing gross profit dollars for the year and intends to enter 2022 with a “sound profitability level that will enable higher investment in 2022.”
So, far the company has kept inflationary pressures in check through volume leverage, pricing actions and continued cost discipline, Van de Put said.
“Trickle reduction” strategy for SKU rationalization protects topline
The company also has managed to drive growth despite inflation and other downward pressures by strategically reshaping its portfolio to enhance performance through SKU rationalization and targeted innovation.
A year ago the company announced plans to rationalize 25% of its SKUs, a level thought high by some, but which has clearly not slowed the company’s organic growth.
Van de Put said the company has been able to execute this without impacting the topline by adopting a “trickle reduction” strategy.
He explained that there are three levels to this approach – the first is stopping production, second is ending inventory and third is no longer offering the SKUs in stores.
“Where we are at the moment is that of that 25%, most of it, the production has been stopped. We are gradually running out of inventor. We didn’t want to write off the inventory, which would have given us a big cost effect. And then it’s now starting to show up in store.”
This gradual approach should cause most cuts to go “almost unnoticed,” he said, adding that as SKUs disappear they are being replaced on shelf by higher turning products, which should help the company gain sales.
“We still have work to do … beyond the core”
At the same time the company is cutting SKUs it is investing around the 25% mark in innovation, Van de Put said. He explained that Mondelez remains focused on renovation and innovation within the core products, such as with new flavors.
“Where we still have work to do is what we call beyond the core,” he added. “We’re working that hard. We’re trying to shift some resources to that. That requires a longer lead time, requires more investment, but over time, can give significant growth for the company.”
Ultimately, the company’s efforts to reshape the portfolio combined with other revenue growth management strategies, including pricing and simplification to offset inflation, should position the company to enter 2022 with strong margins, which Van de Put says will further fuel Mondelez’ ‘virtuous cycle and high investment level.’