Why Does Mondelez See Coffee as Key to Future Growth?

With greater focus placed on its snack food lines, Mondelez is joining forces with European coffee maker D.E. Master Blenders to create a formidable competitor in the coffee business. Can it take market share from its coffee powerhouse rival Nestle?

May 18, 2014 at 11:53AM

Snack food giant Mondelez International (NASDAQ:MDLZ) is putting a greater emphasis on its coffee portfolio as sales of its snack foods in emerging markets slow. With the addition of D.E. Master Blenders to its coffee business, the company will acquire 49% of the company and receive approximately $5 billion in cash after taxes. With the completion of the transaction later this year, about 85% of Mondelez's net revenues will be derived from its snack-food segment. The combined coffee business, to be called Jacobs Douwe Egberts, is expected to generate more than $7 billion in revenues, nearly double the $3.9 million generated by Mondelez alone in 2013.

In addition to the coffee business expansion, Mondelez is engaged in a restructuring program to lower costs by making its supply chain more efficient and reducing its overhead expenses. The program carries a price tag of $3.5 billion and is expected to deliver cost savings of $1.5 billion by 2018. The savings are also expected to increase the company's 2016 adjusted operating income margin by between 15% and 16% and provide further margin expansion beyond 2016.

The strategy should enhance Mondelez's growth...
During the first quarter of fiscal 2014, Mondelez reported net revenue of $8.6 billion, a drop of 1.2%. Revenues grew by 3.4% in Europe and North America, but showed declines in markets like Latin America, Asia, Eastern Europe, and the Middle East. Net earnings fell by almost 70% to $163 million, as did diluted EPS to $0.09 .

Mondelez's strategic actions are meant to strengthen the company's ability to grow, especially within the $81 billion global coffee market. Its newly merged coffee business will lead the coffee segment in more than 24 countries and strengthen Mondelez's position within emerging markets. As for the $5 billion in after-tax cash the company will receive, it will use it to repurchase its shares and reduce its debt.

...And improve its competitive position against rivals
Mondelez's larger coffee portfolio will make it more competitive with rival Nestle S.A. (NASDAQOTH:NSRGY). Nestle's Nescafe brand has been around for the past 75 years and is the world's largest coffee brand; in fact, the company claims that consumers drink approximately 5,500 cups of Nescafe in every second of every day. The company is working on innovative new products to maintain visibility with consumers and the quality of its Nescafe product through technical development in its factories and coffee plants.

In 2013, Nescafe generated approximately $11.3 billion  in consumer sales  . During the first quarter of fiscal 2014, coffee sales grew in the Latin America region, especially in Mexico. Organic growth in both North and Latin America was up 4.1% during the period. The Nescafe brand performed well in emerging and developed markets, including the Philippines, Japan, and the Middle East. In Europe, Nescafe stood out despite an overall slowdown of 0.8% in the European market's organic growth.

Another contender in the snack-food space with Mondelez is PepsiCo (NYSE:PEP). Pepsi's snack-food division has been a bright spot amid the company's continuing decline in carbonated soft-drink sales. The snack-food market is expected to provide avenues of growth moving forward. Like Nestle, Pepsi is also looking at bringing innovation to this segment, specifically to the North American market with products like Doritos Locos Tacos and Starbucks Iced Coffee drinks. The Frito-Lay brand is performing well in North America and the company is putting some of the lessons learned into practice in Mexico, which is seen as a model for the rest of Latin America .

Amid challenging and volatile marketplace conditions, Pepsi reported single-digit organic revenue and EPS growth during the first quarter of 2014. The company's global snack business reported 5% organic revenue growth, while global beverages reported 3% growth. Growth in Latin America mostly reflected higher prices, with the division reporting a 3% decline in volume which resulted in part from a food tax in Mexico. Frito Lay posted the highest increase in revenue for the quarter at 3%. Total net revenue for the period was $12.6 billion and was basically unchanged from the same period in 2013. A decline in expenses contributed to an increase in net income of 13% to $1.2 billion and a 15% rise in diluted EPS to $0.79 .

My Foolish conclusion
With its latest acquisition and the expansion of its coffee business, Mondelez offers an attractive buying opportunity for investors who are interested in the food sector. On average, Mondelez appears to be a better value than many of its rivals in the industry and sector, including Nestle and PepsiCo.





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Source: Yahoo Finance

Both Nestle and Pepsi have lower future growth estimates and higher PEG ratios; they also must manage a wider variety of business segments, some of which are currently depressed. Mondelez's tightly focused snack food business could deliver better long-term results. 

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and Starbucks. The Motley Fool owns shares of PepsiCo and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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