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How Packaged Food Firms Stack in the Profitability Stakes

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Sep. 23 2015, Updated 3:15 a.m. ET

Profitability enhancers

As a result of its transformational agenda, Mondelēz (MDLZ) is aiming at an adjusted operating income margin of 15%–16% by 2016. In 1H15, the adjusted operating margin came in at 14.50%—a rise of 0.20% YoY (year-over-year). Part of the company’s efforts revolve around spinning off non-core businesses, stringent budgeting, improvements in its supply chain, and a heightened focus on its “Power Brands” portfolio. The latter includes brands like Oreo, Tang, and Cadbury’s. They delivered organic sales growth of 6.30% in 1H15.

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Coffee joint venture impacts profitability

Mondelēz is also trying to focus on its core snacks portfolio. It recently entered into a joint venture with D.E Master Blenders 1753. The joint venture combines both companies’ coffee businesses. The JV (joint venture) under the new company is called Jacobs Douwe Egberts. It will be operational in 3Q15. From 3Q15 onwards, Mondelēz will only report its share of after-tax profits and losses from the JV. It won’t form part of operating income.

This transaction is also expected to adversely impact Mondelēz’s margins. The company expects a reduction of 0.75%–1% in its operating income margin in 2015 due to the spin-off. However, the margin’s dilution is expected to be offset by strong performance in its underlying business and cost-cutting measures. The full-year adjusted operating margin will stay at 14%.

Falling behind its peers

That said, Mondelēz’s reported profitability has trailed peers. In particular, competitors like Hershey (HSY), McCormick (MKC), General Mills (GIS), Campbell Soup (CPB), J.M. Smucker (SJM), Hormel Foods (HRL), and Nestlé (NSRGY) have passed Mondelēz in terms of operating profitability. Both Hershey and Nestlé are major rivals for Mondelēz in the faster-growing chocolate business. Nestlé is also a major player in Emerging Markets. It competes in many of the same markets as Mondelēz.

Together, these companies form 8.80% of the portfolio holdings in the First Trust Consumer Staples AlphaDEX(R) Fund (FXG).

Since it reports results in US dollars, Mondelēz has also been at a disadvantage due to its relatively lower exposure to the US—compared to Hershey. Mondelēz derived about 20% of its turnover from North America in 2014.

However, Mondelēz’s management recently unveiled several measures designed to improve the company’s performance. We’ll discuss this in the next part.

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