Mondelēz continues to suffer from chocolate price hike fallout in Europe

Mondelēz CEO and chairman Irene Rosenfeld said during the company’s earnings calls that ongoing business in Europe was “soft”, largely due to reduced chocolate demand after wholesale price hikes. Competitor pricing shifts made earlier in the year added to the difficult quarter for the company.

“We predict revenue trends in Europe will improve the second half as price gaps narrow and our brands benefit from increased A&C support,”​ Rosenfeld said.

Q2 revenues for the company were down 9.2% to $7.66bn compared to the same quarter last year, while net earnings dropped 34.7% to $406m.

Mondelēz also announced it will be investing $130 million to modernize its North American supply chain, while at the same time slashing 600 jobs from its Deerfield, Illinois-based facility.

Chocolate market heavily affects Q2​

The company grew slower than the overall chocolate industry in the first half of 2015. The global chocolate category grew 4.9% this year up to June 2015, according to Nielsen, but Mondelēz's organic net revenues in chocolate rose just 0.2% over the same period.

The European market, accounts for approximately half of the company’s chocolate revenue. Although Rosenfeld cited short-term positives in chocolate, the soft market in Europe clearly impacted Mondelēz’s shares, with only 25% of revenue gaining or holding steady.

In other categories, snacks grew 4.5% for the company and segments, such as cream cheese and beverages, were up more than 5%. Biscuits grew more than 5.5%, with strong growth in in countries like Brazil, China and Russia.

“While our financial results in the first half were strong, our year-to-date share performance is not where we want it to be,”​ Rosenfeld said. “Only 45% of our revenue gained or held share, reflecting some sizable price gaps remaining in our categories, especially chocolate.”​

Mondelēz notably increased prices on its wholesale chocolates earlier this year​,​ causing a 44% drop in profit for 2014. Rosenfeld said in April 2015 that she expected to see chocolate shares rebound in the back half of this year.

In this latest call, Rosenfeld noted that the company has increased its organic revenue growth target and expects to capitalize on margin expansion momentum in the base business over the last half of 2015.

Positivity in the face of adversity​

Even with the poor showing in revenues, Rosenfeld called Q2 “strong” due to the company’s organic net revenue growth of 4.3% and a larger focus on snacks.

" In addition, we're continuing to make excellent progress driving supply chain productivity and overhead cost reductions to deliver top-tier margin expansion and earnings growth,”​ Rosenfeld said during the call. “This provides additional fuel to step up investments in marketing, sales and capacity expansion to accelerate revenue growth and improve market share, both now and over the long term.”​

However, the operating income market was 11%, down 30 points. Mondelēz’s operating income dropped 12.1 percent to $841 million.

Improving the supply chain​

Mondelēz will still be spending heavily, despite the job cuts, as it looks to spend $130 million on a North American supply chain overhaul in its Salinas, Mexico, facility.

The supply chain will be completed by 2016 and will replace nine “inefficient” lines at the company’s Chicago-area plant, which will see roughly half of its workforce cut. Mondelēz has also invested more than $170 million in adding lines to plants in New Jersey, Illinois and Virginia.

Daniel Myers, executive vice president of Mondelēz’s integrated supply chain, said this investment is part of an “ongoing supply chain reinvention plan.” ​

"These investments will enable a significant percentage of our global Power Brands to be produced on advantaged assets and are key contributors to our overall margin improvement,” he said. ​

Regarding the Illinois job cuts, Olivier Bouret, Mondelēz vice president of the North America Integrated Supply Chain for Biscuits, said the plant will continue to be one of the company’s largest manufacturing facilities in terms of headcount. The company said it will invest in more technological and infrastructure upgrades in the Deerfield facility.