Mondelez Navigates Pricing Pressures Amidst Declining Volumes in Q2
For the remainder of the 2024 fiscal year, cocoa is expected to remain a significant "headwind." Despite a 4.7% increase in second-quarter pricing, the company reported a 2.2% decline in volume-mix. This decline was primarily due to prolonged pricing negotiations in Europe, which impacted group volume-mix by 1.3 percentage points in the quarter.
Volume-mix reductions were observed across all geographical regions, with Latin America experiencing the largest drop at 3.2%, followed by a 1.8% decrease in Asia, the Middle East, and Africa (AMIA).
Chairman and CEO Dirk Van de Put reiterated the challenging and dynamic operating landscape. Organic growth slowed for the fifth consecutive quarter, with price increases registering the smallest rise since early 2022. Despite a 2.5% organic growth rate missing the 3.8% consensus estimate, market observers were encouraged by Mondelez’s commitment to achieving the upper end of its 3-5% growth target for the year.
Van de Put expressed confidence in a rebound of volumes and organic growth as inflation cools. “Consumer trends vary by region, but overall, we are seeing volume growth start to rebound as inflation cools,” he told analysts. “Consumer incomes are rising, which helps to reduce the inflation-driven financial strain on many households. As a result, private-label growth in our categories is decelerating, while branded share growth is improving.”
In Europe, Van de Put noted that while "elasticities are moving slightly higher but remain modest," the resolution of retail negotiations positions Mondelez well for the second half of the year in terms of top-line and volume growth.
Alexia Howard, a US food analyst at AllianceBernstein, highlighted investor concerns over sales guidance in her research note. She noted that the company’s maintained guidance suggests an acceleration in second-half organic growth to approximately 6.5%, driven by pricing in response to higher cocoa costs.
Despite these projections, Mondelez’s outlook for constant currency full-year adjusted EPS suggests it will come under pressure, likely declining in the mid-single digits due to the currency headwind.
TD Cowen adjusted its 2024 forecast for Mondelez, lowering its growth projection to 3.9% fr om 4.3%. Analyst Robert Moskow indicated concerns that Mondelez’s guidance might be overly optimistic given weaker conditions in the US, India, and Mexico.
Van de Put remained optimistic about North American volume improvement in the second half, forecasting modest elasticities in emerging markets. “Our China business is delivering strong growth in online and social commerce. In Brazil, we're seeing an uptick in elasticities, but the consumer and economy remain resilient,” he said. “In Mexico, the economic backdrop is healthy with solid employment and consumer confidence. And within India we see some food inflation impacting lower- and middle-income households driving a pullback in spend and causing some down trading, particularly in biscuits.”
Volume pressures also stemmed from ongoing boycotts of Western food brands in the Middle East and Asia, linked to the conflict in Gaza. Mondelez reported a 40 basis point impact on volumes due to these boycotts, affecting overall group growth by two percentage points.
John Baumgartner of Mizuho Securities maintained a high conviction that Mondelez’s volume-mix guidance would be met, despite adjusting the bank's organic growth outlook for the company to 4.8% from 5.2%.
Cocoa pricing remains a critical topic, with Zaramella indicating that commodity prices are locked in for 2024. He noted that Mondelez would take pricing actions in "the least elastic segments and consumer occasions" to lim it elasticity and volume losses while protecting gross profit dollars. He expects a market correction for cocoa prices in light of emerging mid-crop trends.
Looking beyond 2024, Zaramella conveyed optimism about a correction in cocoa prices. “We believe there is going to be a correction. The market, in light of the mid-crop, and importantly of the evolution of the main crop sees a clear adjustment of prices going forward.”
Image by mondelezinternational.com
