When it was spun out of Kraft (NASDAQ:KHC) in 2012, Mondelez International (NASDAQ:MDLZ) was supposed to be the “class” part of the act, with brands like Chips Ahoy Cookies and Ritz Crackers.
The company was the brainchild of Irene Rosenfeld, who started in advertising and then went into food marketing with General Foods. It took what was then the snack food side of Kraft, where most of the company’s ad spend was going, and left the rest of the grocery business behind. Rosenfeld retired last year.
Mondelez hit the news July 21 when it was forced to recall some products in its Ritz Crackers line, due to fears of salmonella contamination. But it’s a good chance to tell a more interesting story — that of Mondelez’ own disappointment as an investment, and the more general decline of mass-produced American food.
The Bourdain Effect
Over the last five years, gains in Mondelez have been half those of the S&P 500. Sales have generally been declining, as the company tried to institute cost controls and Dirk Van de Put replaced Rosenfeld.
The company is due to report on its second quarter July 25, with analysts expecting net income of 54 cents per share on sales of $6.14 billion and hoping for a penny more. Analysts remain optimistic but are concerned about rising costs for raw materials.
What has killed Mondelez’ growth prospects is what I call the “Bourdain Effect,” named after the late travel journalist Anthony Bourdain. Every viable small town now has a sushi bar, Korean Barbecue and artisanal doughnut shop. Even middle-American diners crave “the good stuff,” with hot spices, vinegar and fresh cilantro playing their symphony of hot-sweet-sour-salt over the palate.
In this world, the factory-made American combination of wheat flour, sugar and salt seems pale. The affordable luxuries of what used to be Nabisco, like Oreo Cookies and Ritz Crackers, which were such a big deal early in the 20th century, are just not that big a deal in the 21st. “The U-needa Biscuit in an airtight sanitary wrapper made the cracker barrel obsolete” as sung in The Music Man, but it has now itself been replaced.
Mondelez isn’t the only company suffering. Despite using 3G Capital’s “zero based budgeting” system, Kraft-Heinz (NYSE:KHC) stock has done worse than Mondelez. Hershey (NYSE:HSY), which Mondelez tried to buy in 2016, for $23 billion, has also done worse since it rebuffed the takeover attempt
International Waters
Part of the hope for Mondelez was that it could do well internationally, because while still under Kraft it bought Cadbury, the English chocolate maker, for $19.5 billion. Mondelez is now a global concern, with just one-quarter of its sales coming in North America, selling shelf-stable cookies, chocolate, gum and candy brands like Oreo, Toblerone and Trident.
But even here results have been disappointing, despite a steady stream of positive analyst reports and favorable publicity. That run ended with the Ritz news, but the company will come back from it.
What it can’t come back from is the plain fact that packaged food is not growing. Other companies in the space have the same problems as Mondelez. Kellogg (NYSE:K) sells for barely more than it did five years ago. General Mills (NYSE:GIS) is down from where it was five years ago. Nestle S.A. (OTCMKTS:NSRGY), is up because it is buying what appear to consumers to be artisanal brands, often in unrelated areas like vitamins.
The Bottom Line
Packaged snacks, once seen as an affordable luxury of the middle class, are now seen as low class, contributors to the global obesity epidemic. The mass market has dwindled, replaced by a collection of smaller niches, and Mondelez hasn’t kept up with the changes.
Mondelez is being consumed by the Bourdain Effect, and there is no easy solution since the company hasn’t even identified the problem.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
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