French trade dispute dents Mondelēz Q3 earnings

Mondelēz resolves French retailer backlash over wholesale price hikes but loses some distribution in the process

Mondelēz International third-quarter earnings fell 11% compared to last year due to disputes with French retailers over wholesale pricing changes and 'soft' developed market demand.

The drop – equating to a 1.6% quarterly decrease in net revenues and 32.4% drop in operating income – was largely put down to a fall in organic net revenues in developed markets Europe (-2.4%) and North America (-0.2%). Conversely, emerging markets saw an increase of 18.5% in Latin America, 1.3% in Asia Pacific and 5.6% in Eastern Europe, Middle East and Africa (EEMEA). The firm has forecast a 2-2.5% increase in organic net revenue for the full year. 

Irene Rosenfeld, chairman and CEO for the company, said: "The primary revenue driver in Q3 was pricing to offset higher input costs, which contributed 5.8% points to our growth." 

Earlier this year, the firm upped wholesale prices across all products, particularly for chocolate and coffee, something which was met with some initial resistance in European markets like France.

French dispute impact

Rosenfeld said the impact of the French trade dispute was expected to be felt into the fourth quarter.  In the earnings call this week, executive vice president and CFO David Brearton said: "We resolved the French disputes in Europe, in the process we lost a little bit of distribution in a few customers and some of those disputes were only resolved in October."

The overall global snacks category (biscuit, chocolate gum and candy) grew 3.9% year-to-date up to September. Over the same period, Mondelēz's snack business grew 1.8%.

Rosenfeld said the difference between global category growth and Mondelēz growth was primarily due to three things, "the elasticity impact of significant chocolate pricing, the impact of the customer disputes in France across a number of our categories, and the cycling of the investments we made in China biscuits last year."

Cutting costs

Brearton said the results were a strong step towards its longer term margin goals in the third quarter and added that cost-reduction plans were expected to deliver an adjusted operating income margin of around 13% for 2014 and an adjusted earnings per share (EPS) of 9% due to taxing and interest in its favour.  

In September last year, the company announced plans to consolidate production by closing smaller plants and open five new plants by 2020. 

Pinpointing the growth and decline

The firm's greatest Q3 growth was seen in Latin America, largely driven by pricing gains, particularly in the inflationary economies of Venezuela and Argentina. Elsewhere in the region, Brazil grew mid-teens, a good chunk of which came from volumes spread across categories. Here the Oreo and belVita brands continued to perform well. 

In Asia Pacific, China was up high single digits, something it put down to innovation and marketing support combating last year’s weak results in biscuits as it introduced Oreo Thins and Mini Oreos. India also saw double-digit growth, fueled by new pack sizes and formats for Cadbury Dairy Milk . 

EEMEA saw growth despite political and economic volatility. Russia grew mid-teens, with solid performance across most categories and its Marvellous Creations format secured a 1% share of the chocolate tablet market within its first month.

On decline, in Europe it pinned this to “pricing-related elasticity across the region and customer disruptions, particularly in France”. Meanwhile the North America near flat line reflected slower growth in biscuits and declines in confections.

The Oreo and Cadbury owner raised its full-year 2014 earnings outlook to $1.82 to $1.87 per share, up from $1.73 to $1.78 per share.

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