Mondelez Pricing Spineometer: 5 of 5 Vertebrae

Mondelez, a global chocolate, candy, gum, snack food, and other consumables company, had a strong Q2 2023. Revenue rose sharply 17% to $8.5 billion and earnings before interest and taxes rose 54% to $1.5 billion over the same period last year excluding impairments and amortization costs.

A review of Mondelez July 27^th earnings call and financial report provided insight regarding the importance of pricing on performance.

Executives at Mondelez must address or otherwise avoid many potentially political quagmires.  (1) Mondelez operates globally, far more than the 41 countries I have engaged, and their success requires avoiding entanglements with geopolitics.  (2) Mondelez serves consumers of all stripes and management must carefully tread social-political issues. (3) Mondelez is compelled (for many reasons) to engage in initiatives striving for sustainable cocoa growth, reduced waste and carbon emissions, ensuring child-labor free sourcing, encouraging healthy eating, and Diversity, Equity, and Inclusion. (4) And executives at Mondelez must address economic issues.  They are a key connector between inflation in sourcing costs (agriculture, labor, transportation) and consumer costs (food).

On top of these issues, management is accountable for meeting shareholder profit expectations.

This is not a peril-free environment that allows for free-wheeling exposition.  One might expect price management to be low on the list of priorities at Mondelez.

It wasn’t.

Dirk Van de Put, Chairman and CEO of Mondelez, clarified the importance of pricing in the second sentence of his address to shareholders in the July 27^th earnings call.

“Our strong performance was driven by effective pricing combined with healthy volume growth in three of four regions,” said Van de Put.  In response to protracted negotiation in Belgium, he continued with “We successfully implemented our planned price increases in Europe.”

When a consumer food company raises prices, many may reasonably fear it would lose volume.  Van de Put however was confident, stating “we … feel good about continued consumer confidence.”  He continued with “our strong profit dollar growth was driven by cost discipline and pricing to offset cost inflation.”

But raising list prices isn’t the same as raising net prices.  Van de Put addressed this stating, “Promo levels, we see some increase in promo levels in biscuit, but it’s largely flat and down somewhere else. We even see promo prices going up faster than non-promo prices in percentage.”

I took delight in his statements.  (1) He focused on profit dollars, not margin percentages.  (2) He communicated the connection between pricing and cost inflation.  (3) He expressed the importance of negotiating with backbone (see Reed Holden) with individual customers. (4) He addressed the difference between promotional frequency and promotional depth in driving profitability and revenue growth.

Luca Zaramella, CFO of Mondelez, was on board regarding the importance of pricing to financial performance.  “Sound pricing execution, strong profit dollar growth, and significant brand reinvestment enabled us to continue driving sustainable value creation,” he stated.

And are price increases over at Mondelez?  The executives doubt it.  For firm-specific reasons, Mondelez is facing increasing raw cocoa and sugar prices over the balance of 2023.  Zaramella stated, “We continue to expect a double-digit inflation increase for 2023, driven by elevated cost in packaging, ingredients, labor, and lapping favorable commodity hedges in 2022.”  In other words, more consumer price increases should be expected in this category.

Clearly management feel pricing is important to performance and is something they must manage, as opposed to the result of the invisible hands of the market.  Furthermore, management comments and accompanying slides pointed out the value of Mondelez’s dedicated revenue growth management (RGM) leadership and teams and use of analytical tools to drive performance.

Mondelez statistics provide expectations for pricing capability needed to fit the bill.  Industry benchmarks indicate Mondelez should have between 60 and 320 professionals engaged in pricing globally. Management comments indicate we should have expectations at the upper end of this spectrum. Their product portfolio and innovation expectations imply Mondelez should have a routinized approach to pricing new product development and brand positioning.  Their global nature would imply that every country with over USD 200 million in revenue would have a dedicated pricing professional.  The multi-currency and inflationary challenges might even suggest the engagement of a macroeconomist or two.  And then there is the key issue of disentangling brand elasticity from category elasticity and simply pure demand shifts in and out of the category.

But do they have the capability to execute?  But is it hype or is it real?

Yes, they do. It is real. Mostly.

Research uncovered a capability at the upper end of this spectrum.  After identifying over 100 professionals at Mondelez dedicated to pricing, I accepted management’s declaration of intent is matched by their actions.  Professionals were mostly identified with the phrase “revenue growth management” rather than the word “pricing” yet their responsibilities are similar.  The geographic footprint of such professionals was global, largely matching the global footprint of Mondelez.  Seniority varied from analyst and manager to director and vice president.  Functional requirements varied between analytics, customer negotiations, and category management (specific promotion and/or brand foci were not identified but may exist).

Given the importance and capability of pricing at Mondelez as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of August ‘23.

Mondelez Pricing Spineometer: 5 out of 5 Vertebrae.

MDLZ (Mondelez International Inc.) rose from 73.7 the day prior to their earnings call to 75.3 one week later. FY 2022 revenue of $31 billion with a 12.5% operating margin and P/E ratio near 25.

For FY 2022, a 1% improvement in price would yield 8.0% improvement in operating profits holding all else constant at Mondelez.

P.S.: My offices are in Chicago if executives and revenue growth managers at Mondelez would like to have lunch.