There’s a couple of reasons why I’ve been thinking about Mondelez International (NASDAQ:MDLZ) this past week or so. First is the unsurprising news that the bid for The Hershey Company had been withdrawn. There were just so many hurdles that it would have taken an offer well in excess of what was on the table, or what was realistically likely to be bid, in order to have a chance of going through. The second reason I had Mondelez stock on my mind is that as I was munching on one of my girlfriend’s favourite biscuit brands I noticed the Mondelez logo tucked away at the bottom of the wrapper. Here was what I thought was a tiny independent and regional brand of plain biscuit, that was actually just another addition to the giant stable of Mondelez brands.
The thing with Mondelez is that it should be one that you can file away into the “even a monkey could run this business” camp. Needless to say that for long-term income investors this is the camp that you want to be spending most of your time looking at. There’s no need to worry about keeping up with technological changes, obsolete business models or anything complicated. As long as there is demand for chocolate, snacks and confectionary then Mondelez will be in business in some form or another. Cadbury, for example, can trace its roots back to 1824 when a 23 year old quaker by the name of John Cadbury began selling tea, coffee and drinking chocolate in Birmingham, England. Today its one of the most recognizable brands in the United Kingdom. Milka – an absolute powerhouse of a brand in Continental Europe – goes back to a Swiss confectioner born in 1797. Today it commands leading market shares in several European countries.
If you ever want some validation of the longevity of confectionary and chocolate moats then all you need do is just look up a list of Mondelez brands. In total somewhere in the region of 45 of them are at least one hundred years old. Do you honestly see Cadbury disappearing anytime soon? Not me. What about Oreo, which has been around since 1912 and is now the number one selling cookie in the United States? Not likely. What about the multitude of other brands in their portfolio such as Toblerone, founded in 1908? I’m sure that one will still be flying off supermarket shelves over the next forty or fifty years as well. The same goes for other iconic brands like Côte d’Or and Halls.
(Source: Mondelez 2016 Corporate Fact Sheet)
Despite that awesome brand equity locked up under their ownership Mondelez has done nothing but make headlines for the wrong reasons. It started almost right off the bat with the name. For some bizarre reason when they were in the process of splitting the original Kraft Foods business the employees were tasked with coming up with the name of the new snacks orientated business. They held a contest and chose Mondelez International as the winner.
Personally when I think of the word “Mondelez” it conjures an image of a mid-size South American fruit packaging company rather than a global snack business that houses iconic brands like Cadbury. The general public had a similar reaction that was pretty much universally negative, going down particularly badly in Russia where the word is apparently a combination of separate vulgar terms. It’s not as bad as it could be; after all its the brand names that are really the most important, but it certainly doesn’t help.
Mondelez then went down the slippery path of meddling with some of these brands for the sake of margins and profits. The situation with the Cadbury Creme Egg is the most egregious example of this. Now I have no idea of the status of the Creme Egg outside any other market other than the UK, but here it takes on an almost iconic status. It’s a brand that was aided by very skilful marketing and advertising from what is one of the dominant chocolate companies in terms of domestic market share. Who doesn’t remember the “How do you eat yours?” commercials on the TV? It’s a legendary marketing campaign; one of those few that you end up remembering pretty much forever. Yet despite all the years of brand building around the Creme Egg, within five years of Cadbury being taken over by Kraft/Mondelez the company had shrunk the package size and changed the recipe.
You can get away the former quite easily without damaging your brands too much; less so with the latter, especially if its sole objective is to increase short term profitability. The result is that the ensuing customer and media reaction (including a dedicated “save the Creme Egg” website) now means that everyone knows about it. If you want to single handedly wreck a brand there are few worse ways of going about it. The alarming thing is that there’s a list as long as my arm of these kinds of changes to Cadbury that are undoubtedly aimed at cutting costs at the possible expense of product quality.
You can gloss over the reasons why Mondelez might go down the road of so noticeably tinkering with a boring and established brand, but the point seems to me that there is way too much short-termism. Stock price looks dead for a few years? Got to take action. Possibly overpaid for Cadbury or some other deal in the first place? Got to take action.
It’s something that crops up in stock buybacks where you have some firms, including Mondelez, leveraging up their balance sheets to create short term “value” at the possible expense of the longer term picture. You have all these brands and its the company’s job to nurture and invest in them until they pass on to the next generation. If shareholders are getting antsy because the stock is dead money for a few years they need to look at the bigger picture.
The good thing though is that these types of firms can survive that kind of damage better than most. It’s not like the banks where an obsession for short term profits meant that some of them literally ended up destroying their own businesses in the process. I imagine that decades down the line long-term investors in Mondelez might well see spin-offs, mergers, take-overs and (hopefully) name changes. As long as what results from that is still on a publicly listed exchange then it will be a stock with healthy profits paying out a regular dividend.
A business like Eastman Kodak probably had no chance if it didn’t reinvest heavily into digital photography, and even then it would never have been able to recreate a wide moat business; Mondelez flogs billions of dollars worth of different brands of chocolates, biscuits and candies. Just look at their sales data across all the major continents and product categories. That kind of core business just doesn’t degrade in a hurry.
Even catastrophically poor decisions over the short term will either take a long time to do lasting damage or prove to be reversible with simple changes. Think the company is lumbered with an underperforming CEO? Doesn’t matter much in the timescales we’re talking about. In the case of Mondelez the oft criticised CEO, Irene Rosenfeld, is 63 years old. Brands like Milka and Cadbury can surely outlast any potentially poor corporate strategy calls made on her watch.