Mondelez International Acquires Stake in UK Based Nutrition Brand Grenade
Deal Overview:
- Announcement date: 22 March 2021
- Industry: Consumer goods/food producer
- Deal value: Undisclosed
Company Details: MDLZ:NSQ
- Founded: 2012
- HQ: Chicago, Illinois
- Market cap: $81.99 billion
- EV: $95.65 billion
- LTM EV/Revenue: 3.60
- TTM P/E: 23.52
Mondelez International, albeit a relatively nascent company, is built upon centuries’ old brands dating back to Cadbury’s formation in 1824, Birmingham. Mondelez brands boast household names such as Oreos and Toblerone, spanning across beverages, chocolate and meals.
The group’s agility in the face of rapidly changing circumstances appealed to newfound consumer habits, bolstering their bottom line growth. Mondelez share price recovered from its March nadir of $43, and is up 16.8% YTD, evidence of favourable trends towards comfort eating.
They were also swift to respond to stay-at-home conditions through a combination of advertising and marketing campaigns coupled with revamping their product offering. The Oreo brand went down like a treat for consumers and investors alike, driven by bold, creative marketing tactics deployed by Mondelez, notably a collaboration with Lady Gaga marking the launch of limited edition Oreos.
During the pandemic, consumers turned to comfort foods to offer a dose of pleasure amidst the loneliness and anxiety. Consuming indulgent foods such as chocolate and ice cream triggers visceral pleasures and this effect has become even more pronounced when consumers were confined to their homes during the periods of lockdown.
Mondelez reported that its global consumers gravitated towards “nostalgic snack brands from their childhood” that helped boost its revenues during 2020. The lockdown season has seen Mondelez sweeten analysts’ revenue expectations beating its Q4 revenues, seeing earnings buoyed by rising demand for its snacks among developed economies.
Consumers’ dependence on comfort foods will fade as the world gradually emerges from lockdown. Mondelez’s move to grab a chunk of the health foods market will enable the group to be well positioned to not only capitalise from rising health trends but serve as a buffer against potential adverse effects with regards to its traditional comfort foods.
Company Details: Grenade Ltd
- Founded: 2010
- HQ: Solihull, England
- Revenue (2020): £51.7 million
Grenade Ltd was founded in 2010 by entrepreneur couple, Alan and Juliet Barratt, whose mission statement was to dominate sports nutrition, offering colourful and explosive products that promote weight-loss, training and support nutrition. Their core consumer includes high-performance athletes and the elite military, offering bold and nutritional protein powder, bars, energy drinks and more.
Strategic Rationale
A healthy addition: Are investors in for a treat?
Mondelez has been operating in a period marred with ever growing concerns surrounding obesity that research has shown has been linked to increased risk of death from Covid-19.
The group is taking steps to reduce their exposure to goods with high sugar/fat content; their stake in Grenade is evidence of a strategic expansion into healthier snacks, in a fight to tackle obesity and diversify their product range. The health foods market is worth an estimated $810 billion globally and Mondelez wants a slice of that pie.
The UK, home to Mondelez’s second largest market, is tackling the rise in obesity through curbs on junk food advertising and sugar taxes. The group’s acquisition of Grenade marks a bid to penetrate the health food market and sustain their profitability despite sugar taxes and reduced scope for advertising.
Grenade will nestle among a range of health brands
Mondelez has been ramping up its acquisitions as of late, in an effort to consolidate market share in the health foods market. Q1 of 2021 saw Mondelez purchase the remaining stake in Hu Master Holdings, producer of vegan, paleo-friendly chocolate bars. Hu have gained a loyal following among customers who favour sustainable, vegan products, a trend that is growing in popularity.
Mondelez acquired US-based Perfect Snacks, for $284 million, a producer of protein bars during 2019 to tap into healthier snacks, complementing the group’s newly acquired stake in Grenade.
Grenade’s wellness products appeal to a younger demographic, one that is health conscious coupled with an appetite for bold products that will aid Mondelez’s market expansion. This partnership will crucially provide Grenade with access to vast resources and years of expertise in the snack-making industry designed to secure a robust presence within the health and wellness market.
The uptick of inflation: A sweet touch
The relentless rise of US bond yields has seen the 10-year yield on track for their largest quarterly rise since 2016. Jitters among global markets are yet to settle as investors grapple with the looming prospect of rate hikes that will reduce companies’ future cash flows, casting a shadow on lofty valuations.
During bouts of inflation, investors favour companies that are profit-making and will, crucially, turn to those that have the ability to pass on the increased costs to their consumers; confectioners are seemingly well-placed to do so.
Mondelez serves as a defensive large-cap stock and has demonstrated a continuum of resilience in the face of changing consumer habits through its flexibility and creativity. The stock also yields a comfortable 2.17% dividend that will make a noteworthy addition to any portfolio, boding well with income seekers as growth stocks lose their appetite.
Risks
Input costs: The proof is in the pudding
The narrative surrounding the price of cocoa, a key ingredient of many of its products Mondelez brands, is marred with concerns over human rights violations, inflationary pressures and recent legislation.
With the Ivory Coast and Ghana controlling 65% of global cocoa production, they remain price takers to a large degree. While they have attempted to tackle farmer poverty, through premiums, their efforts have been overwhelmingly futile; prices continue to remain relatively low ever compounded by excess supply. Cocoa has been not joined the commodity rally amid economic recovery hopes.
The EU plans to pass legislation, that will come into effect in 2024, directed towards the prevention of importing of such commodities that are linked to human rights violations. While the efficacy of such laws will no doubt be tested, price rises are on the horizon, leading to ever tightening markets. With cocoa eating a large chunk of input costs, price rises seek to dampen this recent sugar rush.
Confectioners, however, are notorious for shrinkflation (offering smaller sized goods at their existing prices), an unwanted by-product of stagflation. This was prominent in the aftermath of UK Brexit vote due to Sterling’s depreciation. While input prices such as cocoa have not hit their apex of 2016, rising prices are on the horizon and Mondelez should be able to pass on these price rises to the consumer, albeit under the guise of smaller goods, whetting investors’ appetite as the dawn of inflation gathers steam.
By Dinah Wolf, Cass Business School
