This Company Is the Big Winner in Big Food

By Berna Barshay

Friday, July 10, 2020

► Big Food has been conflicted over what products to sell to consumers…

On my last pre-COVID business travels in mid-February, I went to a consumer-packaged goods conference where I met with some of the largest food and beverage, household products, tobacco, and personal care companies in the U.S. and Europe.

Companies shared their marketing plans and their upcoming new products. A few themes stood out… Premium pet food remains a hot business, nobody wanted to talk about vaping (the hot topic the prior year), and companies were excited about plant-based everything.

But one opposing theme kept emerging: Food companies wanted to grow the assortment of their healthiest products while simultaneously touting innovations around their classic junk foods.

Playing on the healthy trend, companies were eager to tout and lay out samples of their newly launched organic and plant-based offerings. Soda companies wanted to talk about their water, milk, and tea businesses.

But at the same time, these companies were showing slides that communicated the persistent popularity of their most sugar-laden offerings and explaining how they would keep that momentum going with new product extensions.

► Indulgent snacking – sometimes called conscious or mindful indulgence – is the new junk food…

The marketing takeaway was that Big Food remains under duress – with secular growth in many products clipped and even turning negative – because consumers are looking to reduce sugar, carbs, and calories.

The solution has been to introduce “healthier for you” products while still pushing demand for the unhealthiest ones, often putting a more socially conscious spin on selling junk by adding portion control to the packaging.

► Perhaps nowhere in the packaged-food world is the struggle between health and indulgence more prevalent than at General Mills (GIS)…

The company has a huge natural/organics division, with brands like Annie’s, Epic, and Cascadian Farms. At the same time, it’s pushing innovation in the cereal division with the introduction of Hershey’s Kisses and Jolly Rancher cereals (both real items new to grocery shelves in 2020).

These companies were already skating a thin line, coming under scrutiny for their contribution to the obesity epidemic, while still trying to promote new healthy products. But the pandemic has presented new marketing challenges.

As I discussed in yesterday’s Empire Financial Daily, we’ve seen a boom in grocery shopping and packaged food as people stay home more, eat out less, and increase their snacking. Food companies want to seize the moment without coming off as crass and opportunistic.

► When COVID-19 hit, packaged-food companies had to make a quick pivot in their messaging…

For these businesses, winning means taking care of three things: generating product demand, winning shelf space at retailers, and achieving manufacturing and marketing efficiency.

Marketing and product innovation have always been at the heart of demand creation, but companies have had to radically pivot in the last few months. Though quarantine may have been the best time ever to attract new customers, the standard sales pitches didn’t always apply.

As I discussed yesterday, indulgent items like cookies are typically doused with nostalgia and family imagery to tempt consumers. Companies have leaned hard into that, with many Big Food players emphasizing family togetherness through the use of quarantine home videos to make new ads.

One way to opportunistically remind consumers about products they can buy without coming across as unempathetic is to offer useful messages about how to use products as an ingredient. With people cooking more, Campbell (CPB) soup reminds customers that canned soup can make a casserole, and McCormick (MKC) is posting videos on social media showing how to use spices to bake bread.

► Companies are taking different approaches that are resonating with consumers…

A survey from Pepsi (PEP) and market research firm Ipsos found that respondents are valuing empathy in brand messaging at this time.

Acknowledging these challenging times with humor, Kraft Heinz (KHC) ran an Oscar Mayer ad encouraging people to stay at least 12 hot dogs apart during outdoor cookouts this summer.

Other companies have rallied around first responders by advertising their donations to them. Hershey (HSY) is releasing superhero chocolate bars with DC characters like Wonder Woman and Superman, but the first shipments are reserved for hospitals, police stations, and firehouses.

Companies are also advertising how they and their employees are good corporate citizens and community members. Unilever (UN), owner of Lipton tea and Ben & Jerry’s ice cream, held a National Day of Service on May 21 and donated all products manufactured that day to people who the pandemic has affected.

Another tactic some companies are taking is emphasizing the contributions of their employees as essential workers. Similar to Amazon’s (AMZN) ubiquitous ads showcasing the efforts of their distribution centers and delivery workers, Kraft created a “We Got You, America” TV ad that conveniently showcases company products while reminding you of their employees’ sacrifices. (You can watch the minute-long spot on YouTube here.)

As Kraft Heinz’s U.S. Divisional President Carlos Abrams-Rivera explained, the company has an important mandate to keep people fed…

Our company’s mission has never been clearer – we have a mission to help feed the world… And our employees are on the front lines making sure the products consumers know, love and trust make it to store shelves. They are the heroes of our company!

The front-line workers showing up to work every day indeed deserve our gratitude for keeping us fed… But it’s also clear companies like Kraft Heinz want us to keep eating mac and cheese.

► Big Food has had to make some operational pivots as well…

One volume growth driver that you may see less of on grocery shelves because of the pandemic is limited-edition items and new flavors for existing products.

With demand up so much, manufacturing plants are running full out. The switch from making one variety of product or packaging to another means briefly shutting down production lines, which lowers total output. Reducing the variety of products sold is one way to help already-stressed supply chains keep up with demand.

At Mondelez (MDLZ), many limited-edition Oreos will need to take a pause. As North American divisional president Glen Walter told CNN…

Some of the innovation flavors that we have in the pipeline… we’ve chosen to either postpone or cancel to allow us to make sure that, from a production standpoint and an execution standpoint, we can deliver to consumers what they know and love… [the variety of Oreos available isn’t] as robust today as it would have been before the pandemic.

While demand for Oreo Thins and fudge-covered Oreos has grown, Walter said “the biggest uptick” was in the classic, regular Oreo.

Even if pumpkin-spice Oreos may be hard to find this fall, I’m still bullish on one snacking giant in particular…

I already liked Mondelez’s (MDLZ) prospects before the pandemic, and now I do even more.

Snacking is a $1.2 trillion business. Unlike many packaged-food categories, which are secularly shrinking – like cereal and sugar soda, until recently – snack categories like cookies, candy, and chips have experienced consistent volume growth in the positive low single-digits.

The reason for this is that 77% of consumers believe in healthy (and occasionally indulgent) snacking, and four out of five parents use snack time as a way to connect with their children.

There’s no better way to play the snacking trend than Mondelez, which was created in 2012 when the former Kraft Foods separated into a global snack company and a North American grocery company.

Mondelez has nine global giant brands – including Oreo, Cadbury, and Toblerone – that make up almost half of its revenue. The other half is made up of national or regional brands like Ritz crackers and Sour Patch Kids in the U.S., LU in France, and Milka in Germany.

The company is diversified geographically, with 75% of sales coming from outside the U.S. Europe and Asia/Middle East/Africa are 39% and 22% of revenues, respectively. Higher-growth emerging markets contribute 37% of sales.

Mondelez has a first- or second-place market share in all categories of cookies, chocolate, candy, and gum. That allows the company to claim the most coveted shelf space in grocery stores, and to continue to invest in the business through advertising, tuck-in acquisitions, new product innovation, and direct-to-consumer initiatives. Packaged foods are a scale business, and Mondelez has the scale that will reinforce its leading positions.

The company is a cash flow machine – generating about $3 billion per year – and pays a 2.2% dividend. Since the Kraft Foods separation nearly eight years ago, Mondelez has returned $23 billion in cash to shareholders through dividends and share repurchases.

Like its peers, Mondelez has paused new product introductions so it can keep up with the surge in demand. But this is a net positive, because it will give the company a deeper bench of ideas to turn to when the pandemic is over and manufacturing capacity is less constrained.

Like most packaged-foods companies, Mondelez is feeling cost pressure from the pandemic, as safety protocols layer expenses onto manufacturing and distribution facilities. This is temporary, though, and the company can handle this due to its healthy operating margins, which typically hover around 16%.

Its smaller competitors may not be so lucky…

The longer the pandemic continues, the more that smaller snack brands will likely need to cut back on advertising to save on costs. Big brands like the ones at Mondelez will gain market share.

Smaller brands may also find themselves struggling to fulfill orders during outbreaks and surges in demand, which is another opportunity for Mondelez to capture space at grocers and market share with consumers.

While marketing was initially pulled back somewhat at the beginning of the pandemic, Mondelez has recently said it plans to increase media spend in the near term to opportunistically make a play for share when other companies may be struggling.

You don’t get to be as big as Mondelez without being a great marketer, and the company has managed the pivot to empathetic pandemic marketing well. Its recent Oreo ad “Stay Home, Stay Playful” emphasizes family time at home, and features families exercising together, playing games, and yes, consuming Oreos.

The company recently reinforced this messaging around playfulness while adding a social responsibility angle through astute use of social media.

Oreo created a TikTok challenge asking people to film themselves moving an Oreo from their forehead to their mouth without using their hands and committed to making a charitable donation for the first 1 million videos uploaded. The campaign inspired thousands of videos and almost 100 million views.

With great brands, marketing, and global scale, MDLZ shares look especially attractive today.

Lots in the mailbag today on both international stocks and cord-cutting…

How do you feel about the recent surge in empathetic pandemic advertising? Do you find yourself snacking more during quarantine? Share your thoughts at [email protected].

► “Hi Berna, I enjoy your daily emails – love the broad coverage and in-depth analysis offered. Makes me feel like I’m getting away with the better end of the bargain! I think it’d be great to explore non-U.S. stocks as many multinational companies trade on international exchanges despite deriving the majority of the sales and profits from the U.S. After reading Lawrence Cunningham’s Quality Investing, international stocks’ strong track record makes it hard to avoid high quality international companies that are often overlooked by U.S. investors. Keep up the amazing work.” – John A.

► “Anywhere in the world that there is money to make, take me there!” – Richard D.

► “I strongly recommend watching the documentary-China Hustle before you recommend any Chinese stocks. Financial fraud is endemic in this country and we have no good way to vet their financials. I have a grandson who has done educational financial internships in China and whose father has done furniture business with Chinese factories for years.

“The Chinese government has no interest in doing anything to protect U.S. investors. The U.S. is a commercial competitor and a geopolitical rival. They have no issues with taking advantage of us in any way possible.” – Richard D.

Berna comment: Thanks for the recommendation, Richard. I agree that there are fewer investor protections in China, which is why I think you need to stick with large caps there, which American banks have scrutinized.

► “I have attempted to cut the cord but internet service in my particular area is best served by Cox. I have eliminated the TV and the home phone from Cox. I have DirectTV now, and although it is not perfect, it will do. Cox was hammering me for $200+ per month with no Premium channels! A far cry from the original price of $99!” – Douglas M.

► “I ditched the cable tv system a long time ago, about 5 years now. I got sick and tired of paying for channels and service I really didn’t use or care about, but I have kids so I had to find another way to satisfy them and keep my sanity ( to keep them busy and leave daddy alone for a bit). So, me and a couple of friends created our own buddy system. Each friend opens a streaming service with access to multiple devices, we all give each other access to these accounts. So, at the end, you only pay for your internet plus one streaming service but have access to others and that way everyone wins and saves a bunch of money. Love your newsletters, if you ever do a SPARTAN RACE let me know – that’s my kind of sport.” – Andy A.

Berna comment: My colleague Whitney will gladly do a spartan race with you, Andy!

► “I am sure I am in the minority, but I stopped watching TV years ago and have very limited use of the internet for informational purposes only. Instructional YouTube videos are really a source of entertainment. The whole covid-19 fiasco starting the first week in March was the icing on the cake. I am ready for the internet to become a totally paid service – there is way too much sensory overload and information, 99% of which is total garbage and crap.

“As old-fashioned as it sounds, I read books and actually learn something. My mantra is less predicting and pontificating and more preparing. Again, I’m sure I am in authority and as my grown kids say I am a dinosaur, but I am a happy dinosaur, cheers!” – Robert R.


Berna Barshay
July 10, 2020

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.