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Morningstar | Mondelez’s Decision to Elevate Brand Spending Strikes Us As Prudent, Despite Near-Term Profit Hit

After just more than a year at the helm, Mondelez’s CEO Dirk Van de Put has taken a conciliatory tone, calling out the progress made to date while emphasizing the need for further investments to ensure recent momentum persists. We’ve never thought righting the ship at Mondelez would necessitate seismic shifts in its operations but rather more tactical initiatives to facilitate sustainable improvement, particularly in terms of sales. We weren’t surprised that accelerating the top line is at the forefront of the firm’s updated strategic direction. Mondelez is targeting 3%-plus sales growth longer term as it works to extend the distribution of its fare and reinvest in product innovation aligned with consumer trends both at home and abroad.While much attention has centered on opportunities to bolster sales, we didn't expect the pendulum would shift entirely to sales gains under Van de Put’s direction; rather, based on his tenure at privately held McCain Foods and his recent rhetoric, we suspected he would put the firm on a path to drive sustained, profitable growth. As such, we weren’t surprised by the suggestion that Mondelez is poised to realize additional efficiency gains between fiscal 2019 and fiscal 2022. While management has refrained from quantifying its cost-saving objectives, we see an additional $1 billion in excess costs that it could remove (on top of the $1.5 billion realized over the past several years), primarily by extracting further complexity from its operations, including rationalizing its suppliers, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities.We didn’t expect the bulk of these savings to bolster its profits, though. In line with our thinking, management has stressed that a portion of any savings realized would fuel additional spending behind its brand mix in the form of research and development and marketing, supporting the intangible asset that underlies Mondelez's wide economic moat. This aligns with our forecast for research, development, and marketing to edge up to nearly 9% of sales over the next 10 years (or about $2.7 billion annually), above historical levels of 6%-7% ($1.8 billion).