The Long and Short

Mondelez’ guidance a warning for packaged food peers

Meredith Contente | February 2, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Passing along cost inflation to the consumer through higher prices on packaged good will become harder this year. That’s the message in the recent 2024 guidance from Mondelez International (MDLZ), the bellwether in the snacking space. MDLZ’s revenue growth last year came entirely from higher prices as the company saw sales volumes decline. Rising cocoa and sugar prices have management guiding to a high-single digit increase in inflation for 2024, relative to 3% to 5% organic revenue growth. Management will need to rely more heavily on manageable cost containment to help preserve margins.

The guidance suggests that peers with exposure to cocoa and sugar input costs may be issuing or revising guidance for the year that falls short of consensus when they report earnings. Volumes at most packaged food peers were already offsetting pricing actions to some extent and could continue to play a much larger role in 2024. Volume declines picked up in its fiscal fourth quarter at MDLZ, primarily in North America and Europe as consumer elasticity remains below historical norms. MDLZ peers that are still slated to report earnings include: The J M Smucker Company (SJM), The Hershey Company (HSY), Kellanova (K), General Mills (GIS), and Campbell Soup (CPB). Any new or revised guidance that falls short of consensus could put further pressure on spreads.

Exhibit 1. Consumer Staples BBB Curve (2/1/24 vs. 12/29/23)

Source: Bloomberg TRACE; Santander US Capital Markets

Cocoa futures hitting highs

Cocoa futures increased dramatically since the start of the year with NY cocoa futures hitting a 46-year high while London cocoa futures climbed to a new record high. Cocoa prices are being driven by concerns that cocoa fields in the Ivory Coast are drying out as a result of more extreme West African winds. Furthermore, crop disease over the past year has resulted in lower crop yields. The Ivory Coast remains the world’s largest cocoa producer. Cocoa shipments from the country over the four-month period from October 2023 to January 2024 declined roughly 36%. Additionally, Ghana, the world’s second largest cocoa producer, postponed shipments as fertilizer depletion and crop disease resulted in a 13-year low for crop yields.

Exhibit 2. NY Cocoa Futures (1960-2024)

Source: ICE Futures US; Bloomberg

Sugar futures have rallied in January

Raw sugar futures have increased 16% in the month of January alone, representing the largest monthly gain for the commodity in roughly nine months. Unlike cocoa, sugar has not seen record highs, but has recouped roughly half of the sell-off witnessed in December. The monthly climb largely reflects a decline in sugar production in India. Sugar has been diverted to make ethanol in India and there are concerns that the Indian government may increase the amount of sugar allowed to be used for ethanol production. India remains the largest producer of sugar largely due to its favorable climate. Concerns abound that India may become an importer of the commodity as soon as next year, should the government lift its diversion caps. Brazil, the second largest producer, is already having production estimates trimmed as it is experiencing drier weather, particularly in the country’s Center-South region.

Exhibit 3. Raw Sugar Futures (February 2023-January 2024)

Source: ICE Futures US; Bloomberg

Margins likely at risk

The USDA predicts that food inflation will decline to about 2.9% in 2024, relative to the 5.8% prediction for 2023. Drilling down further, grocery food prices are predicted to rise only 1.6% in 2024. However, based on MDLZ’s guidance, inflation for the year is set to increase in the high-single digit area. The disconnect seems to suggest that less inflationary pricing will be passed on to the consumer. This could lead to margin contraction for the packaged food space in 2024.

While MDLZ witnessed 10 bp of adjusted operating income margin expansion in 2023, the company was aggressively managing productivity and leveraging SG&A in addition to price increases to achieve the margin gain. SG&A/sales declined 120bp for the year, to 22.2%. This is 260bp below the company’s 10-year average for the metric. Packaged food companies may have little to no “low hanging fruit” by the way of cost controls to offset rising costs if they can’t pass it on the consumer via pricing. This presents a real risk that operating margins in the packaged food space will fall short of expectations this year.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

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