For those with a sweet tooth, the upcoming Chinese New Year holiday will test your will power. In case you’re not familiar with Chinese New Year tradition, families usual keep a box of sweets at home. When friends and families come over to visit during Chinese New Year, they’re supposed to have some sweets so that they will have a sweet year ahead.
To give you a feel, here’s what we are stocking at home. You can see some traditional local candies like the “White Rabbit”, “Yan Chim Kee Coconut Candy”, the “Orange/Melon Jelly Candy”, as well as some western favourites like Dairy Milk and Crunchie.
Who Made Dairy Milk? Cadbury, Hershey, Kraft or Mondelez
Two of my favourite chocolate bars are the Dairy Milk Fruit & Nut and the Crunchie. While Crunchie taste pretty much the same around the world, Dairy Milk has been a source of contention. Some argue that UK version is far superior to what you can buy in the US or elsewhere.
This brings us back to the above question.
Who makes Dairy Milk? The answer is “All of the above”.
Officially Dairy Milk is made by Cadbury. However, in the US, Hershey has the license to manufacture and distribute Cadbury products. In the rest of the world, it would be made by Cadbury UK.
However, Cadbury UK was bought by Kraft Foods in February 2010, so one could also argue that Dairy Milk is made by Kraft. But hang on, there’s more. The Kraft Foods from 2010 is not the same as the Kraft Heinz today. In October 2012, Kraft Foods decided to spin off its North American grocery business, calling it Kraft Foods Group Inc. The original entity, Kraft Foods, was renamed as Mondelez (MDLZ). Then in 2016, Kraft Foods was merged with Heinz to form Kraft Heinz Company (KHC).
Why the long intro? That’s the most exciting part
I was first drawn to Kraft Heinz when I saw its share price chart for 2017. Against the S&P 500’s 19% gain, KHZ had fallen by 11%. MDLZ did not do much better, falling some 3% in 2017. Normally, this is the type of set up that I find interesting. Household brands that had lagged behind the broader market and potentially poised for a catch up.
However, the first thing that cooled my interest was their PE. Even with the past week’s market correction, KHC and MDLZ were both still trading at 23x. Intuitively, I tend to think of 20x PE as fair for consumer staples. While I see KHC and MDLZ as having great products, current valuation seems to already reflect that.
But is there another angle? If you cannot count on multiple expansion, what about earnings growth. Are people eating more chocolates? Buying more ketchup? What about growth from the emerging markets? Are the Chinese splashing more ketchup onto their KFC fried chicken?
Geographic spread – KHC very North America centric, Mondelez more evenly split
We start by looking at their sales distribution. Here we see quite a big difference between the previous sister companies. KHC is predominately a US and North American focused company. The US and Canada account for 70.4% and 8.7% of its sales. Europe and the Rest of the World are only 8.9% and 12.0% of KHC’s sales. I guess that’s why it had looked to Unilever to add some geographic diversification to its business.
Mondelez, on the other hand, has sales that is more evenly distributed. Europe is the biggest contributor at 37.8% of sales, followed by North America at 26.2%. AMEA (Asia Middle East and Africa) is the third biggest at 22.2% with Latin America rounding things off at 13,8%. As Cadbury is licensed to Hershey in the US, this probably explains why Mondelez’s North America business trails its European side.
I know I have been talking a lot about Cadbury chocolates but there are actually a lot more to MDLZ. Some of its other brands include Oreo, Nabisco, Toblerone (another one of my favourites), Trident chewing gum, Halls and Tang. The three biggest sales categories are Biscuits at 41% of sales, followed by Chocolate at 30% and Gum and Candy at 15%. The reason why these seem to be increasing in proportion is due to Mondelez injecting its coffee business into what eventually became Keurig.
For Kraft Heinz, as the name implies, condiment & sauces and Cheese & dairy are the biggest contributors at 26% and 21%. But in case you’re wondering, its brands also includes the likes of Oscar Mayer, Planters, Maxwell House, Philadelphia, Kool-Aid and Jell-O just to name a few.
Sweating costs rather than top line growth
With so much acquisitions and divestments over the years, it is difficult to compare sales trends. However, if we just look at the last reported year, we see that Mondelez overall sales was flat. LatAm was the fastest growing region at 5.1%. Europe gained 0.4% but AMEA and North America both saw overall sales declining by 1.3% and 2.3%.
For KHC, during the first nine months of 2017, its overall sales declined by 1.4%. Sales in the Rest of the World grew 5.1% but the other three regions all declined. The US and Europe declined by 1.7% and 1.6% while sales in Canada tumbled 5.5%.
I don’t know whether it is just consumer staples or the fact that people are making healthier choices but the inability to grow the top line is something that we also saw in China’s instant noodle market as well (see previous post here).
The good news is that although it has been difficult to find top line growth, both companies have been effective in cutting costs and boosting margins. For MDLZ, over the past four years, it has managed to boost its operating margin from 11.3% to 15.0%. Through the first nine months of 2017, KHC’s operating margin was 26.5%, up 11.5pp from 2014’s pro-forma 15.1%.
Think I’ll wait for them to go on sale
While I like the margin improvement story, with fair valuation and little top line growth, my compulsion to act is low.
That said, with the recent volatility in the markets, I suspect these two great products may well be on sale soon.I just hope that it won’t be a 2-for-1 sale. If that is the case, I will need to eat a lot of chocolates to help cheer me up.Embed from Getty Images