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Summary

  • Mondelez International Inc. recently announced it would spend $110 million to build a new factory in Russia despite geopolitical concerns in the region.
  • Russia is part of the company’s EEMEA geographic segment that contributed the least to the company’s sales revenue in 2013.
  • The company disclosed that its move to invest in Russia is part of a formerly declared initiative to improve its supply chain to support its bottom line and cash flows.

Mondelez International Inc. (NASDAQ:MDLZ), the popular U.S. manufacturer of confectionery products, has recently announced it would spend $110 million to build a new factory in Russia. Therefore in this article I will analyze the factors that have swayed the company to make this decision and gather courage in times when Russia is experiencing an apprehensive geopolitical climate.

Let us begin with a discussion on the details regarding the company's new factory in Russia and the geopolitical chaos affecting U.S. players in the region.

Details on the New Factory and Geopolitical Concerns

According to the company's spokesman, Michael Mitchel, the company's Russian unit will construct the plant in Novosibirsk, the third most populous city in Russia. This plant will add ample capacity for the company to produce 50,000 tons of snacks per annum from the facility. The factory is regarded as Mondelez's most advanced facility in Russia and is anticipated to generate 180 jobs. The products produced by the new plant will include Jubilee, TUC and Barni biscuits, in addition to Alpen Gold, Milka and Vozdushnyy chocolate.

The company is eager to invest and expand in the region that is not in-line with the general trend and activities that other U.S. companies are undertaking in the region. The political tension in Russia is creating headwinds for American companies operating in the region. Recently, McDonald's Corp. (NYSE:MCD) declared it would close its three locations in Crimea mentioning the deferment of essential financial and banking services as the reason behind the decision. The U.S. and Europe are looming to impose further economic sanctions against Russia subsequent to President Vladimir Putin's move to seize Crimea from Ukraine last month.

Hence, I will discuss some of the factors that indicate that the company is making the decision at a favorable time without taking into account the political situation in the region.

Favorable Industry Outlook and Growth Prospects

I will first determine what Russia is currently contributing to the company in terms of growth prospects. The Russian region is part of the company's EEMEA geographic segment. The following table shows that the company is currently generating the least revenue from its EEMEA geographic segment.

Source: MDLZ 2013 10K Filing

Additionally, the geographic segment's revenue increased by 4.8% during FY 2013 in comparison to FY 2012 and that was the highest percentage increase in revenue among the company's segments in FY 2013. The company's revenue from Latin America and the Asia Pacific geographic segments declined in FY 2013 while Europe and North America recorded growths of 1.8% and 1.3% respectively. The company disclosed in its FY 2013 10K filing that the revenue growth in the EEMEA segment was due to favorable volume/mix impact mainly from Russia.

The following table illustrates that Russia's per capita consumer expenditure on food, beverages, and tobacco is expected to record a CAGR of 10.7% from 2011-2016. This growth rate is much higher than the 0.7% average EU CAGR for per capital consumer expenditure on food, beverages, and tobacco from 2011-2016.

Source: KPMG Consumer Markets Report

These factors indicate the growth potential for the company from Russia as the measures indicate better expansion opportunities for the company in Russia in comparison to other regions.

Now let us discuss the outlook of the Russian snack markets for the coming years.


Source: KPMG Consumer Markets Report

Russia is regarded as one of the fastest growing economies in Europe. The chart above shows that Russia is expected to maintain 4% growth in its real personal disposable income during 2012-2015. This growth rate reflects an increase from 3% measured for 2011. The second chart above illustrates that the region's consumer prices and inflation rate are expected to fall in the coming years. This shows the rise in the disposable income of consumers and growth in middle class population of the region.

These economic factors are forecasted to create growth opportunities for the region's confectionery and snacks industry. An inclination towards convenience foods is increasing. Busy lives will drive the demand for confectioneries as on-the-go snacking alternatives. This factor drove more than 30% of consumption of confectionery products in Russia in 2012.

The sweet snacks category that includes a variety of chocolates and salted snacks such as TUC biscuits are what Mondelez will mainly be manufacturing at its new Russian facility. Therefore, I will discuss the outlook of these product categories in Russia.

Even though the increasing levels of obesity are a worry for Russian consumers the desire for these snacks will drive strong growth in the sweet snacks category. The following charts show the chocolate market dynamics both in terms of volume and value are forecasted to see positive growth in 2012-2015.

Source: KPMG Consumer Markets Report

The Russian salty snack market is also forecasted to see a positive CAGR in terms of volume and value from 2012-2015 as shown in the following charts.


Source: KPMG Consumer Markets Report

Up until now I have discussed the growth prospects the Russian market has for the company. Now, I will discuss another interesting factor regarding the company's decision to invest and expand in Russia in terms of timeliness.

The Value of Russian Ruble is Low

The following chart shows that the U.S. Dollar is strengthening compared to the Russian ruble. In other words the Russian currency is becoming devalued compared to the U.S. Dollar.

(click to enlarge)

Source: Business Insider

Currently the chaos in Russia is affecting its currency exchange rate against the U.S. dollar and looking forward the trend is forecasted to continue.

A majority of analysts are not optimistic about the Russian currency. According to analysts, more factors indicate that the ruble will decrease by 6% by the end of 2014. Economist and Professor Andrey Zaostrovtsev from the Higher School of Economics has faith that the U.S. dollar will become the most steadfast currency as the euro has not recuperated from the economic havoc. The professor also commented on the fact that the Russian ruble is gradually losing its value. Additionally, the Russian ruble will remain volatile as the Central Bank of Russia is prepared to allow the ruble to float freely and focus entirely on holding inflation. Henceforth, there is no prediction favoring the ruble. Therefore, the advisors are suggesting people refrain from keeping their savings in rubles but if there are any expenses to be paid in rubles then it is the right time to incur them.

Other Factors Causing the Company to Make this Decision and Concluding Remarks

Mondelez has disclosed that its move to invest in Russia is part of a formerly declared initiative to improve its supply chain. The company is putting efforts into saving $1.5 billion in net productivity and increase its cash flow by $1 billion over the next three years as shown in the diagram below.

Source: MDLZ CAGNY Conference

Additionally, the company's move in Russia is also related to numerous initiatives the company is undertaking around the globe in order to capitalize on growing demand in emerging markets.

Despite the geopolitical issues, the company is looking forward to capitalize on the growth opportunities in the Russian snack market. This is in-line with the company's growth and cost-saving initiatives. The figures from the company's latest annual report indicate that Russia is an emerging region for the company's EEMEA geographic segment with much room for growth. Russia is predicted to record further growth in its sweet and salty snacks market both in terms of volume and value in the coming years. The Russian ruble is currently trading at a discount to the U.S. dollar and the trend is expected to continue. This means that right now is a favorable time to incur expenses and invest in the region as Mondelez is an American company.

Source: Mondelez: Now Is A Favorable Time To Invest