Beyond Chocolate
In February last year, Mondelez India, the maker of Cadbury, reported its worst performance in almost a decade. Revenues dipped from Rs6,562.7 crore in 2015 to Rs5,698.7 crore in 2016, while profits fell over 60 per cent. Though the November 2016 demonetisation was the immediate cause - consumption of chocolates and biscuits dipped over 25 per cent - the chocolate-maker had been seeing lacklustre revenue growth for almost two years prior to that.
There were murmurs of the erstwhile Cadbury senior team being unhappy under the new leadership of Kraft (Kraft took over Cadbury in 2010; in 2012, Kraft was split into two, with one part, Mondelez, focussing on snacking portfolio in fast-emerging markets such as India, West Asia and Africa). There was a spate of exits. Cadbury veteran Anand Kripalu, who was the then managing director (MD) quit in July 2013. Manu Anand, who replaced him, moved to Singapore as President, Regional Category Team, Chocolates, in 2014. Thats when Chandramouli Venkatesan took over as MD. He quit in 2016. Deepak Iyer took over in August 2016. "Mondelez India faced an exodus after the formation of the new entity and more recently because of adoption of the category-led business model due to which there were some lay-offs, too," says the CEO of a leading executive search company. Today, the company has three category heads - Chocolates, Biscuits, GCPB (Gum, Candy, Powdered Beverages) - in Singapore who take complete charge of profit and loss of their respective categories in the region, while the country head drives sales, marketing and distribution.
So, was the poor performance a result of restructuring? Not entirely. "Brand Cadbury had become complacent at least 10 years prior to being bought by Mondelez. The latter had to work hard to knock-off the complacency," says FMCG industry veteran A. Mahendran, MD of Global Consumer Products and former MD, Godrej Consumer Products. Though Cadbury is synonymous with chocolates in India (in 2015, it accounted for close to 60 cent share of the Indian chocolate confectionary market), it currently has a 55.4 per cent share in the Rs12,090 crore Indian chocolate confectionary market, according to Euromonitor. One reason is that newcomers such as Mars and Ferrero Rocher and upstarts such as LuvIt are gaining ground. "Cadbury, in the recent past, hasn't been able to replicate the emotional connect it had created with iconic campaigns such as Kuch Khas Hai Kuch Baat Hai and Kuch Meetha Ho Jaye where it positioned itself as a replacement to the traditional mithai," says N. Chandramouli, CEO, TRA Research, a brand data insights company.
So, imagine the surprise this February when the $26- billion Mondelez International's new CEO, Dirk Van de Put, talked about India's stellar growth at the Consumer Analyst Group of New York (CAGNY) conference. Van de Put said the India business grew in double digits (12 per cent) in 2017, and the country was among their top eight growth markets. He mentioned that the Indian arm's market share grew by 1 per cent. While the Euromonitor report says that Mondelez has a 54.5 per cent market share in India, Nielsen has called them market leaders with a 66.2 per cent share. Was this a message to investors that the company had put its worst behind and was now looking at a new phase of high growth? The company surely thinks so. "India is a very important market for us as the demographics here are strong. We see a growing middle-class with low per capita consumption of chocolates," Mondelez International CFO Brian Gladden had said earlier at an investor meeting.
But will this turnaround last or is it a partial relief based on short-term measures? While the company has got many things right in recent years, there are also many worries. One is its almost complete dependence on chocolates and relative lack of success in making any headway in other categories such as biscuits and healthy snacking, a category that is seeing high growth, with striking innovations. Here, experts point at a lot of piecemeal changes but lack of an overarching strategy. Then there are nimble local competitors such as Britannia - well in tune with the country's fast-changing market and consumer tastes - to deal with. For Mondelez, it is not going to be an easy ride.
The Right Moves
What did Mondelez India do to emerge as one of the most important markets for its global parent? To begin with, it put in place an entirely new team. It hired new heads of sales, human resources and finance, and finally brought in Deepak Iyer, former CEO of Bharti AXA, as MD, Mondelez India. Iyer's first step was ensuring availability of products across the length and breadth of the country. Mondelez products are now available in 2.6 million outlets. "Eighteen months ago, we used to service 20,000 villages directly; today, we service approximately 50,000 villages directly. We have invested in about 300,000 visi coolers to chill our products," says Iyer.
The company has also been launching new products in mid-premium as well as mass segments across Cadbury, Oreo and Bournvita brands. From Silk Bubbly, Silk Caramello, Silk Oreo and Golden Oreo at the premium end to Fuse, Lickables and Bournvita Biscuits at the mass end, Mondelez India has been on a roll over the last two years.
Iyer attributes the shrinkage the company went through more to the state of the economy than the structural transition the company went through. "Ninety days after I joined, we had demonetisation. Despite the dip in consumption, we launched Silk Oreo in December 2016, which was the second month of demonetisation. Three months after that, we followed it up with Cadbury Dairy Milk Lickables. There will always be ups and downs. The biggest thing we are proud of is that we looked at it optimistically."
For Mondelez International, India is important because of its growth potential. Mondelez's home market, the US, contributes just 23 per cent to its revenue, while 36 per cent comes from emerging markets such as India and Vietnam. In an environment where most global- packaged food companies are facing headwinds, especially from retailers pushing their own private labels, the analyst community believes Mondelez is less vulnerable than peers given its wider geographic exposure. "With roughly 36 per cent sales coming from emerging markets (where growth has improved of late), and channel diversification, Mondelez offers investors more of what they want and less of what they want to avoid," says a recent Goldman Sachs report.
This explains the company's huge investment in India. In early 2016, Mondelez put up its largest production facility in the Asia-Pacific region, a smart factory, at an investment of $230 million. It also invested $15 million in an R&D facility in Mumbai.
Is It Enough?
Van de Put said at the CAGNY conference they wanted to become the world's best snacking company. "Consumers are working longer hours, they have longer commutes, more women are entering the workforce, and time is compressed. As result, people snack more," he said. But he also agreed that Mondelez's portfolio is heavily skewed towards sweet snacks, which are showing low growth. Though the company has, in recent years, come up with multigrain breakfast biscuits and gluten-free and anti-allergy snacking options, it needs to do more. With chocolates accounting for 85 per cent revenue, Mondelez India is overdependent on its sweets portfolio, and perhaps that's why the company hasn't looked at getting its other offerings such as Belvita and Milka into India, as they are sweet.
"Most snacking companies, barring PepsiCo, are Indian, and none of them really offers healthy snacking. If Mondelez can focus on healthy snacks and create a market, there is definitely scope," says Mahendran of Global Consumer Products.
But healthy snacks and sweet snacks (Cadbury had to take Bytes off shelves in 2011) have not worked in India, and creating a category of healthy snacks will require a lot of time and patience. But the larger question is - whether the company is doing enough to expand its existing business of chocolates and biscuits?
Yes, 2017 did saw a slew of launches, but were they category creators? A recent study by a large retailer on the Indian chocolate industry says while most players are creating sub-brands (like Cadbury Dairy Milk Marvellous Creations, Silk Oreo, Silk Temptations), there are few innovations. Consumers, it says, are looking for innovative variants such as sandwich chocolate bars or fresh fruit bars coated with chocolate, which no national brand is considering getting into. The recent Cadbury launches, says Chandramouli of TRA, are mere category innovations and not habit changers. "What are Bubbly or Silk? It is the same chocolate, there is no innovation. Similarly, Fuse is a category copy-cat," he says. Mondelez hotly disputes this view saying these are real innovations.
Even in biscuits, all that the company has done is to launch Oreo in various flavours. Is that enough when competition is creating new categories of cookies almost every quarter? Mondelez's market share in the Rs24,630-crore sweet biscuit market is just 0.8 per cent, according to Euromonitor.
While Iyer and his team have done a brilliant job of penetrating deeper into the market and increasing sales, brand gurus say a sales-led strategy can lead to short-term revenue growth but cannot change consumption habits. Mondelez India needs to figure out a larger purpose in India, says Alpana Parida, MD, DY Works. "They need to figure out what meaning their product will have in a consumer's life. It's a fragmented strategy where there is separate thinking for each brand and sub-brand and its variant. There isn't an overarching thought that is covering this." Parida says most recent launches, be it Lickables or Fuse, meet a certain short-term tactical need.
Time is running out as competition has started making moves. Britannia, for instance, has announced the launch of baked chocolate croissants, which it will position as a healthy on-the-go snack. Similarly, Indore-based Pratap Snacks has launched a three-layered sponge cake with jam and chocolate filling under the brand Rich Feast.
Having a larger snack play isn't going to be easy. "They have to come up with options relevant to the Indian context. They also have to be clear whether or not they want to focus on the health platform since they like to call themselves joy givers," says Raghu Vishwanath, MD, Vertebrand, a brand valuation company.
Category-led Model
In 2015, the company shifted from country-led model to regional category-led model, which is becoming increasingly popular, with most global majors seeing it as a way to get economies of scale. "Our regional and global teams have been very supportive - especially in events like demonetisation. Had we been following a country model, we would have had to fend for ourselves and it would have been difficult for us to bounce back so fast post-demonetisation. The Category model allows use of global synergies for other areas as well, such as Innovation and Procurement. At the end of the day, no model is fully right or wrong. Companies need to evolve their operating models to meet the needs and demands of an ever changing business environment," he says. "Cadbury Dairy Milk Silk-Oreo was a global platform launched in India. On the other hand, we have developed many products and brands locally in India and are now taking them to other parts of the globe. For example, 5-Star is now available in South-east Asia, South Africa, Latin America. CDM Lickables and Cadbury Fuse were launched in India first and we have already launched Lickables in China. Similarly, as we use our global scale for procurement, we save huge costs."
But won't category focus, as opposed to country focus, reduce accountability in a particular country? "There is no way you can be a multibillion-dollar business and lose accountability. I think it is more a question of balancing accountability between functions and categories and countries versus sole accountability. The final truth being growth is a team sport" says Iyer.
While FMCG industry veteran Mahendran of Global Consumer Products speaks in favour of the category model, provided it's executed without compromising on local needs, a large segment of the industry says it is fraught with challenges. Unni Krishnan, Co-founder of brand consultancy LongWealth, considers it a short-term value extraction model which is, in the long term, poisonous for the brand. The only performance indicator in a category led model, says Chandramouli of TRA, is sales. "That's the big problem with anything that is category-led as your controllers are no longer looking at consumer interests; it's about pushing a product to you." The list of MNCs that have switched to a category-led model include PepsiCo and Nestle. While PepsiCo has shrunk in India in the last few years, Nestle, too, is struggling to grow fast. With local companies having hit the critical mass, a category-led model, if not executed properly, can increase response time immensely.
Van de Put also emphasised the need for a little bit more focus on how they drive local growth. "Sometimes, category priorities conflict a little bit with what is possible overall in a country. Is there another way we need to think it through?"
How far the strategic exercise that Van de Put has embarked upon would impact India needs to be seen. However, what is clear is that in order to be a high-growth market, the joy givers need to think differently.
@AjitaShashidhar
