When it comes to snack foods, investors typically think of PepsiCo, Inc. (NYSE:PEP)’s Frito-Lay division as the the dominant force. With a 40% share of the global salty snack market, it is an understandable first thought. However, investors may soon think of Mondelez International Inc (NASDAQ:MDLZ) as the king of snacks.
Strong brands, global reach
PepsiCo, Inc. (NYSE:PEP) is dominant in the United States — it has a whopping 64% share of the U.S. salty snack market. The North American snack business is also PepsiCo’s most profitable segment; it accounts for 40% of operating profits.
However, Frito-Lay is not nearly as profitable overseas — that’s Mondelez International Inc (NASDAQ:MDLZ)’s domain. Mondelez International Inc (NASDAQ:MDLZ) is a global snacks powerhouse that has a leading market share in every category and every region in which it competes. Its brands include Oreo, Nabisco, Cadbury, and Trident.
Mondelez International Inc (NASDAQ:MDLZ)’s global scale, leading market share, and strong brands enable it to earn higher margins than competing brands. In addition, the company’s large exposure to confectionery products provides stable cash flow and market share due to consumers’ brand loyalty in the category; private labels have been unable to gain traction in the market.
Having a large segment of revenues protected from private label competition is a major bonus; the consequences of private label competition are evident in General Mills, Inc. (NYSE:GIS)’ troubles with off-brand items.
General Mills, Inc. (NYSE:GIS) has a dominant share of the ready-to-eat cereals category — Cheerios alone has a 12% share of the market. It also has strong market share in yogurt and canned soup, not to mention its Pillsbury brand which has a 70% share of its category.
However, even General Mills, Inc. (NYSE:GIS)’ category dominance is not immune to private-label products. Grocers have invested heavily in their own brands over the last half-decade, which has vastly improved the products’ quality and consumers’ willingness to purchase them. This presents a tremendous hurdle for General Mills, Inc. (NYSE:GIS), which has yet to find a way to stave off the new-found competition. Luckily, Mondelez International Inc (NASDAQ:MDLZ) is not as exposed to private label competition.
Despite having a better hold on the international markets, Mondelez International Inc (NASDAQ:MDLZ) is still at a disadvantage to Frito-Lay because it does not have PepsiCo, Inc. (NYSE:PEP)’s vast direct-store-delivery network. The direct store delivery system allows PepsiCo to maintain direct relationships with retailers, which increases its bargaining power. But more importantly, the company maintains control over its distribution and can deliver both snacks and carbonated soft drinks in a cost-efficient manner.
Nevertheless, Mondelez is positioned to equal PepsiCo’s dominance if it can keep from making additional capital allocation mistakes. For instance, it paid way too much to acquire Cadbury and sold its frozen pizza business to Nestle at a bargain price. The smartest thing Mondelez could do is merge with PepsiCo, Inc. (NYSE:PEP), but it should be able to compete in international markets if it just keeps promoting its brands.
Mondelez International Inc (NASDAQ:MDLZ) is a great company, so it does not come at a cheap price. Management has guided to $1.56 earnings per share in 2013, so it trades at about 20x earnings. However, the company should easily be able to grow into that valuation through organic sales growth — something that has been hard to come by in recent years but is expected to pick up again soon. In that case, investors can expect a better-than-market return from Mondelez going forward.
The article This Company Seeks to Dominate Snacks originally appeared on Fool.com and is written by Ted Cooper.
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