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An Analysis of Mondel!z International in Switzerland

By: Akash Miriyala, Kathleen Trax, Michael Oliphant, and Brent Modugno

5$ !"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! ! EXECUTIVE SUMMARY Kraft Foods Inc. demerged in 2012, and split into Kraft Food Group Inc. in North America, and Mondel!z International elsewhere (including Switzerland). While Kraft in North America handles more grocery brands, Mondel!z is in a more potentially lucrative snack foods market. The items in their portfolio include brands in chocolate, cookies, gum, beverages, and crackers. These power brands include Cadbury, Oreo, Halls, Trident, and more, with specialized brands appearing in certain countries worldwide. We will analyze the snack food industry in Switzerland, market trends, and end at a conclusion of our thoughts on the position of Mondel!z International. We found that Switzerland has a saturated snack food industry, and there is not as much growth potential as there is in emerging markets. Thus, we conclude that Mondel!z itself is an attractive company as its brand portfolio is yet to spread deep into the emerging markets However, it must not invest more in its European markets (and Switzerland), as growth seems to have stalled in those regions. Mondel!z must aim to hold onto those markets, while aiming to spread elsewhere. PEST ANALYSIS Political Factors TTIP The Transatlantic Trade and Investment Partnership (TTIP) is a free trade agreement between the Unites States and the European Union thatll be enacted by the end of 2014. See figure 1 below. Covering 46% of the worlds GDP, a free trade area between these two has the potential to be the largest in history. The United Kingdom's Centre for Economic Policy Research stated that 80% of the potential economic gains from the TTIP agreement would be a result of reducing duplications between EU and US rules on tariffs and other regulatory issues. Potential categories benefiting from these lessened restrictions range from food safety all the way to automobile parts. The US and EU will gain the reputations of being innovative and setting standards, as well as attracting producers worldwide, like Mondel!z International, toward joint EU-US standards. Figure 1:

!"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! 6! ! Corruption Switzerland ranks 7th out of the 177 countries in Transparency Internationals 2013 corruption index. They had a score of 85 out of 100, 100 being very clean, compared to a score of 91 for the first place country. So, the public sector of Switzerland is one of the cleanest in the world in terms of corruption. This means that the start-up costs are low for new entrants because there are little to no bribes to be made. Overall, companies that choose to do business there eliminate the burden of political corruption and paying bribes. Economic Factors TTIP This new facet of the European Union, TTIP, would make its members extremely attractive places to do business, and although Switzerland, where Mondel!z International is headquartered, is not a member of the EU, they will receive some 3rd party effects. Switzerland is in the European Free Trade Association, which is included in some of the proposals for the TTIP, so they could potentially be a part of this agreement first hand. But, regardless of whether or not they are included in the agreement, the TTIP is estimated to bring the average European home an extra 545 euros per year once it is fully implemented. The Centre for Economic Policy Research estimated in March of 2013 that a comprehensive agreement would result in annual GDP growth between 68 and 119 billion euros by 2027 in the EU, and annual GDP growth between 50 and 95 billion euros in the US. That same report estimated that a limited agreement, that focuses solely on tariffs, will result in annual GDP growth around 24 billion euros by 2027 in the EU, and annual growth around 9 billion euros in the US. So, no matter the type of agreement that is ultimately enacted, economic growth and stimulation is coming to this region of the world. Economic Freedom Switzerland comes in 4th on the 2014 Economic Freedom Index out of 178 ranked countries, and 1st out of the 43 ranked European countries. With a steady rise in economic freedom in the last 19 years, entrepreneurial activity and innovation in a variety of industries has resulted. As one of only 6 countries in the world to be considered economically free by this index, the people of Switzerland are more inclined to want to work, consume, trade, and invest, all things that stimulate an economy on keep it on the right track. Societal Factors Food European culture as a whole puts substantial emphasis on sauces as condiments, seasonings, or accompaniments. Dairy products are popular for use in the cooking process. Wheat-flour bread and pasta have a long history in the region as a common source of starch, although the potato has become a major player in that starch market as well.

7$ !"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! ! Geography Switzerland has 26 states, called cantons, and is divided into 4 linguistic regions; the German-speaking region, making up the center, north and eastern areas, French-speaking region, in the west, Italian-speaking region in the south, and a small Romansh-speaking region in the southeast. The country is located between France, Italy, and Germany, bringing a real clash of cultures from Latin to Germanic. This variety has helped lead to the recurring issue of a national culture. The Alps run right through the middle of the country as well creating a very mountainous terrain throughout the country as a whole. Trade Factors Relationship with EU Raw materials are generally a big part of Switzerlands imports due to a lack of natural resources. The most important exports include jewelry, watches, and chemicals. The major trading partners are Germany, France, and the United States, along with other European Union countries. The EU accounts for around 68% of Switzerlands trade. While not being a formal member of the EU, Switzerland is highly integrated in the EU economically. In the late 90s Switzerland signed an agreement with the EU giving citizens of each party the right to enter, live, and work on the others territories. They also have agreements loosening reciprocal access restrictions with regards to the transportation of people and goods by road, plane, and rail. Switzerland also participates in EU Research Programs and civilian crisis management missions. PORTERS FIVE FORCES New Entry The food processing business carries a large start-up cost. In Switzerland, skilled labor is more expensive than in less prosperous countries. Thus, it causes operating expenses to be a large percentage of revenues. Mondel!z products carry strong customer loyalty are firmly established, thus new entry is not a threat. Substitutes Generic brands are a substitute to Mondel!z products, as well as competitor brands. Thus, consumers have low switching costs. Generic brands offer similar products at much lower prices. These brands do not have the strength or quality that Mondel!z brands have. Customers Mondel!z customers are: supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, convenience stores, distributors, gasoline stations, drug stores, and value stores. Competition is intense; customers dont have much incentive for brand loyalty. Swiss consumers are sensitive to a trend of health and fitness. To capitalize on this, Mondel!z has reduced the sodium of its Dairylea cheese brand by almost 25% since 2009 and has increased its selection of biscuit products with wholegrain by 50%.

!"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! 8! ! Rivalries Mondel!z biggest rival is Nestl. Nestl is the largest food manufacturing company in the world. It has a very large product portfolio and has quit a few heavy hitters in its line up including but not limited to Baby Ruth, Butterfinger, Wonka, Skinny Cow, 100 Grand, Buitoni, DiGiorno, Hot Pockets, and Coffee Mate. Nestl originated in Switzerland as a producer of baby formula in 1866 and is still headquartered in Switzerland. Suppliers Mondel!z has over 4,000 suppliers feeding their 70 factories in Europe. Having many suppliers gives the sledgehammer to Mondel!z because they have the ability to switch between suppliers if needed. However many of Mondel!z factories and supply chains are out of date and are in drastic need of updating. Figure 2: New Entries Substitutes Strong barriers to entry Success dependent on having multitude of brands and brand strength. Cost of entry extremely high. Generic brands cannot compete with the brand recognition of Mondel!z. Nestl is Mondel!z largest competitor. Swiss customers sensitive to price and there is a current trend of customers wanting healthy and convenient foods/snacks. Toblerone in Berne

Generic brands Nestls Brands Supermarket chains, wholesalers, supercenters, club stores, mass merchandisers. 70 factories throughout Europe, 170 throughout the world, over 4,000 suppliers Nestl




Headquartered in Switzerland Large brand portfolio Largest food processor in the world

MONDEL!Z INFRASTRUCTURE Supply Chain Supply chain inefficiencies have plagued Mondel!z even before its split with Kraft. From 2003 to 2008 Kraft spent 3 billion dollars on a restructuring program to optimize capacity and to leverage its global scale. Although this was a step in the right direction, it was not enough to maximize Mondel!z efficiency. In 2013 Daniel P. Myers, the Executive Vice President, Integrated Supply Chain described Mondel!z supply chain as, fragmented,

9$ !"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! ! complex and inefficient. A major problem is that Mondel!z currently has 74,000 stock keeping units. Their average revenue per SKU is a third that of other leading food processing companies. This overcomplicates the supply chain and increases costs. By 2020 Mondel!z goal is to cut complexity by 60% and to save 100 million costs. Manufacturing Issues Mondel!z manufacturing as a whole is in a sort of state of despair. Only 15% of the factories in Europe are A rated. Many of their factories are very old and out of date. This causes production to suffer and increases costs because older factories require more labor to operate than newer factories. Old factories also increase the likelihood of accidents that could blemish their brand name. For example, in 2013 a fire at the Toblerone factory in Berne, Switzerland halted production for a time and wasted nearly a ton of cocoa beans. In another incident, a faulty wire screen in Mexico caused wire mesh to be in baked into the biscuits and led to a massive recall. Addressing Manufacturing To address this issue Mondel!z is taking steps to improve the performance of its factories and is building new factories. Mondel!z is implementing the Lead Sigma Six managerial program in an effort to eliminate waste and to increase profitability. At the 14 lead sites where this program was introduced capacity was increased by 15% and costs were cut by 1 million dollars on average. Mondel!z is also constructing new production lines in their factories. They plan to replace 60 lines in the next three years. The new lines consume less space, require less labor and are double the capacity of old. In the next three years Mondel!z plans to construct 8 new factories. The Factories will be strategically located in proximity to suppliers. Factories will be 6 times larger than the average factories Mondel!z currently has in operation. The factories will enable Mondel!z to reach their goal of increasing production by 25% by 2020. Improving factories has also allowed Mondel!z to advertise environmental responsibility. From 2005-2010 they reduced energy consumption by 16%, reduced greenhouse gas emissions by 18%, eliminated 200 million pounds of packaging materials, and reduced water use by 30%. As Mondel!z continues to update its factories, productivity and reduction in waste will continue to increase. McKINSEY 7S ATTRACTIVENESS Hard Ss Strategy Mondel!z International, Inc. is one of the worlds largest snacks companies with leading market shares in every category and every region of the world in which they compete. The company uses unique competitive advantages including: Fast-Growing Categories, Advantaged Geographic Footprint, Favorite Snacks Brands, Leading Innovation Platforms, Strong Routes-to-Market and World-Class Talent & Capabilities. As a global snacks powerhouse, Mondel!z leverages their competitive advantages to achieve two primary goals: to deliver top-tier financial performance and to be a great place to work. To achieve these two goals, Mondel!z focuses on the following strategies; unleash the power of our people, transform snacking, revolutionize selling, drive efficiency to fuel growth, and protect the well being of our planet.

!"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! :! ! Structure In an effort to increase employee interactions, Mondel!z International has moved to an open floor plan. At Mondel!z, only nine executives, including CEO Ms. Irene Rosenfeld, have an assigned seat. Neighborhoods were created to give some sense of where departments might cluster. With less structure there is more flexibility. Furthermore, the companys new organization structure is purposely set up to aid in growth for growth in emerging markets. In its Form 10-Q ending September 30, 2013, Mondel!z states, We changed and flattened our operating structure to reflect our greater concentration of operations in high-growth emerging markets and to further enhance collaboration across regions, expedite decision making and drive greater efficiencies to fuel our growth. Systems Mondel!z International is answering the call for well-being. Their approach is focusing on four key outcomes to drive growth-mindful snacking, sustainable resources and agriculture, product and people safety, and community partner ships. At Mondel!z International, they believe that you can enjoy what you eat and still live a healthy lifestyle. Thats why they are dedicated to making the foods people love, even better. The companys supporting programs and partnerships help educate and motivate people to make healthful choices. Mondel!z is an active member of the World Economic Forum's Workplace Wellness Alliance. The Alliance brings together 39 multinational companies from around the world that are committed to advancing wellness in the workplace by improving the overall health and wellbeing of the global workforce. Soft Ss Shared Values Mondel!z International believes in the power of big and small. They have the scale and resources of a global powerhouse, but also the speed, creativity and agility of a fresh new start-up. Mondel!z uses seven values as a foundation and guide for everything that they do. Mondel!z tries its best to: Inspire Trust, Act Like Owners, Keep it Simple, Discuss Decide Deliver, Tell it Like it is, be Open and Conclusive, and Lead from the Head and the Heart. In addition, Mondel!z core belief is that people should be treated fairly and with dignity. Style Mondel!z is open and inclusive. It's a simple concept. Being open and inclusive is critical to creating a delicious work experience for our employees and business partners. And it's the foundation of the companys strategy to build a high-performing culture. As a global business, reflecting the face of our consumers in our employees and especially in our leaders also is critical to our success. Different perspectives help Mondel!z see firsthand how they can better meet consumer needs with innovative and delicious foods.

;$ !"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! ! Staff Every day, Mondel!z success depends upon 110,000 capable, dedicated and diverse Mondel!z International employees around the world. Treating them well and providing them with a workplace that is safe is the right thing to do and essential for our long-term success. Mondel!z recognizes that healthy employees are engaged and productive which is why they encourage and support their employees in having healthier lifestyles. Various health and well-being tools and resources are offered in many of the facilities. Skills Mondel!z International provides specialized training for procurement employees. This training helps them identify and mitigate labor-related sourcing risks and includes a section on human trafficking and slavery. Their global compliance and integrity program helps guide the employees to obey all applicable laws and regulations while conducting business around the world. It also emphasizes how important it is for Mondel!z to act with integrity and make ethical decisions for their business, shareholders, employees and consumers, because their trust and confidence is critical to Mondel!z success. GE ATTRACTIVENESS ANALYSIS Kraft Demerger The demerger of Kraft Foods into Mondel!z split the company into two specialized food companies. While Kraft focuses on innovation and brand equity in America, Mondel!z is focused on spreading the brand portfolio to less saturated markets. According to an article by Euro monitor analysts, a significant advantage of the demerger is that each company can concentrate its resources (marketing & innovation) on the key brands in their geographic areas. Given its vast coverage, Mondel!z positioned itself well to drive growth in certain emerging markets: Brazil, India, and Russia. These countries show positive growth in snack food categories because of growing middle classes and stable economies Key Analysis Points It is agreed that the motive for Mondel!z is a play towards the emerging markets. For example, in China it holds only a 1% share of the confectionary foods market, while leading competitor Mars Inc. holds 18% of the same market. Mondel!z hopes to expand in these emerging markets with a stronger brand portfolio that includes confectionary and snack foods, due to the demerger from Kraft. While the company focuses on emerging markets, we are interested in how Mondel!z will hold, grow, or lose market share in the developed markets it currently operates in. Specifically, we will analyze Switzerland, growth prospects for the country, and its snack foods industry. In performing a GE Attractiveness analysis for Mondel!z in Switzerland, we must end up with a decision on whether the company lies in a high, medium, or low attractiveness based on multiple factors: 1) On the horizontal axis, we assess the market, industry, and economy within the country. 2) On the vertical axis, we assess the strength of the company and its growth prospects. Based on our decisions, we can deduce whether

!"#$"#"%&'('$)*$+)#,-%./$(#$'0(1/-2%"#,3! <! ! the company should stop investing, hold their market share, or invest in new ideas. Figure 3 shows our plot of Switzerlands attractiveness. Switzerland Country & Industry First, we assess the economic factors of the markets in Switzerland. Looking at the country, the first thing to notice is prosperity. According to the Legatum Prosperity Index, Switzerland is ranked number two in the world. The index is based upon ratings in wealth, economic growth, quality of life and freedoms. While Switzerland is prosperous, it is not completely perfect, it still has trade protectionisms in place and is dependent on its European neighbors to purchase about half of its exports. In general, the Swiss enjoy low unemployment, a skilled labor force, and one of the highest per-capita GDPs in the world. In addition, according to the CIA World Factbook, 57.4% of GDP is household consumption. For a company like Mondel!z, especially, these measures are good news. A high per-capita GDP, especially one that is spent heavily on consumer consumption is a positive sign. If the population has a higher disposable income, they are more likely to spend it on goods that are not always necessary, in this case, confectionary and snack foods. Of course other multi-nationals flock to Switzerland as well, due to political stability, a fair legal system, low corporate taxes, efficient capital markets, and a well-developed infrastructure. In the end, competition is inevitable for Mondel!z in such a highly segmented industry. In fact, according to Seeking Alpha, the top five players in the industry generate only a quarter of global confectionery revenues. This indicates that scope and infrastructure may not be the only driving factors in the industry. Regardless, Switzerland is an attractive country for any player in the snack foods industry. Its population generally tends to have a higher disposable income and the European region has historically been a strong market for Mondel!z. We believe there is a medium attractiveness, and that Mondel!z must hold on to its share of the market in Switzerland. At this point, Mondel!z hopes to focus growth in the emerging markets, so it is not the right time to invest even more in Switzerland. Company Analysis Next, we assess the company based on some vital factors that will indicate its position. With an influx of competition in a developed market like Switzerland, gaining market share is a challenge. Plus, with strong snack food competitors like Nestle, Mars and Unilever, price is often something that is not very controllable. Profit margins will generally benefit those with higher production efficiencies, and is not dependent much on market performance. For these snack food companies, brand equity is key to establishing a market, which is why Kraft demerged into Mondel!z in the first place. It wanted to provide Mondel!z with a strong brand portfolio as it was poised to enter the emerging markets. In this highly competitive, mature industry, consumers have low switching costs and there are hundreds of choices. Taking a look at Figure 4, while Mondel!z owns a strong portfolio, it competes with hundreds of brands it is no surprise that customers find themselves willing to switch brands easily. With regard to its current distribution of revenues, as Figure 5 shows, Europe is a major contributor to sales for the company.


! Mondel!z goals are to grow market share in emerging markets like China, Brazil, India, and Russia. Unfortunately, growth in the global confectionery industry is expected to decelerate in the coming years. Certain industry and consumer trends indicate a shift in attitudes, which may not pan out as beneficial for Mondel!z. One recent consumer trend has to do with lifestyle choices and unhealthy foods. It is known that sugar is a key component for these global snack food companies. If they opt for healthier recipes, product tastes will be affected. However, they cannot just sit idle, as no action may hurt public image. Conclusion Looking again at Figure 5, we see the Asia-Pacific region (including India and China) is not a large chunk of Mondel!z business. One key move that Mondel!z hopes will pay dividends in the emerging markets is its plans to invest $190 million in a new plant in India. Due to poor forecasts for snack food growth in general, Mondel!z has made the correct decision in focusing efforts in the emerging markets. Although Switzerland, and other European countries have shown strong markets, the only markets where there is certain growth potential are the emerging markets. Thus, we believe Mondel!z is quite attractive for long-term growth. In conclusion, Mondel!z must hold its market share in Switzerland (Medium), and must continue to invest in long-term growth prospects such as the factories in emerging markets (High). Once again, our final GE attractiveness plot is shown with Figure 3. Figure 3:

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Figure 5:

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