Why Mondelez Stock Hasn’t Gone Up

When we track the price of goods or services over time to measure inflation, we often neglect to account for the improvement that represents more value being delivered to the customer. For instance, if someone trades in a Toyota Camry XSE for a Lexus ES, we don’t describe the this switch as inflation even though the Lexus ES costs more because we understand that the latter has more features.

Likewise, even though the we use the same name “Toyota Camry” to describe the vehicle each year, it can be easy to just look at the price changes in the vehicle each year from 2008 through 2018 to calculate the inflation without realizing, of course, than many of the features available in the 2018 version were not available in the 2008 version.

If we wanted to calculate the inflationary effect, we would have to compare a hypothetical 2018 version of the car that had the exact same features and conditions as the 2008 version, and then compare that against the difference in the 2018 version of the Toyota Camry with the new features that it actually possesses. The name stays the same over time, but the product is actually different as it comes to include additional features, and that ought to be included in any analysis of price increases attributed to inflation versus payment for additional features.

This even applies to foodstuffs, which seem immune from the type of improvements that we associate with widgets or services. If you bought a piece in chicken in 1970, maybe it had a 1/100,000th chance of giving you salmonella. Maybe someone who buys chicken today has a 1/10,000,000th chance of giving you salmonella due to improvements in the handling and distribution of chicken. If you wanted to calculate “true inflation”, you’d have to isolate the portion due to the lowered probability of salmonella poisoning and determine the economic value of that, and then see how that compares against the raise in the price.

Keeping in this mind affects how I study and select investments. For instance, when I study United Technologies Corporation stock, I note that the increase in price for elevators (through its Otis Elevators subsidiary) includes improvements in safety, speed, and limited down time. If the price of the elevator to be purchased by an owner of commercial real estate goes up over time, it’s not just that United is charging more because it wants more money and thinks it can, but it is also delivering a better product and is charging more for the additional features developed.

It follows, then, that the investments we should worry about are those that raise prices but actually deliver a worse product over time. Take something like the Cadbury cream eggs, a signature product of Mondelez.

Under former CEO Irene Rosenfeld, the company switched from using dairy milk to a milk substitute in its cream eggs but simultaneously raised the price of Cadbury cream eggs by 8% at the same time. It is almost a form of deception, in which the company is relying upon the strength of its intellectual property (what people historically thought they were getting with a Cadbury cream egg) to instead give them something cheaper. Even though the cost of a cream egg was up 8% on paper, it really might be something like a 15% price hike because you aren’t comparing a cream egg with dairy milk against another cream egg with dairy milk, but rather, with a milk substitute. The item sold is branded the same, but the underlying good has changed.

This is obviously a weak foundation for future sustainable price increases, as customers will wise up, devalue the intellectual property of the brand that took decades to build up, and reduce their consumption at the elevated price.

I do not think it is a coincident that Mondelez trades at $44 per share today, a bit lower than the $48 per share it traded it in 2015 when it started to make these changes. The profit margins have grown from 9% to 13% to represent the lower costs of materials and higher prices of the products, but revenues are down from $29 billion to $26 billion (and the actual volume of units sold is down even more). That is because an Oreo of today is not the Oreo of yesterday, and the struggling volume growth is in part a reflection of that.

This does not mean that I would not purchase Mondelez stock. It owns a lot of entrenched food brands that will be around decades from now generating a profit. But it does mean that I disfavor it compared to a business like Alphabet, which may charge advertisers more and more, but delivers more detailed aggregate data for targeting customers over time. If Mondelez fell below $35 per share, I’d probably be quite interested in buying it. But I am not going to pay 20x earnings, or even 15x earnings, for a stock whose business model currently relies upon raising the price without delivering a corresponding increase in value delivered to the customer. That is a weak foundation, both for driving current sales and future price increases.