Mondelez Battles Cocoa Inflation: Will Margin Pressure Ease in 2026?

Core Insights - Mondelez International, Inc. (MDLZ) faced significant challenges in Q3 2025 due to record-high cocoa costs, resulting in a $796 million drop in adjusted gross profit at constant currency and a sharp decline in adjusted gross profit margin to 30.4%, down 1,010 basis points [1][9]. Group 1: Cocoa Costs and Profitability - The decline in adjusted gross profit and margins was primarily driven by increased raw material and transportation costs, along with an unfavorable product mix [2][9]. - The company indicated that Q3 represented the peak of cocoa inflation for the year, with recent signs of cocoa prices beginning to moderate due to a stronger crop [2][9]. Group 2: Pricing Strategies and Consumer Sensitivity - Despite the potential for lower cocoa prices to alleviate some pressure, earlier price hikes, particularly in Europe where chocolate prices rose by about 30%, have made consumers more price-sensitive, with elasticity increasing to approximately 0.7 to 0.8 [3][9]. - To address this sensitivity, Mondelez is adjusting pack sizes and resetting price points to make products more appealing to consumers [3]. Group 3: Promotional Challenges and Productivity - Mondelez faced challenges with promotional efforts that did not meet expectations, compounded by retailer margin pressure and shifts in consumer shopping behavior [4]. - The company emphasized the importance of productivity, noting that cost savings in manufacturing and overhead helped mitigate the impact in Q3, and continued progress in this area will be crucial for 2026 [4][5]. Group 4: Valuation and Market Performance - Mondelez's shares have declined by 8.2% over the past three months, underperforming the industry decline of 7.6% and the broader Consumer Staples sector's drop of 5% [6]. - The company currently trades at a forward 12-month P/E ratio of 17.9, above the industry average of 14.66, raising concerns about the justification of this multiple given the uncertain pace of margin recovery and ongoing cost pressures [10].