Are Candy Stocks like Mondelez (MDLZ) Doomed by the Rise of Online Grocery Shopping?

To journey through the average department or grocery store is to be bombarbed with hundreds of decadent products that we’d love to buy for their great taste, if only they weren’t so darn bad for us (and specifically for our waistlines). Whether it’s Oreos from Mondelez International Inc. (NASDAQ:MDLZ), chocolate bars from Hershey Co (NYSE:HSY), or Tootsie Rolls from Tootsie Roll Industries, Inc. (NYSE:TR) (or all of the above), shopping is a constant battle of wills between the rational part of us that wants to be healthy and the sugar freak part of us that wants to go all YOLO.

That battle reaches its peak at the checkout aisle, where we’re often stuck waiting to have all of our healthy purchases rung up while vile candy, gum, and magazines with Kim Kardashian plastered on them stare at us without remorse everywhere we look. Is there a man or woman among us who hasn’t cracked under the pressure of the checkout aisle and its strategically-placed impulse buys, sheepishly tossing a Reese’s Peanut Butter Cups on top of their kale? No, no there isn’t.

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However, there’s a looming threat facing candy makers. Since it obviously isn’t a sudden wave of reason overruling YOLO (like that will ever happen), it’s clearly something else, and that something is the growth of online grocery shopping. Research conducted by Food Marketing Institute and Nielsen found that just under half of all survey respondents had purchased consumer packaged goods within the last three months, more than double the rate from just over a year earlier. Unsurprisingly, millenials are leading the charge, with over 60% of that group having done so as of the latest survey. That rapid growth had FMI and Nielsen predicting that the overall figure could top 70% by 2022.

Interestingly, it’s not just Amazon.com, Inc. (NASDAQ:AMZN) that is driving the online grocery shopping boom, but also major U.S retailers like Wal-Mart Stores, Inc. (NYSE:WMT), Kroger Co. (NYSE:KR), and Target Corp. (NYSE:TGT). Indeed, the very companies that once tempted us so mercilessly may yet be our salvation, and not just because of online shopping; the rise of self-checkout aisles, which are often devoid of chocolatey frills, is also contributing to lagging sales.

Why is online shopping bad news for candy makers? Because by and large, those shoppers don’t give in to impulse buys like candy the same way that physical shoppers do. It’s much easier for them to navigate only to the items they mean to purchase and stick to that list, partly because there’s no immediate gratification from giving in like there would be at the checkout aisle. You still have to wait for your goods to be delivered when ordering online, while if you give in at checkout, you could be tearing open that Twix in your car two minutes later.

Those headwinds are among the reasons why candy-coated ETFs like PowerShares Dynamic Food & Beverage (NYSE:PBJ) have gone nowhere over the last three years and the future outlook for the industry doesn’t look very sweet. We’ll look at the prospects for Mondelez International Inc. (NASDAQ:MDLZ), Hershey Co (NYSE:HSY), and Tootsie Roll Industries, Inc. (NYSE:TR) on the next page.

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Mondelez International Inc. (NASDAQ:MDLZ), which counts Oreo, Cadbury, Trident, and Toblerone among its vaunted portfolio, is trading near 52-week lows. Unlike the other two companies discussed below, Mondelez is in a better position in terms of its product mix better aligning with the growing trend towards healthier snacking. Mondelez is also looking towards the upper-end of the market, citing specialized food experiences as a potential growth market.

Mondelez’s revenue has been consistently falling over the past few years, though net income growth has been solid and is even accelerating, with double-digit growth now expected this year. Nonetheless, the company’s large debt load ($13 billion in long-term debt) and relatively paltry annual dividend yield (2.19%) hold it back from being an overly attractive play, despite hovering around yearly lows.

Hershey Co (NYSE:HSY) is in a much worse position than Mondelez, as it relies far more heavily on impulse purchases. The company is aware of that, and aware that online sales are cutting into sales of its products, as evidenced by its recent In a Shopper’s World annual report, which stated that 25% of online shoppers who pick up their orders in-store cut back on their impulse purchases.

Credit Suisse’s Robert Moskow downgraded Hershey last week, predicting that even under a best-case scenario where online grocery shopping only accounts for 20% of grocery sales, Hershey’s sales would still decline by 0.5% annually. UBS also cut its rating on Hershey to ‘Sell’ back in April, citing the same headwinds from online sales and healthier eating trends, as well as intense competition in the chocolate space and rising cocoa prices.

Tootsie Roll Industries, Inc. (NYSE:TR) is not only the maker of the eponymous Tootsie Rolls, but also of Junior Mints, Frooties, Charleston Chew bars, and Dubble Bubble gum. Wall Street finally appears to be souring on the company, which has had relatively flat revenue and gross profit over the last five years, pushing its shares down by 16% in 2018.

Last October, Spruce Point released a report which slapped a ‘Strong Sell’ rating on Tootsie Roll shares, claiming that the company has long been overvalued based on the hope that it would eventually be a takeover target. It criticized the company’s lack of transparency, noting that it doesn’t host investor calls, has no analyst coverage, and omits vital financial information from its SEC filings. In terms of adjusted gross margin, Spruce Point estimated that Tootsie’s 31% figure is far below both Mondelez (46%) and Hershey (39%).

Hedge funds tracked by Insider Monkey also prefer Mondelez and Hershey to its smaller rival, with 53 being long Mondelez at the end of 2017, compared to 30 owning shares of Hershey and just 13 being shareholders of Tootsie Roll. Overall, hedge funds weren’t overly bullish on any of the three companies however, owning less than 5% of Hershey’s and Tootsie Roll’s shares, and less than 10% of Mondelez’s.

Disclosure: None