Companies have logos – easily recognisable symbols which embody the whole of its activities. Consumer goods companies take special care polishing and enhancing their brands. They invest an astronomical amount of money to do so.
Take Shell, Daimler Benz or Coca-Cola – which by most yardsticks is the most valuable brand on earth, worth billions of dollars. These symbols are the banner of customer loyalty and sometimes rallying point for boycotts when corporations behave irresponsibly. Exxon Mobil, BP or VW come to mind. So what should one think about a company selling three times more foodstuffs to consumers than Coca-Cola and yet featuring a brand that hardly anyone will recognise?
Test question to prove my point: What company stands behind the bird’s nest, adorning sales items unchanged since 1867? Who’d recognise Nestlé?
Nestlé sells $90 billion worth of food per year, or one million items every day, from pet food to chocolates, bottled water to coffee. It is the world’s biggest food company by revenue, yet its company logo is nondescript.
Then again, its branded products are immediately recognisable: KitKat, Nespresso, After Eight, Buitoni pasta, Friskies pet food, Perrier, Vittel and San Pellegrino, Häagen-Dasz, Polo, Cheerios, Carnation and – since this year’s purchase of the sales rights – now even Starbucks. It employs 323,000 people operating on all continents.
Nestlé is a truly multinational company, perhaps more than any other company. Even car companies with their global supply chains are more firmly anchored in their home markets. It is a giant, yet a sleepy giant. Its headquarters are still in Vevey on Lake Geneva, where, in 1867, pharmacist Henry Nestlé (which translates as “little bird’s nest” – hence the company logo) developed Kindermehl, a baby food formula, to combat child malnutrition by mixing flour, condensed milk and sugar.
Sleepiness might also characterise its steady yet boringly slow share price rise, for 20 years unspectacularly in tune with the stock markets, just without their severest slumps. In the last three years Nestlé rose only 15.31 per cent, markedly underperforming most share indexes. Profit margins lag behind competitors like Unilever, and rapidly changing consumer tastes demanding ever more artisanship and high-end quality are not fully recognised, according to critics of Nestlé’s alleged inertia.
In the 1970s the company went through purgatory. Many readers will still remember the “baby milk scandal”, when Nestlé massively marketed breast milk subsidies in Sub-Saharan Africa – to devastating effects. Countless infants died when caring mothers used contaminated water for bottle feeding. Nestlé was slow to forgo profits in favour of saving lives, and consumers worldwide mounted the barricades. The behemoth looked very vulnerable. Less than 10 years later Nespresso set out to conquer the world, a triumphal procession of corporate success.
As investors over the years, we couldn’t be more content. Nestlé has an AA- credit rating, a financial standing many countries would be happy about. It was the first corporation in the financial crisis whose bonds turned negative: creditors were willing to pay for the honour – and safety – of lending large scale to Nestlé. Mark Schneider, its CEO since June 2016, has a savvy record as a manager emphasising organic growth as well as incremental acquisitions. He firmly believes that size, far from being a disadvantage, has its merits. When trends prove successful, there is always enough money in the till to buy the latest success story.
Nestlé is a frugal company, the legacy of its late boss Helmut Maucher, who famously drove a battered VW Beetle and was loath to accept excessive pay: “How can I expect my employees to save money when I lavishly spend on myself?”
It is heavy on bureaucracy perhaps, and a bit slow in decision making, but this seems to have served the company well over the years. If there ever was a thing like a forever-investment, it’s Nestlé shares. This is what grannies could pass on to their grandchildren. At the time of writing, shares are priced at 79.74 Swiss Francs, with a steady dividend yielding 2.95 per cent per annum. With a price/earnings ratio of 24 it is expensive and will hardly be explosive on the upside.
No quick money to earn here. This is why Daniel Loeb, the billionaire hedge fund manager and ‘activist investor’, has now set eyes on the Swiss colossus. The business strategy of an activist is thus:
1) A sizeable quantity of shares are bought in the markets, enough to demand a seat on the board as a large-scale investor;
It can weather punitive tariffs, embargoes, trade wars and even nuclear conflict. No artisan production will ever be in a league with Nestlé
2) A programme is drafted how to best boost companies’ earnings, by either divesting of assets, cost cutting, increasing debt, boosting dividends, share buy-backs and management revamps – often all of this together;
3) A letter is written to the board of directors and other investors, explaining the desired strategy and wooing other investors to join the battle against management;
4) Such letters, particularly when drafted by Loeb, include usually a scathing critique of the alleged ineptitude and greediness of management;
5) Such black painting in public – justified or not – is often enough to boost the share price, as people make their bets that current management, caving in to the demands or leaving the company altogether, will not outlast the assault;
6) Shares are sold after the activist intervention, sometimes even to the suffering target and hopefully for a profit.
Loeb and his Three Point investment fund have followed this textbook in the past with mixed results. Loeb has bought into Sony and Yahoo and many others, and earned himself and his family a stratospheric fee income. His personal wealth stands now at $3.5 billion.
Celebrated in 2014 as hedge fund manager of the year, Loeb has on average actually performed worse than the stock market and certainly worse than Nestlé’s share price, without much damage to his image as star performer. My guess is that this is mainly due to his impeccable style of letter writing, relished by the investment community. Now owning 1.25 per cent or 40 million of Nestlé’s shares, he is its sixth largest investor.
It is difficult to foretell how this activist fight will be carried out at Nestlé. CEO Schneider might clandestinely even welcome Loeb’s demands, while grandstanding in public. Loeb’s 35-page letter could be helpful for Schneider to implement reforms he himself has planned to carry out, overcoming resistance by pointing at Loeb.
First on the list of reforms could be the sale of Nestlé’s 30 per cent stake in L’Oréal, worth $27 billion. Boosting profit margins might prove more tricky, not only because Nestlé is a business of traditionally low margins but also because it accounts for its profits in Swiss Francs, a terribly overvalued currency. By some estimates, profits over the past few years could have been $28 billion higher if accounted for in USD. Expect shares to oscillate more feverishly in the next few months, as Loeb and his chums start their war of attrition.
Nestlé’s operations at the beginning of the 20th century resembled the past successes of the East India Company, with bridgeheads from Spitsbergen to Gibraltar, from Port Said to Hong Kong, from Panama to Sidney. It profited immensely from both World Wars, supplying the Allied Forces with condensed milk and chocolates.
Then, after the war, it profited from worldwide food relief programmes like Care. It could do so because it could always substitute war-torn production lines with factories overseas. My guess is, this will make Nestlé still a safe bet today.
It can weather punitive tariffs, embargoes, trade wars and even nuclear conflict. No artisan production will ever be in a league with Nestlé.
But before you rush off to buy its shares, remember that right now is probably not the best moment to do so. The markets are dizzyingly high and it is not just Loeb but Donald Trump too can play havoc with our savings.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.