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As anyone who has read this column over the last two or three months will realise, I'm a fan of the idea that you spot the best investments by simply walking around. You can also get inspiration if you sit down and 'shoot the breeze'. For instance, I met a colleague for coffee recently. We ordered coffees, a couple of San Pellegrino sparkling waters and some After Eight mints. We debated the merits of Pellegrino vs Perrier. Suddenly we realised we were bang in the middle of Nestle Country.
All the stuff we consumed or spoke about were the product of this one Swiss corporation, now No 13 in the ' Financial Times' Global 100 list.
The sheer scale of Nestle (which probably produced the shop's coffee machine as well) has now become a subject of wonderment.
I've been a strong admirer of Nestle since the Swiss corporation took over the long-established Williams & Woods (W&W) outfit in Ireland, which was probably some 30-odd years ago.
W&W was listed on the Irish market for many years and inspired some significant product names that still live in the public imagination, such as Chef tomato ketchup, Little Chip marmalade and Silvermints. W&W was subsequently renamed Nestle (Ireland) and today has sales of €100m.
Nestle has many attractions that make it pretty remarkable. Selling 'wellness' around the world – and if you can sell that you can sell anything – it boasts a market cap of SF200bn (€160bn). It is the world's biggest food company by sales (€67bn) and one of the 10 most admired companies in the world (' Fortune Magazine'). It has 450 factories in 88 countries, employing 328,000 people worldwide. Another plus for investors is the geographic spread of sales; Nestle has around 32pc of its sales in Europe, 30pc in the Americas, 18pc in Asia and 22pc in the rest of the world. This spread helps those investors nervous of emerging markets. Through companies such as Nestle they can hedge their bets.
As large supermarket companies such as Wal-Mart, Costco, Carrefour, Tesco, and Metro have enormous purchasing power, only a few companies such as Nestle have the equivalent supplier power. Its market cap is six times that of Tesco.
For students of management theory, this is explained in the five-force model of competition. The supplier power of Nestle comes from its 8,000 brands, 29 of which have annual sales of over €800m.
Sales by activity in 2011 show 27pc are generated from drinks, 26pc from dairy products, 18pc from ready-prepared dishes, 12pc from chocolate, 11pc from pet products, 6pc by pharmaceuticals and 2pc from baby milk roughly.
Nestle was formed in Switzerland in 1905. World War One created demand for Nestle dairy products by way of government contracts. After the war these contracts dried up. Nestle's strategy was to expand into new products, mainly of the chocolate variety. World War Two impacted on Nestle in that profits dropped considerably. As a result, the company decided to shift its concentration from Europe to Latin America.
Post-war, the company returned to Europe and expanded by way of acquisitions. Possibly the most controversial was the takeover of Rowntree Mackintosh in 1988. It required a statement from Margaret Thatcher stating she would not interfere with the controversial merger. The reduction of world tariffs saw Nestle once again on the acquisition trail.
Just because Nestle is big does not mean it has no competition. Rivals such as Unilever, Mars, Kraft and Danone are extremely formidable.
However, it helps investor confidence that the company was named in 2011 by CNN Money as the most profitable company in the world. Consideration then should always be given to Nestle shares, which are up 20pc in the year, and trading in a strong currency such as the Swiss Franc.
Interestingly, Swiss shares are on a four-and-a-half year high, so maybe buying Nestle shares may have to wait a while. However, if you are having a coffee in the local coffee shop or using your George Clooney Nespresso, the folks in Switzerland will be smiling.
Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.
Irish Independent
