5 Food & Drink Companies “Suffering” to Ensure a Strong Future
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tom Russo of Gardner, Russo & Gardner has a strong track record in international value investing. Previously with the Sequoia Fund, Russo invests with a long view of corporate profitability and brand building:
"The three prongs that I look for when investing in a business are: the fifty cent dollar bill, the capacity to reinvest in great brands and the 'capacity to suffer.' The 'capacity to suffer' is key because often the initial spending to build on these great brands in new markets has no initial return."
While many investors are well-versed in buying exceptional brands and dollar bill securities selling at fifty cents, the concept of having the capacity to suffer is worth exploring. If great companies have the capacity to suffer while entering new markets, how should investors assess these companies? The current suffering may manifest itself in current GAAP figures showing diminished operating margins or relatively high capital expenditures. As such, a quantitative assessment of the “capacity to suffer” is challenging when thinking about future results. Investors cannot simply extrapolate current results into the future to assess corporate value. Let’s look at five food & drink companies with excellent track records of investing for the future.
Coca-Cola (NYSE: KO) is a classic success story of having the capacity to suffer while establishing their iconic brand. Coke has been expanding into new markets for over a century while investing heavily in current markets to establish its current 28% ROE and 10.8% ROA. By systematically investing in new products and geographies, Coca-Cola not only paved the way for its Coke product but has amassed a portfolio of over 500 brands of water, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. Coke owns and markets four of the world's top five nonalcoholic sparkling beverage brands: Coca-Cola, Diet Coke, Fanta and Sprite.
Like Coke, Diageo (NYSE: DEO) has been producing beverages and growing its business for over a century. A spirits purveyor, Diageo markets brands include Johnnie Walker, Crown Royal, J&B, Buchanan's, Smirnoff, Ceroc and Ketel One vodkas, Baileys, Captain Morgan, Jose Cuervo, Tanqueray and Guinness. With a market cap of $74 billion and global operations, Diageo has been a relentless expander for decades and now boasts operations across the world. With a $73.8 billion market cap, ROA of 9%, and ROE of 37%, Diageo benefits from its “capacity to suffer.”
Nestle (NASDAQOTH: NSRGY) is the world’s largest food company, with over 8,500 food, pet food, confectionary, coffee and Mineral water products. Nestle takes a 35 year view forward during its corporate planning – nearly unheard of in corporate decision making. Russo has highlighted Nestlé’s decision to stay in Russia during the 1998 currency crisis, as well as the lengthy time to enter China and India, as examples of a company that is willing to re-invest its profits at low initial return levels to ensure long term results.
At $29 billion in market cap, Heineken (NASDAQOTH: HEINY) is a bit smaller than some of the other food and beverage companies on the list. Yet Heineken is one of the most international beverage companies, with operations in over 170 countries with over 250 beer brands including Amstel, Birra Moretti, Dos Equis, Foster’s, Newcastle Brown Ale, Primus, Sagres, Sol, Star, Tecate, Zlaty Bazant and Zywiec. With an average ROA of 6% and ROE of 15%, Heineken is likely much earlier in its investment life cycle than Coca-Cola with its double digit ROA percentage and 28% ROE. Keep an eye on Heineken as it begins to monetize its efforts to grow their business.
Similar to Heineken is another ~$30 billion market cap business is Danone. Danone (NASDAQOTH: DANOY), the French food & nutritional products company that produces fresh milk, yogurt, baby foods, biscuits, cereal products, medical nutrition products, and bottled water, is expanding significantly in emerging markets. After decades of corporate investment, 52% of the company’s sales are in emerging markets, and margins in the emerging markets have risen to eclipse developed country margins. In fact the company’s original market, Western Europe, has been shrinking as a percentage of sales for 20 years. Additionally, Danone believes they can increase their margins 1% in Russia, continue to grow the infant formula business in emerging markets, and further penetrate global markets with its healthy Activia branded yogurt.
Global value investors should regard the success of Coca-Cola, Diageo, and Nestle as examples of what budding food & beverage businesses can produce given a willingness to continue to reinvest in new market, brands, and geographies. As Warren Buffett says, “Someone is sitting in the shade today because they planted a tree years back!”
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