|»5 Minute Wrap Up by Equitymaster|
On This Day - 25 MAY 2015
Stop eating 'Maggi'! But don't stop owning it...
In this issue:
Well, personal stories apart, I thought of sharing my two cents on the recent controversy surrounding Maggi - Nestle's instant noodle brand - that came as quite a shocker.
From what I have been reading, I gather that high levels of monosodium glutamate (MSG) and lead content were found in some of the Maggi samples tested by Uttar Pradesh Food safety and Drug Administration (UP FDA). Both these items are known to have detrimental effects on health. As per The Times of India, LFSDA has initiated an inquiry and written to the Food Safety and Standards Authority of India (FSSAI) in New Delhi seeking cancellation of Maggi's licence.
In its response, Nestle India maintained that it does not use MSG in manufacturing any of its products. Apparently, the company also said in a statement that it was surprised to know about the high lead content in the food samples.
There are two key perspectives that I want to present on this issue.
First, wearing the hat of a consumer and a responsible parent...
In matters of health and safety, even a potential hazard must be avoided. So whether Maggi is found guilty or not, whether Maggi is banned or not, I am certainly not going to eat the instant noodle again. And I will make sure my child does not eat it as well. In fact, one must try and avoid processed junk food in general. Well, this is only my personal view. Not everybody thinks that having stuff like Maggi once in a while is so bad. You see, big names and fancy packaging does not make your food safe. My mom's traditional wisdom gets vindicated hands down.
Now, wearing the hat of an investor...
Should investors of Nestle India worry about the recent controversy and dump the stock? I don't think so. Let me explain.
Nestle's Maggi is a very big brand that has ruled the instant food market for decades. Of course, there may be temporary setbacks and the company may have to go into overdrive to protect its image. Competitors like ITC will try to make the best of this controversy and to grab market share from Nestle. But the long term impact of this controversy would be very limited.
Given its immensely strong brand equity, market penetration across the length and breadth of India and financial muscle it has the essential ingredients to deal with such shocks, take corrective actions and resurrect its brand image.
Apparently, Maggi is not the only super brand that has come under the regulatory scanner for poor food safety.
Do you remember back in 2003, Cadbury was mired in a similar controversy after there were reports that said worms were found in Cadbury's most popular chocolate brand Dairy Milk? Did anyone stop eating Dairy Milk after that episode? No. After the fiasco, Cadbury invested heavily into product quality and better packaging. To revamp its brand image that may have been tarnished by the controversy, it roped in Amitabh Bachchan as its brand ambassador. Rest all is history. Cadbury continues to retain its leadership position in the Indian chocolate market.
Many other big brands including McDonald's, Coca Cola, Pepsi, KFC, Heinz have been engulfed by various controversies around the globe on issues pertaining to food safety, hygiene, contamination and health side-effects. In the end, these junk food giants have prevailed.
In Berkshire Hathaway's recent annual shareholder meeting, Charlie Munger defended his love for junk food businesses.
It turns out that consumption pattern of individuals are sticky. Hence, even if product quality suffers in the interim but is associated with a strong brand, the good image in mind of individuals remains intact. In the end, it all boils down to investing in wide moat companies. Bigger the brand, wider the moat...
So, if you or your children have been eating junk food like Maggi noodles, I would reiterate my mom's advice to you. But if you are a shareholder of Nestle India, there is no reason for you to panic.
Do you think the recent controversy relating to reports of high MSG and lead content in Maggi noodles could severely impact the future prospects of Nestle's instant food business? Let us know your comments or share your views in the Equitymaster Club.
As seen in today's chart the one year performance of Indian stock markets under the Modi regime has been dismal with returns of just 6%.
However, poor returns should be seen in the context that markets had already priced in huge expectations from the new government well in advance. And that euphoria has been frittered away recently as Modi premium is slowly fizzling out. While it is too early to judge the performance of any government in one year, markets made up their mind over it. Also, India's underperformance has got a lot to do with foreign institutional investors (FIIs) pulling out money of late as they were significantly overweight on India. This portfolio rebalancing exercise has led to a correction in markets.
While the one year returns have lagged so far it would be interesting to see how the performance will be after Modi government completes its first term in 2019.
Hope you have had a chance to listen to Vivek Kaul's analysis of the government's performance in the past year.
While such outperformance is certainly noteworthy it may give an opportunity to Modi critics to hurl the cronyism bow at him. Mind you the opposition continues to label the government as crony with utter disregard for farmers. But what is the truth? Is the government really ignorant towards the needs of poor and is business centric?
Well, there is no sure way to know this, certain steps taken by the new government show that it is keen to display it does not favour industrial groups at the cost of common man. Take the case of Reliance Industries for example where increasing gas price has been a contentious issue for long. Though the Rangarajan committee's formula yielded a figure of US$8.4 per unit the Modi government is allowing only US$5-5.5 per unit to be charged putting RIL at a disadvantage. This is not a one of case. Modi's strategy to distance himself from the Adani's Australian coal block project loan imbroglio with SBI is another example indicating that the government does not want to fall into corporate lobbying. Even the general sentiment is that influence from New Delhi cannot be bought anymore.
While this does not mean that Modi government is pious and incorruptible, it is taking steps to project itself as being indifferent to corporates and common man. We reckon this is the best strategy to survive in politics as you are dependent on former for funding and latter for votes! Apart from sloganeering and marketing, diplomacy is another thing at which the new government is certainly good at.
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