Enchanting the World with Chocolate

Sep 6, 2024 8 min read

Thierry

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

– Warren Buffett

arvy’s teaser: Lindt & Sprüngli is more than just a chocolate company; it is a masterclass in business excellence. Under the visionary leadership of Ernst Tanner, Lindt’s share price soared 32-fold, driven by relentless innovation, pricing power, and uncompromising quality. A sweet lesson in how the best companies keep winning – even at a premium.

Chocolate.

I eat it every day.

In moderation, not in excess, of course.

After all, it is a moment on your lips but a lifetime on your hips.

As a Swiss, chocolate is part of my DNA. That is half of my excuse. The other? Not only is it a delicious treat, but it also has many health benefits. Pure cocoa chocolate has a neuroprotective effect, improves heart health, is anti-inflammatory and reduces oxidative stress – simply put: it supports healthy ageing. Is this the explanation for Switzerland’s 83.9-year life expectancy, second only to Japan at 84.5 years? Not only, but that makes it even more difficult for me to abstain…

As Switzerland is known for the highest per capita consumption of chocolate, it is not surprising that the market leader for this delicacy is based here.

The company enchanting the world with chocolate?

Lindt & Sprüngli.

Chart 1: Ernst Tanner, Chairman and former CEO of Lindt & Sprüngli with Ambassador Roger Federer

Source: Lindt & Sprüngli

Skin in the Game

Let us first clear up a misconception.

What many people do not know: Confiserie Sprüngli, which you can find on Paradeplatz, at Zurich Main Station or at Enge and in many other places, is not the same as Lindt & Sprüngli.

In 1892, Rudolf Sprüngli (son of company founder David Sprüngli) divided his company between his two sons. Johann Sprüngli received the chocolate factory (now listed on the stock exchange as Lindt & Sprüngli), while David Sprüngli took over the confectionery, which is still the private Confiserie Sprüngli of today. Since then, there have been two independent companies.

But now to Lindt & Sprüngli and the mastermind behind its great success.

Ernst Tanner (chart 1).

His story and his success with the company should be on every entrepreneur’s radar.

When Ernst Tanner took over the company in 1993, it was valued at CHF 660 million, revenue was CHF 891 million and the share price was CHF 3,460. After three decades of entrepreneurial excellence, the valuation rose to CHF 26 billion, revenue to CHF 5 billion and, buckle up, the share price skyrocketed to CHF 111,000.

Thanks to his passion, discipline, leadership, innovation and vision, he was able to increase the share price by a factor of 32.1. This also benefited his wealth, as he accumulated considerable “Skin in the Game” over the years with a stake of around 1.6% in Lindt & Sprüngli, which is now worth CHF 400 million.

Frequent readers know that we prefer management that is committed to the company. Whether founder-led (chart 2), family-owned or a good employer – such companies perform better in the long term than others.

We look for such quality traits in a “Good Story”.

However, they often come at a price.

Chart 2: Founder-Led Companies Outperform the Rest (based on S&P 500)

Source: Bain & Company, Harvard Business Review

Valuation Is Not as Important as Quality

It hunts me in my dreams.

“I cannot buy Lindt & Sprüngli, it is too expensive”.

The word expensive in connection with this company is used synonymously when it comes to investing. Its price/earnings ratio was on average at 32 over the last 20 years. This is almost double the historical average of the Swiss Market Index (SMI). Yet the company has generated a return of 11.6% p.a. during the same period.

The SMI in comparison?

7.3%.

CHF 100 in Lindt became CHF 806, CHF 100 in the SMI became CHF 312. How on earth can something so richly valued be so successful?

Simple.

Companies like Lindt & Sprüngli are much better than average. They have a strong competitive advantage, solid balance sheets, a management that can be trusted and is committed to long-term goals, structural tailwinds that lead to organic growth and market opportunities where they can reinvest their cash flow in their own business.

All key attributes of a wonderful business model – they are winners that keep winning. For this reason, the market allows them to trade at a premium.

Therefore, in our opinion, the quality of the company is more important than the valuation (chart 3), but of course you should avoid paying too much for quality companies.

Otherwise, as Warren Buffet said, you will not have a wonderful company at a fair price.

But a fair company at a wonderful price.

And that rarely ends well…

Chart 3: It is okay to pay more for quality – PE you could have paid for a 7% p.a. return

Source: Ash Park Capital and Refinitiv Datastream, excludes dividends, in USD, 1973 – 2019

Pricing Power

As Warren Buffet turned 94 last week, I would like to pick up on another piece of wisdom from him.

The most important decision in valuing a company is pricing power. If you have the power to raise prices without losing business to a competitor, you have a strong business.

Taking Lindt & Sprüngli as an example, the year 2023 shows that the company was able to achieve organic growth of 10.3 %. This was possible due to two factors: 1) the company was able to increase prices while consumers accepted this, and 2) it was able to sell more at the same time.

But Thierry, isn’t a double-digit growth rate within the realms of possibility?

Yes, but this was achieved even though the world chocolate market slowed down, we had inflationary pressures and prices for the most important raw material, cocoa, soared to record highs due to the global shortage of cocoa beans.

If that is not a sign of a wonderful company.

What then?

Chart 4: Lindt & Sprüngli over the last 20 years