Questionable regulatory standards in some markets open the door for reliable food brands.

Who doesn’t love a glass of milk? That is, unless it’s tainted with detergent, mercury or melamine.

Unfortunately, questionable food safety standards make this a very real possibility in some countries. Take China, for example, where in 2008, 300,000 people were poisoned and six infants died as a result of consuming milk tainted with melamine, an industrial chemical. The result? A significant deterioration of trust in locally produced milk that has encouraged the hoarding of foreign milk. A recent Bloomberg headline tells the story: “Milk Smugglers Top Heroin Courier Arrests in Hong Kong.”1 Significant buying of milk in Hong Kong, Australia and the UK by Chinese tourists has created the need for limits on the amount of powdered milk that can be purchased by a single customer.

Overall, growth in the $30 billion baby food industry is being driven by the rising middle class in emerging markets like China, and an increase in mothers working outside the home. Rising affluence in developing nations, combined with a lack of trust in domestic safety standards, has placed an emphasis on brands with strong global reputations, on the assumption that a well-regarded brand has fewer local quality control issues. Nestle is well positioned to take advantage of this growth trend. It has a long legacy and a strong brand in the global infant food market, having launched infant cereal back in 1867.

Nestle’s dominance extends beyond baby food. It has been ranked the number one consumer food products company for the past eight years in Fortune’s survey of the World’s Most Admired Companies,2 and according to a 2012 survey,3 Nestle was perceived as the most trustworthy food and beverage brand in China. This brand strength will allow Nestle to take advantage of the strong long-term growth trends in China and other emerging markets, where food consumption, per capita, is still only a fraction of what’s seen in the developed world.4

Nestle has consistently been able to convert the power of its brand into returns for shareholders. Strong market positions, as well as product and geographic diversification, have allowed Nestle to churn out consistent mid-single-digit organic revenue growth. As it continues to expand in the emerging markets, we believe strong long-term sales growth could translate into steadily improving profitability and returns. All of this is further supported by strong cash generation, with the company reporting almost 10 billion Swiss francs in free cash flow in 2012,5 a substantial portion of which is returned to shareholders.

1Bloomberg: April 24, 2013.

2Fortune: World’s Most Admired Companies, 2013.

3Millward Brown: Survey of Top 22 F&B Companies in China, 2012.

4Nestle: Investment Seminar, September 25, 2012.

5Nestle: Financial Results, 2012.