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Urbem's 'Wonderful Business' Series: Nichols

U.K.-based Nichols PLC (LSE:NICL) is an international provider of still and carbonated soft drinks in more than 85 countries and territories. While the company owns a diversified portfolio of brands, its primary business has been built around the British classic Vimto drink. In 1908, the pharmacist John Noel Nichols invented the secret recipe of Vimto. The drink, which contains the juice of grapes, raspberries and blackcurrants, along with a few herbs, was initially intended as an herbal tonic to provide "vim (energy, enthusiasm) and vigor (strength and power)." The drink was originally produced under the name Vim Tonic, which was later shortened to Vimto.


Today, more than 20% of Nichols PLC is still owned by insiders, mainly the founder's family affiliates, including the current Non-Executive Chairman Peter John Nichols.

Last year marked the 110th birthday of the Vimto brand. In this regard, the business should earn a high defensive score from the perspective of the "Lindsay Effect," which states that the future life expectancy of a non-perishable thing is proportional to its current age.

In the U.K., Vimto has remained one of the most chosen beverages (according to Kantar) and a favcorite among kids (according to Brand Finance). Outside of its home country, Vimto has gained considerable popularity, particularly in the Middle East and Africa. Vimto has even become a big Ramadan tradition in the Muslim world. The drink has been sold in the Middle East region since the 1920s, even before oil was discovered there. Nichols generates around 20% of its total revenue from overseas, largely thanks to Vimto.

At Urbem, we appreciate the asset-light business model in light of its low capital requirement and strong cash generation. Nichols heavily leverages production and bottling partners, third-party distributors and brand licensees in building its routes to end-consumers. As a result, we usually see an annual capital expenditures at the percentage of only 1% to 3% of the total sales.

While it could be argued that the lack of an owned distribution network might weaken the company's competitive position, the century-old signature drink company should provide a robust brand moat through a substantial share of mind among target consumers. According to the chart below, the return on assets at Nichols PLC has been consistently outperforming peers such as Coca-Cola (NYSE:KO), Keurig Dr Pepper (NYSE:KDP), Suntory (TSE:2587) and A.G. Barr (LSE:BAG) for over a decade now.

Moving forward, Nichols PLC should be able to deliver continuous growth through a combination of geographic expansion and product innovation. It is worth noting that alongside the continued investment in the Vimto brand, the company's strategy identifies acquisition as a key growth driver. In this regard, investors should keep an eye on the development of capital efficiency. For example, a downtrend in asset turnover or a sharp increase in goodwill (see below) is somewhat of a warning sign, in our view.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we own shares of Nichols PLC.

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This article first appeared on GuruFocus.