McCormick & Company, Incorporated (MKC) Business Profile

What it does

McCormick is a flavor-products company headquartered in Hunt Valley. Brendan M. Foley is Chairman, President and Chief Executive Officer. It manufactures, markets and distributes herbs, spices, seasoning mixes, condiments and other food products for retailers, food manufacturers and foodservice businesses.

Its Consumer business sells branded and private-label products through retail channels. Its portfolio includes spices and seasonings, condiments, sauces, dessert products and chilled herbs. Brands sold in the Americas include McCormick, French’s, Frank’s RedHot, Lawry’s, Cholula, Club House, Gourmet Garden and OLD BAY. Regional brands and product lines also serve markets in Europe, the Middle East, Africa and Asia-Pacific.

Flavor Solutions supplies food manufacturers and foodservice customers with ingredients and customized products used in packaged foods and restaurant menu items. Its offering includes seasoning blends, spices, herbs, condiments, coating systems and compound flavors. The company supports these customers with sensory testing, culinary research, food-safety knowledge and flavor-application expertise.

The company also participates in joint ventures that make and sell flavor products. McCormick de Mexico is its most significant joint venture and sells mayonnaise, spices, marmalades, mustard, hot sauce and tea under McCormick brands.

How it makes money

McCormick earns revenue by selling packaged flavor products to retailers and by supplying ingredients and tailored flavor systems to food manufacturers and foodservice customers. Consumer sells products that consumers buy for home cooking, snacks and other eating occasions. Flavor Solutions sells products that customers incorporate into their own finished foods or menu items.

Consumer is the higher-margin segment. Its sales are centered on spices and seasonings, condiments and sauces, alongside private-label items for retailers. The company uses advertising, promotions, product innovation, category-management tools and customer engagement to support branded sales. It also takes pricing actions, although it says price elasticity can unfavorably affect volume and mix.

Flavor Solutions has customer relationships that in many cases have been active for decades. Its sales can recur as manufacturers and foodservice customers use flavor ingredients in their products and menus, but demand depends on customers’ own consumption and product-launch activity. The business differentiates its offering through customized development work, a broad product range and technical capabilities.

The latest fiscal year brought sales growth from favorable volume and product mix and from pricing, while currency movements reduced sales. Management said on the call that softer quick-service restaurant traffic and weaker consumption-driven demand from consumer packaged-goods customers affected Flavor Solutions in the latest reported quarter.

Sales, operating income and operating cash flow are generally higher in the holiday-season quarter, principally because of Consumer buying patterns.

Customers and how it sells

McCormick sells directly to customers and also uses brokers, wholesalers and distributors. Consumer customers include grocery retailers, mass merchants, warehouse clubs, discount stores, drug stores and e-commerce retailers. These outlets sell branded products to consumers and can also source store-brand products from McCormick.

Flavor Solutions customers are multinational food manufacturers and foodservice businesses. They are supplied directly and indirectly through distributors, wholesale foodservice suppliers and e-commerce. Food manufacturers use the products as ingredients in finished goods, while foodservice customers use them in menu items and for dine-in and take-out occasions.

Wal-Mart Stores is a Consumer customer, and PepsiCo is a Flavor Solutions customer. McCormick also identifies customer concentration within Flavor Solutions, where its largest customers represent a meaningful portion of that segment’s sales.

The company’s principal sales, distribution and production facilities are in North America, Europe and China, with additional facilities in Australia, Central America, Thailand and South Africa. Consumer brands reach consumers in approximately 150 countries and territories. Non-U.S. operations account for a material portion of sales, and the company is exposed to local economic conditions, currency movements and restrictions on investments, royalties and dividends in those markets.

Suppliers and costs

McCormick’s important raw materials include dairy products, pepper, garlic, onion, red peppers and paprika, salt, tomato products, sugar and soybean oil. Pepper and various spices and herbs are generally sourced outside the United States, while dairy products, onion and soybean oil are primarily obtained locally in the United States or at international locations.

Agricultural inputs can fluctuate in price and availability because of weather, growing and harvesting conditions, inflation, market conditions and global trade policies. The company responds through strategic purchases, forward purchases, customer price adjustments and savings from its Comprehensive Continuous Improvement program. There can be a lag between input-cost inflation and the effects of pricing or savings actions.

Manufacturing and conversion costs, packaging, labor, freight and distribution are also relevant costs. McCormick relies on third-party transportation providers for inbound materials and product deliveries. Labor shortages, transport-capacity constraints and higher fuel costs can raise its transportation expense and suppliers’ costs.

Management said on the call that a potential packaging-component issue was concentrated in Consumer Americas and did not affect broader spice and seasoning sourcing. It said the company planned to use alternative packaging formats to mitigate the issue.

Competitive position

McCormick operates in competitive global markets. In Consumer, it competes with numerous spice, seasoning, condiment and sauce brands in the United States and internationally. Some competitors are owned by large food manufacturers, while others are small privately owned companies. Private-label products are also a competitive factor.

In Flavor Solutions, competitors include specialists with narrower product ranges or geographic reach, as well as global flavor companies that provide integrated offerings extending beyond flavor into functional and nutritional ingredients. McCormick does not specifically name any competing companies in the available information.

The company seeks to compete in Consumer through innovation, brand marketing, promotions, analytical category-management tools and a portfolio spanning premium through value-priced products. In Flavor Solutions, it emphasizes culinary and consumer-inspired flavor development, product breadth and customer engagement.

Our reading: McCormick’s portfolio of established trademarks is a moderate moat because those marks are material to its business, while private-label use and competing brands can challenge relevance and shelf position. [item1]

Our reading: Flavor Solutions has a moderate moat from customized development capabilities and customer relationships active for decades, but larger global flavor companies can offer broader integrated ingredient solutions. [item1]

Growth opportunities

McCormick’s long-term growth plan combines its base business, new products and acquisitions. The base business is intended to grow through brand marketing, category management and differentiated customer engagement. The company identifies digital marketing as a channel for providing recipes, cooking advice and product discovery to consumers.

New-product activity spans cooking occasions, from gourmet and premium products to convenient and value-priced flavors. For Flavor Solutions customers, McCormick develops seasonings for snacks and other foods, as well as flavors for menu items. Its innovation work includes clean-label, organic, natural and better-for-you products, supported by product innovation centers around the world.

Geographic expansion is another part of the plan. The company recently increased its ownership in McCormick de Mexico and says the business provides a platform for Mexico and Latin America. Management said on the call that it views Mexico as a long-term growth market, including further potential in herbs and spices. Management also said that the transaction was delivering the expected accretion across the income statement.

Management said on the call that it is pursuing additional distribution in club stores, e-commerce and discount channels. It also described price-pack architecture, sharper promotions, assortment work and retail-media investment as actions intended to improve Consumer performance. The company expects favorable volume and product mix, pricing, marketing investment and its cost-savings program to support its growth plans.

Structural risks

• Agricultural commodities and other inputs can become more expensive or less available because of weather, harvest conditions, inflation, trade policies and other factors outside McCormick’s control. Pricing actions and cost savings may not offset these costs on the same timetable.

• Consumer demand can weaken during deteriorating economic conditions, inflation, recession or economic uncertainty. Price sensitivity, value trade-down and lower category consumption can affect sales volume and product mix.

• Flavor Solutions demand depends partly on food manufacturer and foodservice customer activity. Management said on the call that softer quick-service restaurant traffic and weaker consumption-driven demand from consumer packaged-goods customers affected the business.

• McCormick has significant indebtedness. Higher interest rates or changes in credit ratings can increase financing costs, limit borrowing flexibility and make the company more vulnerable to adverse economic and industry conditions.

• The business depends on brand relevance, product quality, labeling, food safety, intellectual property and information technology. Brand damage, increased private-label use, product concerns, infringement claims, cyber-attacks or data breaches could affect operations and customer relationships.

• Global operations expose McCormick to currency movements, geopolitical conditions, changing regulation, tariffs and other trade restrictions. Transportation capacity constraints, fuel costs and labor shortages can also raise supply-chain costs.

Bottom line

Our reading

Our reading: McCormick is a packaged flavor business built around retail brands and a business-to-business flavor operation, with sales spread across home cooking, food manufacturing and foodservice. [item1]

Our reading: Its brand portfolio, global sourcing, technical flavor capabilities and long customer relationships support the business, but commodity inflation, competitive shelf conditions, private label, foodservice demand and indebtedness remain material constraints. [item1; item1a; item7]

Our reading: The company is investing in innovation, distribution, marketing and Mexico while using pricing and cost savings to manage input-cost pressure. [item7; call_qa]