The Rising Influence of Rising Affluence

[DewDiligence]

McCormick Spices Up Product Line

[This article is from Jan 2012. I have no position in MKC, but I’ve considered it from time to time as a steady and reliable play on The Global Demographic Tailwind. It gets 60% of sales from outside the US and is expanding in emerging markets such as China. Currently, the stock is not exactly cheap, but neither is it unduly expensive, IMO. The dividend yield is about 2.5% and the beta is an astonishingly low 0.24.]

http://online.wsj.com/article/SB10001424052970203899504577126892320260290.html

›JANUARY 3, 2012
By LAUREN WEBER

Business has been far from bland for McCormick & Co.

One of the world's largest spice dealers, McCormick has had to cope with rapid price inflation for core products like pepper and cinnamon, along with some catastrophic weather and political unrest in the equatorial regions where most of its raw ingredients are grown.

Alan Wilson, McCormick's chairman, chief executive and president since 2008, has managed to keep growth steady with a combination of price increases, alternative sourcing when supply chains are disrupted, expansion into new geographic markets and cost savings.

In a downturn that scared many Americans away from restaurants [although the restaurant industry appears to be back on the upswing now], McCormick has refocused its product line and marketing to appeal to home cooks, who account for 60% of sales. That helped to offset recent weakness in its industrial segment, which serves restaurants and large food manufacturers.

McCormick also gained footholds in new geographic and product markets with several acquisitions, including Polish seasonings maker Kamis SA; Indian basmati rice seller Kohinoor Foods Ltd; and the Kitchen Basics line of soup stocks in the U.S.

Mr. Wilson, 54, talked with The Wall Street Journal about the price of cinnamon, America's eating habits and how the company has weathered the downturn. Edited excerpts:

WSJ: How has McCormick experienced the downturn?

Mr. Wilson: What we saw in 2008 and 2009 was a return to basics. We sold a lot of taco mix and spaghetti seasoning as people cooked simpler things, and some of the higher-end organic spices dropped off a little bit. As people have gotten a little more confident, they're back to experimenting more. Our organics and our gourmet products are doing well again.

In the last few years we've seen a lot of commodity inflation. So we've really tried to offset cost increases and we've changed our advertising strategies to focus on value-type meals.

WSJ: People in developing countries don't shop the way we do in the U.S.; they go to open markets. How does McCormick gain a foothold in places like that?

Mr. Wilson: It's changing. In China, we're selling to the large international retailers like Carrefour and Wal-Mart. We're also selling to the Chinese chains that may have 50 or 100 smaller-format stores. But we also have distribution in the open markets in Shanghai, Beijing and Guangzhou, where consumers come in and buy a sachet of red or white pepper for a couple of renminbi.

In Turkey and other markets, what we're selling is convenient, safe packaged goods instead of what you find in an open market.

WSJ: You mentioned that commodity prices have been going up. What's behind that?

Mr. Wilson: The prices of most of our commodities have really surged in the last year. The price of pepper has basically quadrupled in four years and doubled in the last 18 months. Cinnamon is up about 30%. Farmers are like any other businesspeople, they're going to grow the things that will generate the best returns. In Vietnam, which is a large pepper and coffee growing area, we've seen farmers move into things like cocoa.

Most of the products that we buy and sell are grown within about 10 degrees of the equator, and there have been a lot of weather events in those parts of the world.

It's also about political unrest. For instance, we source a number of herbs from Egypt, and as that country became more uncertain, we immediately brought in a lot more inventory and shifted some of our sourcing to other parts of the Mediterranean.

WSJ: Around 40% of your sales come from the U.S. Do Americans' eating habits change fast enough to create the growth you need?

Mr. Wilson: People are pretty comfortable with their meal repertoire, but they tend to get into a rut and what we're trying to do is help them expand that weekly meal. We want to help them discover new things, so instead of just making a piece of chicken with soggy barbecue sauce on it, we try to spice it up into rosemary chicken. And that's how we've gotten some of our growth.

WSJ: What kind of cost-savings have you seen?

Mr. Wilson: We set our public goal of saving $150 million over four years. We're in our third year of that program, and we'll be about a year early in meeting the target. In the past what we've done, like almost every company, is go along for a while and then step back and do a large restructuring program. We believe it's healthier to do that on an ongoing basis. So for example, by improving the efficiency of the plants in our industrial business in the U.S., we've created enough capacity to avoid building another plant as our business has grown.

WSJ: What's your strategy for expanding the business?

Mr. Wilson: We try to do a third of our growth from our core business, a third of our growth from new product innovation, and a third of our growth from acquisitions. We have a constant stream of new product innovation; things we identify as being new trends in flavor. On the core growth side, we continue to increase our investment in advertising and promotion to make our products top of mind with the consumer.‹