McCormick Possesses a Winning Recipe for Profitable, Long-Term Growth

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As the leading player in the $11 billion global spices and seasoning market—with 20% share, 4 times the next-largest operator—McCormick is a valuable partner for retailers. However, competitive and macro headwinds abound. For one, McCormick continues to face heated costs (related to commodities, packaging, freight, and labor, which management has alluded to as being the highest in the past decade or two) that have ensnarled firms of all stripes. Further, we think consumers (particularly those with lower incomes and/or on a fixed budget) are beginning to tighten spending, given stepped up prices at the grocery store as well as rising interest rates, which could serve to pressure its results if consumers trade down or out of the category.

However, we maintain McCormick possesses multiple levers (the pursuit of durable cost savings, higher prices at the shelf, and the ability to ratchet back discretionary spend) to blunt the profit hit. To facilitate this, we're encouraged McCormick has not siphoned off its brand spending, which we view as key to combatting intensifying competition (with retailers stocking an increased assortment after the harsh rationalization at the height of the pandemic). In this context, we continue to expect McCormick will expend around 5% of sales, or $400 million annually, in support of research, development, and marketing annually on average through fiscal 2032.

We also contend its position as the leading private-label spice and seasoning producer further cements its competitive edge. While others have struggled to play both sides of the aisle, McCormick has used its position to bolster its retailer relationships, solidifying its moat. In this vein, it gained a foothold in two leading dollar stores (Dollar General and Family Dollar) by supplying each firm's private-label fare, before adding a handful of higher-margin branded products, as it showed the retailer's category sales edged up by increasing its branded mix. Despite the lower margin, we estimate private label makes up less than 10% of its consumer revenue (a mid-single-digit percentage of total sales), so these value-priced products are unlikely to dent profits.

Business Strategy & Outlook

We believe McCormick has a wide economic moat stemming from its solid relationships with retailers and a relative cost edge, which we think should enable returns on invested capital (including and excluding goodwill) to exceed its cost of capital on average for at least the next 20 years.

McCormick controls around one fifth of the $11 billion global spice and seasoning market, or about 4 times the size of the next-largest branded competitor. In our view, this makes McCormick a valued partner for retailers and supports its intangible asset moat source. We also think McCormick has been able to exert modest pricing power, as price/mix has generally exceeded inflation over the past decade. We forecast that McCormick will continue to invest behind research, development, and marketing (in aggregate, approximating 5% of sales each year over our 10-year explicit forecast, or around $400 million annually), which we view as a means to enhance the stickiness of its relationships with leading brick-and-mortar and e-commerce retailers. Further, we think this spending should help differentiate its offerings from those of its competitors at both the value and premium ends and maintain valuable shelf space for its offerings.

Unlike its packaged food peers, McCormick's leading position in its category is also marked by a unique feature: It is the largest producer of private-label spices and seasonings in North America, further enhancing its retailer relationships. While others in the industry have struggled to play in both the branded and private-label aisles, McCormick has effectively used this positioning as a way to bolster its retail relationships and solidify its wide moat. McCormick gained a foothold at two leading dollar stores by producing each’s private-label products. However, after gaining distribution through these retailers, McCormick subsequently ran tests to showcase that by stocking an increased mix of higher-margin branded products, category sales for the retailer edged up. Even though these are lower-margin sales for McCormick, we estimate private label makes up less than 10% of its consumer product revenue, or around a mid-single-digit percentage of its total sales, so this value fare is unlikely to dent McCormick's margins but rather stands to support its competitive prowess.

We also believe McCormick is advantaged in its flavor solutions (formerly industrial) operations, which cater to packaged food and beverage firms and restaurant operators. In our view, McCormick’s consumer insights position it to tailor its flavor solutions offerings to align with consumer trends, an advantage its flavor and fragrance peers can’t replicate. The firm’s commitment to expanding this side of its business and the breadth of its offerings is reflected in the fact that more than half of the roughly 10 deals completed in the past few years were to aid this segment of its business. We believe these additions, which afforded further scale and expertise, also helped it secure a position on the global supplier list at four of the top food and beverage companies. Now McCormick boasts 9 of the top 10 food and beverage companies as customers, as well as 9 of the top 10 food-service and restaurant chains; we think the opportunity for growth (and in turn expanding its scale) lies in reaching out to other emerging industrial players, which it previously ignored to focus on driving outsize growth with existing customers.

We think McCormick has also secured a cost advantage from economies of scale. In our view, its standing as a leading operator creates a virtuous cycle that affords manufacturers a mutually beneficial relationship with retailers, through which the vendor is an important retail partner, developing sales strategies to maximize volume and retailers’ margins while also prioritizing its own brands. With its extensive manufacturing and distribution network, we believe McCormick operates with lower unit and distribution costs, as well as greater supply chain efficiency and an enhanced ability to leverage brand spending, than smaller peers. Further, we think that as a result of these cost advantages, McCormick is poised to replicate competitive products and ultimately offer this fare to retailers at a lower cost. As such, while intense competitive pressure (from other branded operators, small niche peers that have proved more agile in responding to evolving consumer trends, and lower-priced private-label fare) is likely to persist, we believe McCormick will be able to withstand these challenges longer term because of this self-reinforcing combination of sources of its competitive edge that has created high barriers to profitable entry, sheltering vendors that have entrenched themselves in retailers' supply chains.

Overall, this defensive incumbent position has proved quite profitable, as McCormick has posted adjusted returns on invested capital of 15.5% on average over the past five years (8% including goodwill), outpacing our 7% cost of capital estimate and supporting our take that the firm maintains a wide moat.

Wide

Economic Moat

McCormick

McCormick & Co., Inc. is engaged in the manufacturing, marketing, and distribution of spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. It operates through the Consumer and Flavor Solutions segments. The Consumer segment operates by selling to retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce through the following brands: McCormick, French's, Frank's RedHot, Lawry's, Zatarain's, Simply Asia, Thai Kitchen, Ducros, Vahine, Schwartz, Club House, Kamis, Kohinoor, and DaQiao. The Flavour Solutions segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors, except for its businesses in China and India. The company was founded by Willoughby M. McCormick in 1889 and is headquartered in Baltimore, MD.

Earnings data Q1 2023

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McCormick & Co., Inc. engages in the manufacturing, marketing, and distribution of spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. It operates through the Consumer and Flavor Solutions segments. The Consumer segment sells spices, seasonings, condiments, and sauces. The Flavor Solutions segment includes seasoning blends, spices and herbs, condiments, coating systems, and compound flavors. The company was founded by Willoughby M. McCormick in 1889 and is headquartered in Baltimore, MD.

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Goldman Sachs Group Inc. GS, -0.69% senior executive Dina Powell McCormick is joining merchant bank BDT & MSD Partners, The Wall Street Journal reported Tuesday. Citing people familiar with the situation, the newspaper reported that McCormick will take on the newly-created positions of vice chairman and president of global client services at BDT & MSD Partners.

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HUNT VALLEY, Md., May 22, 2023 /PRNewswire/ -- McCormick & Company, Incorporated (NYSE: MKC), a global leader in flavor, will be participating in the Deutsche Bank Global Consumer Conference at 9:15 AM CEST / 3:15 AM ET, on Wednesday June 7, 2023.

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HUNT VALLEY, Md. , May 17, 2023 /PRNewswire/ -- McCormick & Company, Incorporated (NYSE: MKC), a global leader in flavor, today announced that Malcolm Swift, President Global Flavor Solutions and Chief Administrative Officer (CAO), will retire at the end of fiscal year 2023.

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