Spice Maker Faces Flat Market : Giant in Field Copes With New Consumer Patterns
For years, McCormick & Co. has led a charmed life. It spends comparatively little on advertising and marketing, yet its hold on consumers in the supermarket spice aisle has gone unchallenged for decades.
Rivals complain that the world’s largest spice maker isn’t only a competitor--it’s an institution. “Competing against McCormick is like taking on the government,” says one industry observer.
But even McCormick’s massive consumer franchise cannot protect it from the changing demographics that have slowed growth to a crawl in the nation’s $2-billion spice market. Today’s busy, two-career couples are far more likely to eat out or pop a frozen entree in the microwave than whip something up from scratch. As a result, the portion of spices sold through grocery stores has dropped from 60% to 40% since the 1960s; retail spice sales are growing at an anemic 2% per year.
Even mighty McCormick, with its estimated 40% share of the U.S. spice market, is feeling the pinch. Unit sales in its consumer products division have advanced less than 5% a year since 1987.
Bailey Thomas, 58, president and chief operating officer, concedes that spice sales were virtually flat in 1988 after falling 2.4% in 1987.
“McCormick’s biggest challenge is finding ways to grow a mature business,” says Clifford Ransom III, an institutional analyst at Ferris Baker Watts in Baltimore.
Thomas’ solution: spicing up sales and profits in McCormick’s core businesses with new products and line extensions and squeezing the fat out of operating costs.
The strategy isn’t a new one. The company has long been a strong player in supplying spices and flavorings to big food processors. Industrial products, which have grown at an average of 17% a year, now account for 26% of total sales, up from 23% in 1986. Consumer products, meanwhile, have fallen from 39% of sales to 35%.
In recent years, McCormick’s management has spent considerable time and effort preparing the company for the day when it can no longer depend solely on its consumer spice franchise for growth.
Three years ago, in a costly bid to revive retail spice sales, it scrapped the familiar red-white-and-blue spice tins for red-capped see-through bottles. And it moved into the new-products arena with pre-spiced chicken and pasta mixes intended for busy cooks.
At last year’s annual meeting, McCormick stunned investors with the news that it was putting its real estate division on the block. Later in the year, it tried unsuccessfully to buy one of its larger rivals in the spice market, and it has made no secret of the fact that it’s shopping for a sizable acquisition.
Results have been mixed. The $200-million repackaging program has won new customers, boosting sales by about 10%. And late last year, the company completed the sale of its real estate, a move that ironically has increased pressure to boost earnings.
Other growth schemes have been less successful. The buyout of San Francisco-based Spice Islands that would have given it a tight hold on the high-margin gourmet spice market was scuttled by the Federal Trade Commission on antitrust grounds. Though recent food industry mergers have left lots of delectable lines up for grabs, the company isn’t willing to pay current prices as high as 20 times earnings.
“We’re looking to acquire a branded product distributed nationally, but we’re not going to pay a ridiculous premium,” says Thomas.
McCormick is biding its time. While it waits for the “right acquisition,” it’s buying back its own securities and paying down debt--a strategy cheered by analysts as the best use for the $140 million in cash from the $540-million real estate sale.
Still, return on equity--14.6%--is a long way from McCormick’s target of 18%. Some argue that the company needs an acquisition to boost retail sales and earnings, given the dim prospects for spice sales.
Though new products are a major thrust, company strategists and observers concede that McCormick must tread carefully. Though king of the spice trade, the company is a mere David against the Goliaths of the food industry and ill-equipped to do marketing battle with the major food companies.
Instead of trying to fight specialty food wars, it is using spices to come up with entries that meet consumer needs but don’t stray too far from its core business.
New Chicken Sauce
As an example, Thomas points to the new chicken sauce and pasta mixes introduced last year that speak to two trends--the popularity of poultry and pasta, and the growing demand for quick, easy meals. The company is also adding to its line of “cooking systems”--bags with premixed seasoning for various dishes.
McCormick is also looking for ways to capitalize on the microwave boom by developing spices tailored to microwaved foods. It recently introduced a new microwave spice line in Canada. Its scientists are also working on a new cooking bag and seasoning system that would give microwave products the simmered texture and taste of slow-cooked food.
More divestitures could be in the offing, though the company stresses that it doesn’t expect to sell any major parts of its food business.
At the same time that McCormick is trying to fine-tune its product list, the company is trying to pare operating costs.
