McCormick eyes ambitious growth in year ahead

by Monica Watrous
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McCormick may need to shake up its spice and seasoning performance to achieve projected growth in 2015.

SPARKS, MD. — Even McCormick & Co.’s top executive admits the company’s target for sales growth in the year ahead is ambitious. Despite a difficult environment, the company reported higher earnings and sales for fiscal 2014, driven by aggressive cost savings, successful product launches and increased marketing support.

Net income for the fiscal year ended Nov. 30, 2014, was $437.9 million, equal to $3.34 per share on the common stock, up 13% from $389 million, or $2.91 per share, for the prior year. Results benefited from a favorable tax rate that offset slower growth in the company’s U.S. businesses.

 Net sales for the year totaled $4,243.2 million, up 2.9% from $4,123.4 million for the year before. Looking ahead, the company is projecting sales growth of 4% to 6%.

“As you look across the food industry, a 4% to 6% sales growth may seem ambitious, but it’s based on several factors that are in our favor,” said Alan Wilson, chairman and chief executive officer, during a Jan. 28 conference call with financial analysts to discuss earnings. “First is the rising demand for flavor.”

Citing I.R.I. retail consumption data, Mr. Wilson said the spice and seasoning and recipe mix categories are expected to grow globally at mid-single digit rates in 2015.

“Flavor is well-aligned with the broader changes in the way that people are eating today, whether it’s spicier food, eating more fresh produce and protein, simple ingredients, or the move towards healthier eating,” Mr. Wilson said. “We think that these changes are here to stay and that each of them drives demand for flavor.

“This is a catalyst not only to our consumer business but also to our industrial business.”

Second, the company continues to increase its investment in brand marketing. McCormick’s level of marketing is currently up more than 50% from five years ago, with new campaigns emphasizing product launches, quality and freshness, everyday cooking and holiday celebrations. The company is planning a further increase this year, with digital marketing representing a greater part of the mix at a third of total advertising, up from 11% in 2010.

“As we develop our marketing programs, a leading audience is millennials,” Mr. Wilson said. “In the U.S., a recent study shows that household penetration of our brands with millennials is right in line with other age groups.”

New products contributed a meaningful percentage to McCormick's sales in the past year.

The third factor driving sales growth is a continued investment in product innovation. Earlier in the month, McCormick opened a new product development facility for the U.S. consumer business. Across both consumer and industrial business segments, 8% of sales in 2014 came from new products launched in the past three years. Last year’s launches of Grill Mates burger seasonings, gluten-free recipe mixes and McCormick skillet sauces contributed to stronger sales.

Fourth, company executives expect to benefit from establishing strong relationships with customers.

“For retail customers, our share of voice, social media presence, digital marketing initiatives, product innovation and category analytics distinguished McCormick from the competition in just about every market where we participate,” Mr. Wilson said. “For industrial customers, a vital part of customer intimacy is support for our global growth. In this regard, we opened a small R.&D. center in Brazil during 2014 and by 2016 we expect to establish a footprint in the Middle East to support our customers’ expansion into this region.”

Along with these factors, an important component of McCormick’s long-term growth plan has been aggressive cost-savings activity. A combination of streamlining actions and efficiency programs over the past decade has generated significant savings that McCormick is investing in brand marketing and product development while offsetting material cost inflation.

In spite of the advantages, McCormick’s success may be contingent on gaining market share in the spice and seasoning category, where it has lost business to smaller brands.

“Our main challenge in this market has been fragmentation in the spice and seasoning category with U.S. retailers bringing smaller brands onto store shelves,” Mr. Wilson said. “These items included value-priced products, ethnic brands and premium as well as organic items.”

Meanwhile, the company gained 2 percentage points of market share in the recipe mixes category in 2014.

“As we head into 2015, we’re pleased with the category growth rates and we’re working to extend our success with recipe mixes to the spice and seasoning category,” Mr. Wilson said.

For the fourth quarter, McCormick had net income of $148 million, or $1.14 per share, up 14% from $129.9 million, or 98c per share, for the comparable period.

Net sales were $1,173.6 million, up 0.3% from $1,170.1 million for the year-ago quarter.

Operating income for McCormick’s consumer business segment advanced 7% to $470.6 million for the year and 16% to $169.3 million for the quarter. Segment sales rose 3.4% to $2,625.5 million for the year and 1.1% to $773.3 million for the quarter, driven by pricing and volume and product mix.

Within the industrial business segment, operating income increased 20% to $132.4 million for the year and 7.5% to $30.1 million for the quarter. Industrial business sales rose 2% to $1,617.7 million for the year but fell 1.2% to $400.3 million for the quarter, reflecting lower volume and product mix, due to weak demand in fast-food restaurants, which was offset by the favorable impact of pricing actions. Growth in snack seasonings in the United States and Mexico were strong.

“In 2014, McCormick delivered solid financial performance despite its difficult environment,” Mr. Wilson said. “Our on-trend categories are growing in markets around the world with increasing consumer demand for flavor. We’re driving growth in sales and profits and in 2015 are stepping up our cost-reduction activities to fuel our growth.”
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