McCormick & Company (NYSE: MKC) is the largest spice company in the world with $2.9B in sales (2007)[1], 40% of which were generated outside of the U.S.[2] It produces and supplies spices, herbs, flavorings, and seasonings to consumers and food-service providers around the world[3].

In the spice business size matters, and with twice the revenue of its next largest competitor MKC has a decided advantage over other spice companies.[4] Consumers of spice tend to be very price sensitive, and McCormick also competes with private label brands. MKC has been able to distinguish its branded offerings from those of its lower priced private label competitors by spending substantial amounts on R&D to come up with new products and by increasing spending on advertising to convince consumers that its products are worth the premium. Products introduced since 2004 contributed 10% to 2007 sales.[5] Ironically, the company is also the largest producer of private label spices and seasonings in North America. According to analysts, its large presence in this market allows it, at least to an extent, ensure that private label brands do not price their brands so low that its branded products appear overpriced by comparison. [6] Finally, the company's size means that it can fuel its growth by making frequent acquisitions. In 2008, the company announced plans to acquire Unilever's Lawry's, its last major branded competitor in the consumer seasonings market[7]. The year before, it acquired to Simply Asia, a company that specializes in Asian spices-- Asian spices are one of the fastest growing spice segments. In the short-term, however, rising prices for the raw materials and spices MKC uses for its products have decreased profitability margins and forced McCormick to raise their prices.

Contents
1 Business Overview
1.1 Customers
2 Trends and Forces
2.1 Acquisitions Drive Growth and Take Over Competitors
2.2 New Product Development and Advertising
2.3 Rising Commodity Costs
3 Competitors
4 References
Business Overview

[[Image:MKCSegmentSales.PNG‎ |thumb|380px|right| MKC MKC's Consumer sales have remained constant at approximately 57% of sales over the past three years, but the Lawry's acquisition will boost Industrial sales since it has the largest industrial wet marinades market share. [8]

[[Image:MKCGeoSales.PNG‎ |thumb|380px|right| U.S. sales have decreased slightly (approximately 2%), while Europe and Other Countries' sales increased approximately 3% total.[9]

McCormick operates in three geographic segments: the U.S., Europe, and Other Countries. Europe and Other Countries represented approximately 40% of its $2.9 B in sales. MKC has production and distribution facilities on six different continents[10] to serve over 100 countries[11], such as the U.S., Australia, China, and Mexico.

McCormick & Company operates in two segments:

Consumer (57% of Revenue): MKC's Consumer segment offers spices, seasonings, marinades, extracts, herbs, and sauces for the everyday consumer. The Consumer segment generates approximately 57% of MKC's sales (U.S. (39%), Europe (16%), and Other Countries (2%))[12] and has a higher profit margin than its Industrial segment[13]. Brands that operate under its consumer segment include McCormicks, Zatarains, Old Bay, Simply Asia, and Thai Kitchen.
Industrial (43% of Revenue): MKC's Industrial segment supplies seasoning blends, wet and compound flavors, and herbs and spices to food manufacturers, restaurants, and other food service outlets. It generates the remaining 43% of sales, with 30% of sales concentrated in the U.S. (9% in Europe, 4% in Other Countries)[14]
Annual income data, in millions 2003 2004 2005 2006 2007
Net Sales[15] $2,269.6 $2,526.2 $2,592.0 $2,716.4 $2,916.2
Operating Income[16] $295.5 $332.7 $343.5 $269.6 $354.2
Net Income[17] $210.8 $214.5 $214.9 $202.2 $230.1
Gross Profit[18] $799.5 $898.6 $1,007.9 $1,114.6 $1,191.8
Earnings Per Share (basic)[19] $1.51 $1.57 $1.60 $1.53 $1.78
Customers
McCormick & Company has a broad range of customers and buyers because it serves both everyday consumers and the industrial food market. Examples of its customers by segment include[20]:


Consumer: Grocery stores, drug stores, warehouse clubs, mass merchandise, and discount stores
Industrial: Food manufacturers and restaurants. In 2007, MKC's five largest customers accounted for nearly 29% of sales[21], and Pepsico (PEP) accounted for 10% of those sales[22].
Trends and Forces

Acquisitions Drive Growth and Take Over Competitors
To maintain its market share in the spice and seasonings market, MKC is constantly acquiring new brands and developing new products. Recent acquisitions include:

Simply Asia Foods was acquired in June 2006[23] and is an easy-to-prepare Asian food company that operates under the Simply Asia and Thai Kitchen brands. The acquisition has since increased MKC's sales by 2.8%[24]. Simply Thai has a 59% market share in the Thai packed food segment.[25] MKC expanded its European presence by also acquiring Thai Kitchen's European segment, which increased sales 2% in the second quarter of 2008[26] .
Lawry's is a spice making company that operates in the consumer and industrial spice and seasonings market. Lawry's represents the last branded consumer spice company for MKC[27], so its acquisition would eradicate its last branded competitor. About 67% of Lawry's sales are to consumers[28] and 12% are from industrial, or food-service industry sales[29]. MKC will benefit from Lawry's industrial wet marinade products since it holds the largest market share in the U.S.[30] Morningstar analysts expect Lawrys to immediately add to MKC sales and increase margins[31]. MKC's agreement to buy Lawry's from Unilever is expected to close at the end of 2008.
Billy Bee Honey Products Ltd is the top honey brand in Canada. It sells a variety of honey products under branded, private, and industrial labels. It generated $37 M in revenue (2007)[32] and has a 60% share of the branded honey market[33], 50% of the private label market[34], and 50% of the honey used by Canadian food manufacturers[35].
New Product Development and Advertising
[[Image:MKCNewGraph.PNG‎ |thumb|375px|left| MKC has increased Research and Development costs 57% since 2002. This graph demonstrates the increase over the past three years[36].

McCormick & Company has maintained its majority market share on the consumer spice and seasonings market by acquiring rival brands, developing new products, and advertising effectively. In order to differentiate itself from private, unbranded, and cheaper products, MKC has made an effort to focus on advertising and research & development (R&D) for new products. The spice and seasonings market is extremely price sensitive, especially on the consumer side. With MKC products side-by-side with similar, cheaper products, MKC must distinguish itself as a premium brand. In order to do so, MKC spent $55M in 2007 on advertising[37], compared to just $27M in 2002. Also, 10% of its $2.9 B in sales was attributed to new products launched within the past three years[38] and contributed to a 6% increase in U.S. consumer sales[39].

Rising Commodity Costs


Soybean oil prices have increased 175% since July of 2007. [40]
McCormick & Company was forced to raise prices in 2008 due to rising prices for commodities like pepper, soybean oil, and flour. Although sales increased 7.3%[41], rising commodity costs negatively impacted gross margins, which measure profitability while taking the costs of production into consideration[42]. High gross margins are important to a company like MKC because more profitable companies will have more to spend on projects like R&D and advertising[43]. In 2Q08, gross margins fell below the industry average of 40.6% to an even 39%[44] and MKC management stated that rising commodity costs were to blame[45]. Since gross margins factor in both income and sales, more sales volume through acquisitions, new products, and advertising initiatives will help offset increasing commodities costs and raise margins in the long-run. Lawry's has very high margins and will help raise MKC's gross margins at the end of 2008 when its acquisition is final.

Competitors

McCormick and Company does not directly compete with any one company, and its main competitors are mostly private label brands who compete with low prices. MKC is the largest company in both the consumer and industrial spice markets, and has built a wide economic moat. MKC is at least two times larger than its next largest competitor[46], so pricing pressure does not pose a problem for MKC because it competes on sheer volume of products sold. MKC has a strong, reputable brand name over its unbranded competitors and has the majority of the consumer and industrial spice markets.

Companies invested in the spice and seasonings market include:

International Flavors & Fragrances (IFF) is a New York based producer of different flavors and fragrances. It had $2.3 B in sales over 2007[47], and 70% of its sales were generated overseas[48]. IFF competes with McCormick on the Industrial side of the market with its seasonings and extracts[49].
Associated British Foods (LON: ABF) is a $13.5 B[50] international food giant based in London that owns ACH Food Companies and Tone Brothers, two subsidiaries that compete with MKC. ACH operates in the U.S. and Europe and specializes in oils, syrups, and spices. Tone Brothers is a subsidiary of ACH[51] and had $61.3 M in sales for 2007[52]. Tone Brothers specializes in manufacturing herbs, seasonings, and spices.

Company Revenue Net Income Profit Margin Operating Margin
McCormick & Company[53] $2.9 B $230 M 7.21% 12.15%
International Flavors & Fragrances (IFF) [54] $2.3B $240.4 10.42% 15.99%
ACH Food Companies (Private) - - - -
Tone Brothers (Private) [55] $61.3 M - - -
 
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