Inflation, supply chain woes weigh on spice maker McCormick

Dive Brief:

• McCormick & Co. said supply chain challenges that are taking longer to ease and inflation that is impacting consumer buying habits are weighing on its business, prompting the company to trim its financial guidance in 2022 for the second time.
• In a statement, CEO Lawrence Kurzius said the “normalization of our supply chain costs is taking longer than expected, pressuring gross margin.” He said the 133-year-old manufacturer of spices, seasoning mixes, flavorings and condiments “will be aggressively driving the elimination of supply chain inefficiencies.”
• McCormick is not the only CPG being impacted by macroeconomic issues. Every food and beverage company is dealing with increased costs, heightened uncertainty and changes in consumer buying habits that have impacted their bottom line and made planning increasingly difficult.

Dive Insight:

Fewer than three months ago, McCormick cut its outlook, citing high cost inflation and supply chain challenges. Now the flavorings giant is lowering it once more. The company said adjusted third-quarter earnings would be 65 cents a share, trailing analysts’ estimates, while it expects adjusted earnings for the fiscal year 2022 to be between $2.63 to $2.68 a share, a drop from its previous guidance of $3.03 to $3.08 estimated in June.

“Supply chain challenges, heightened costs, and tepid consumption are taking a more pronounced toll on McCormick than foreseen two months ago,” Erin Lash, a director of consumer sector equity research at Morningstar, said in a research note published last week.

Brendan Foley, McCormick’s president and chief operating officer, told a Barclays Global Consumer Staples conference audience last week that people are looking for ways to stretch their food dollars, including using more of what they already have in their pantries and eating more leftovers. Shoppers, he said, also are doing more planning ahead and looking for lower prices on the shelf. The shift has been especially pronounced during the last three months.

“Fundamentally, we’re seeing consumer behavior change, really pretty significantly since the first half of ’22,” he said.

In addition to supply chain woes, McCormick is facing a moderation in some trends like baking at home that, while elevated, have eased “both faster and earlier than we expected,” Kurzius said at the Barclays conference.

The executive noted that inflation has left consumers less inclined to accept price increases. McCormick, Kurzius said, is increasing its brand marketing and focusing on highlighting the value of its offerings to drive growth. To be sure, the headaches reflect the economy as a whole rather than anything specific to McCormick, which has a dominating position in the spices category.

“We do see the consumer under pressure. We do see supply chain constraints that are still impacting us. But with that, our sales growth is still quite strong,” Kurzius said. “We still have a lot of confidence in the long-term outlook.”

McCormick is among a handful of food and beverage makers to lower their outlook or report ongoing challenges in recent months. Tyson Foods said last month that consumers are buying more chicken and cheaper cuts of beef to save money. And soup and snack maker Campbell Soup said recently that margins are slipping, and supply challenges impacting its Lance, Late July and V8 brands are likely to continue into 2023.

As consumers watch their spending, a major beneficiary of the current inflationary environment continues to be private label manufacturers such as TreeHouse Foods. While McCormick is best known for Lawry’s, its namesake spices and condiments like French’s and Frank’s RedHot, it also has a strong private label business that could serve as a buffer, Lash noted.

“Even if consumers opt to trade down, McCormick is well placed, given it operates as the largest private-label seasoning and spice manufacturer,” she said. “Most importantly, we think its unwavering focus on investing in consumer-valued innovation and marketing (5% of sales, or $100 million annually) should enable it to navigate the unsettling backdrop and maintain its competitive prowess long-term.”