Wednesday 18 October 2017

Growth a challenge for McCormick as Amazon spices up food market

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John Lynch

Since antiquity, the spice trade has been the real secret behind international trade and commerce. I'd happily bet that the 15th century 'Age of Discovery' would probably have been a lot slower if the medieval world had been less fond of nutmeg, cinnamon, cardamom, ginger and pepper. Now, nearly 600 years later, the demand from the world at large to 'spice up' its grub is undimmed and 'flavour-makers' are still in strong demand. Even the great online retailer, Amazon, has recently been snapping up valuable properties in the food space. It paid $13.7bn (€11.6bn) for up-scale US supermarket group Whole Foods recently, putting the predicted competitive frighteners on smaller food producers. It has even worried the spice firm we are analysing today, the global leader in flavours, the US based McCormick & Co.

McCormick has an extremely strong position in spices, the consequence of an acquisition programme that has been pretty relentless. It sells under many brands including McCormick, Ducros and Schwartz, in more than 120 countries worldwide. Its main operations are in the US, Europe and China, with additional facilities in Australia, India and South America, employing 10,500 people and enjoying a market value of $12.5bn (€10.5bn).

The company has had to fight its way to this sort of global supremacy. In the late 1970s it was at the receiving end of an unwelcomed bid from the giant Swiss concern Sandoz. The bid was successfully rebuffed and the experience stung the group into capturing the leadership of the world's spice business.

The company operates two spice business divisions - consumer and industrial - and is also a leading supplier of private label products.

The consumer business is its oldest and largest, and has a higher margin than industrial, contributing $2.8bn (€2.3bn) to group sales last year and 75pc of operating income. Its main outlets are grocery, warehouse clubs and discount stores. A problem for McCormick is the recent trend of consolidations of supermarkets and distributors. This presents a challenge to the company's growth and profitability. One of Amazon's targets, now that it has Whole Foods under its belt, is Wal-Mart, which accounts for a considerable 12pc of McCormick's consumer sales and represents a particular concern for the company.

McCormick's industrial business had sales of $1.7bn (€1.4bn) last year. The division supplies natural and artificial flavours to food and beverage producers. It also supplies its food service customers with a full line of spices and other products to enhance their menus.

The group has a global footprint and a worldwide mix of business. The US is its most important market accounting for 60pc ($2.8bn) of group sales. Europe, Middle East and Africa sales are only one-third of the US and results last year were mixed. The Asia/Pacific region was also mixed, with a declining industrial market due to a slow-down in India.

Acquisitions, as mentioned earlier, have always been part of McCormick's strategy and last year the company turned its attention to the UK and Reckitt Benckiser. It saw off several competitors to buy the British outfit's food business for $4.2bn (€3.5bn), a high price that staggered some analysts. Popular products like French's mustard and Frank's RedHot sauce were added to the McCormick store cupboard. The deal will push net sales to $5bn (€4.2bn) this year and also generate some cost savings. Investors were unimpressed; shares fell 5pc.

The global food industry is intensely competitive, yet last year McCormick's sales increased to $4.4bn (€3.7bn). Net profit jumped an impressive 17pc to $470m (€397m) and earnings per share were up 20pc to $3.78. Its price earnings multiple is 25; high enough. The company continues to generate strong cash flow which increased to $658m (€556m). McCormick's shares have been outstanding over the last five years, showing a 60pc increase. Having reached a high of $117 early last year they have fallen back to trade at $108 today, probably reflecting online concerns. Interesting times ahead.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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