Not your average commodity
While things like salt and pepper are as common as they can get, the same cannot be said of some of the other specialized spices and herbs that go into the manufacture of McCormick & Company, Incorporated (NYSE:MKC)’s value added products. One example is paprika, mainly used as seasoning and coloring for stews and soups, which is sourced primarily from Kalocsa, Hungary. As the market leader in countries such as the U.S., Canada, the U.K., France, and Poland with more than 40% market share in spices and seasonings, it has the requisite scale and network of relationships to source its raw materials at competitive cost levels.
Low costs, high benefits
According to internal research by McCormick & Company, Incorporated (NYSE:MKC), its products usually represent about 10% of the cost of a meal, but account for 90% of the flavor. In addition, a survey by The Alcott Group indicated that 65% of Americans expressed the view that ‘flavor makes all the difference in their meals.’ This is largely a factor of the trend of dual income families, where ordinary Americans are having less time to prepare meals and are seeking convenient ways to make their food more palatable in the least amount of effort and time. This is where products by McCormick & Company, Incorporated (NYSE:MKC) fill the gap.
Putting yourself in the shoes of a McCormick & Company, Incorporated (NYSE:MKC) customer, you are unlikely to cut back on the amount of spice and condiments you buy in difficult times, or make a big fuss at the supermarket if prices are increased by 5%. As a result, McCormick & Company, Incorporated (NYSE:MKC) exhibits revenue stability and pricing power, evidenced by its financial track record. McCormick grew revenue in every single year in the past decade, with gross margin staying within a narrow range of 40%-42% over the same period.
In terms of geographical exposure, McCormick derived 14% of its fiscal 2012 sales from emerging markets, with a target of emerging markets generating one-fifth of revenue by 2015. This target is likely to be achieved with both organic growth and acquisitions. McCormick completed the acquisition of Wuhan Asia Pacific Condiment, a leading Central China player in bouillon/broth in May 2013.