(1) Growth of (conventional grocery) store-brand products
As previously stated, the company produces roughly half of store-brand spices. This is a double-edged sword. While McCormick’s margins are lower on these products than its own brands, a small chunk of the store-brand pie is better than none. However, the threat is the store-brand pie growing and taking market share away from McCormick’s brands.
Given the high brand loyalty among spice buyers – about 64% usually buy the same brand – the growth of store brands is not yet as much of a concern as it is with other products. But this is a threat investors need to keep an eye on.
(2) The squeezing of the middle-market
This dynamic has largely happened in the retailing business. Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) have done well with their focus on providing low prices for many categories of products. Upper-middle end specialty retailers, such as Lululemon Athletica and Michael Kors Holdings Ltd (NYSE:KORS) have carved out nice niches. Meanwhile, the J.C. Penney Company, Inc. (NYSE:JCP) of the world — where much of middle America used to shop — have largely been left behind with no discernible identity.
I don’t think the threat is as great to middle-market grocery brands and stores, but some squeezing has occurred. McCormick & Company, Incorporated (NYSE:MKC) doesn’t need to address the lower-end threat (dollar store spices), but it might be well served to address the middle-upper end threat from Whole Foods Market, Inc. (NASDAQ:WFM) and others. Specialty retailers such as Penzey’s, which sells fresh spices via a limited (but growing) number of retail stores and has an online site, can be considered a limited threat. However, Whole Foods, given it carries a private label line of packaged organic spices and herbs, presents a greater threat. (Whole Foods’ private label line is manufactured by Frontier Natural Products Co-op.)
Foolish bottom line
McCormick’s stock is pricey based on conventional measures (23 P/E, 20 forward P/E, 2.7 5-year PEG for a company with EPS growth of 9% in 2012), but that’s to be expected for a stock with these attractive features: No. 1 position in industry; strong brand name; high-quality (consistent) earnings; a Dividend Aristocrat (one of a small number of companies that have raised dividends each year for at least 25 years); and a low stock price volatility (beta of 0.45).
The increasing penetration of the emerging markets, particularly China, should keep growth chugging along.
A bonus would be a Berkshire Hathaway Inc. (NYSE:BRK.A) buyout. I know speculation on acquisition targets runs rampant, but there’s little doubt that McCormick is on the possibility list (my other top pick is J.M. Smucker Company).
The article McCormick Isn’t Just a Food Industry Play originally appeared on Fool.com and is written by BA McKenna.
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