“We know what to do in 2023 — drive volume growth, especially in the consumer segment, begin rebuilding flavors solutions margin, and address the acceleration of cost from the last several years, especially in our supply chain," McCormick Chairman and CEO Lawrence Kurzius shared at this week’s Consumer Analyst Group of New York conference.
Recovering in 2023: Normalizing supply chain, boosting efficiency
Looking back at the last five years, 2022 was an “aberration” for McCormick, as profits were impacted by a “volatile environment ... with severe disruption in key markets, and pricing lagged the pace of accelerating inflation,” Kurzius said. The company's operating income suffered “a few major impacts,” including “COVID-related China disruptions and the war in Ukraine pressured margins,” McCormick CFO Mike Smith added.
Looking forward, Smith said McCormick’s global operating effectiveness (GOE) program will increase McCormick’s profit, and other challenges like inflation won't have as big of an impact in 2023. The company “[plans] to fully recover the inflation [as] pricing has lagged over the last two years, which will be a tailwind to our profit in 2023,” he added.
“We're taking streamlining actions across the entire organization by optimizing our processes and aligning our structure for efficiency. … We expect our GOE program to drive annual cost savings of $125m with $75m realized on our bottom line in 2023.”
Cost savings come from McCormick’s efforts in “normalizing [its] supply chain costs while continuing to support customer growth through actions such as reinstating more normal shift schedules and accelerating automation,” Smith said. These streamlining efforts will reduce its American supply chain workforce by 10%, which he reported has been accomplished halfway .
Other cost-savings will be actualized by the “repatriation of production [it] scaled up at co-packers to meet high demand,” with the CapEx expenditure expected to reach a five-year low in 2023, he added.
Responding to consumer demands by releasing new products, packaging
McCormick plans to grow its business further by releasing new consumer products and tweaking established product lines.
"New products are ramping back up in 2023 with our US spices and seasonings launches six times greater than 2022," which "bolsters [its] confidence and ... expected [total distribution points] growth," Kurzius said.
One way it plans to boost the consumer segment is by further supporting its influencer-led products, including its seasoning line with Tabitha Brown.
“The Tabitha Brown Sunshine seasoning was the fastest-selling new blend in [the] spices and seasonings category last year,” Kurzius said. Last year, the company released a creamy mustard seasoning, and this year, the company will release a creamy roasted garlic mustard. McCormick is also partnering with cooking influencer Max the Meat to release new flavors to kick off the 2023 grilling season, he said.
McCormick also is growing in the heat category, McCormick President and COO Brendan Foley said. On the food service side, McCormick is “increasing restaurant penetration, including expanded placement on tabletop, and [increased] share across Frank's Red Hot, Cholula, and French's” and “co-branded, limited time offers increased 120% in 2022,” he said. Additionally, McCormick’s “heat platform represented at least 20% of total McCormick sales in 2022,” he added.
McCormick also is listening to consumer demands on improving existing product lines. For example, consumers didn't like that McCormick switched its black pepper to a plastic can, so it started to transition back to the traditional tin can. With the two sizes that have switched back, "velocities improved substantially," Kurzius said.
Getting flavor profitability, margin back on track
The other prong in McCormick’s 2023 plan is “restoring flavor solutions profitability to recovering margin” and to make the company one of the top three flavor houses, Foley said. And as Kurzius pointed out, “flavor is an advantaged category projected to grow to 7% CAGR over the next three years.”
“Since 2019, we have delivered a 12% sales CAGR across our flavors and branded foodservice product categories; this was partially offset by the pruning of some lower margin business. While our flavor solution sales growth has been outstanding, … our profit margin has been pressured by short-term factors," Foley said. "We expect to resolve a significant amount of the pressure and for it to be a tailwind in 2023, with the remainder being resolved largely in 2024 and a small tailwind in 2025.”
With its acquisition of flavor house FONA International in 2020, McCormick is "reaching a broader customer base and further diversifying it with both beverage and performance nutrition, ... [and its] driving new wins with existing customers by cross-selling across our full suite of offerings," Foley said. McCormick is targeting "attractive high-growth end-market applications" in the flavor space around alcoholic beverages and savory snacks, he added.
McCormick also plans to grow its flavor business through the Flavor University program, founded initially by FONA, which is open to anyone who wants to learn about flavor science, how flavors are created, and their use in products. This program has also created an opportunity to grow McCormick flavor sales, Foley said.
"In 2022, we converted 45% of the new companies attending [Flavor University] into new customers and the customers who have attended are contributing significantly to new product sales," he added.