McCormick’s gross margin dipped slightly in the company’s first quarter to 36% from 36.8% in the same period last year, and while not ideal the change is a significant improvement from the 3.5% drop it reported in the fourth quarter of 2022, executives said during the company’s first quarter earnings call yesterday.
“The progress we are making on gross margin improvement reflects the level of urgency with which we are addressing the pressure points from last year,” CEO Lawrence Kurzius told investment analysts.
He explained the company’s “considerable improvement” in its gross margin performance in the first quarter “reflects the continued recovery of the cost inflation or pricing [which] lagged over the last two years,” but which includes increases passed through at the end of the previous fiscal year and in the last quarter.
The improvement also comes from the company’s Comprehensive Continuous Improvement and Global Operations Effectiveness programs aimed at cutting costs, including through the previously announced layoff of 10% of its US supply chain staff, Kurzius said.
“Our diligence in optimizing our cost through our GOE program … is progressing as planned and remans a key focus. We expect the impact of our GOE program to scale up as the year progresses, and we remain on track to realize $75m of cost savings in 2023, which we will take to the bottom line because our actions to normalize our supply chain costs and to streamline our organization,” he said.
While McCormick CFO Mike Smith said he is pleased with the margin improvement and remains confident that the actions underway will continue to drive further improvement over the balance of the year, he acknowledged the company also faces significant lingering challenges.
“We are still incurring elevated costs in Flavor Solutions to meet high demand in certain parts of our business. While painful in the short term, we know making these investments to support our customers is the right approach to driving long-term growth. That said, we continue to progress on reducing the level of these costs in the first quarter,” he said.
“Also in Flavor Solutions, we incurred dual running costs related to the transition to our new UK Peterborough manufacturing facility. We expect the balance of the year costs to comparable to 2022 and a sales shift between our Consumer and Flavor Solutions segments as compared to last year’s unfavorably impacted gross margin,” he added.
New flavors, products and channels should boost distribution
McCormick plans to improve further its margins and sales by recovering shelf space lost during the pandemic by rolling out new products, bolstering brand marketing and reintroducing promotions, executives said.
“While we cannot get too specific about product development, following a strong year of innovation in 2022, we carried a robust new product pipeline into 2023,” including launches in the fast-growing Mexican aisle and new grilling options, Kurzius said.
“We are launching Cholula Taco recipe as well as sauces based on authentic Mexican formulas and crafted in Mexico using locally sourced fresh tomatoes, and retail acceptance has been strong and consumers will find these new products and the authenticity they are looking for on US shelves soon,” he said, noting the products began shipping this week.
In addition, McCormick is launching new flavors of Griller’s Choice marinade and dry seasoning rubs that “capture real authentic hardwood smoke flavor,” he said.
It also is extending its Tabitha Brown line with new flavors, formats and channels, and launching a French’s creamy roasted garlic mustard.
“In direct-to-consumer, we continue to grow our platform with new innovative flavors as a testing ground and in the club channel we’re launching a world flavors line,” he added.
Brand marketing, promos reinforce consumer engagement
To support new and existing products, McCormick is increasing its brand marketing investments with messaging focused on everyday use, value and superiority of its ingredients and flavors, Kurzius said.
In addition, the company is launching a “flavor on” campaign for mustard and elevating its Cholula campaign to support the launch of new formats and capitalize on the upcoming grilling season, he said.
Finally, he said, McCormick should see distribution and sales gains from an uptick in promotions now that the company can support volumes. Those campaigns will go beyond dialing back prices to focus on “quality merchandising events that drive consumer takeaway,” he added.
While company executives said they are pleased with margin improvements and expect to see additional gains throughout the year, they are holding on celebrating until the can “put [additional] points on the board the second quarter,” Smith said.
Ultimately, he said, the company should see gross margins grow between 0.25% and 0.75% higher in 2023 over 2022.
