McCormick & Company Pricing Spineometer: 3 of 5 Vertebrae

McCormick & Company, a food flavoring company, had a slightly positive Q1 2023. Revenue rose slightly by 2.8% to $1.6 billion while earnings before interest and taxes decreased slightly by 3.9% to $199 million over the same period last year.

If it weren’t for pricing actions, things would have been much worse for McCormick & Company according to its 28 March earnings call.

Price actions over the past 12 months more than overtook the impact of volume declines to produce the achieved growth.  In their earnings call presentation, McCormick & Company’s revenue bridge shows the 2.8% overall growth being driven 10.6% positively by price and 4.6% negatively by volume and mix.  A normative approach to this type of analysis can be found in my research paper “Profit bridges that disambiguate impacts of currency fluctuations from other marketing variables.”

COO Brendan Foley clarified that the volume declines were not driven by price increases stating, “the offsets really are not related to price elasticity.”  Rather, the volume declines at McCormick should be attributed to the impact of divestment in the Kitchen Basic’s brand, the exiting from the Russian market, and the impact of Covid-related disruptions in China.

That is, the spices and flavorings offerings by McCormick are not just facing inelastic demand, but the demand inelasticity is smaller than that which might be anticipated from this financial report alone. From a short-term price optimization viewpoint, McCormick should raise prices to further improve profits.

Looking forward, the executive team at McCormick & Company has further plans to raise prices. CEO Lawrence Kurzius stated, “In 2023, we plan to fully recover the inflation our pricing previously lagged as well as offset current year inflation through our pricing actions and other levers.” CFO Mike Smith stated, “At the top line, we expect to grow sales 5% to 7%, driven primarily by the wrap of last year’s pricing actions combined with new pricing actions we are taking in 2023.”

Price increases are, of course, not the totality of McCormick & Company’s strategy.  Investments in brands, product launches, global trends favoring hot sauces, and the coming grilling season with new merchandising plans are all in the works. Aligned with today’s consumer concerns, McCormick & Company has strategies to increase post-consumer recycled packaging and decrease the carbon footprint of some of their offerings.  And embracing changes in consumer behavior, McCormick is engaging in gaming advertising such as their recent “Fortnite” campaign featuring a chicken-wing-shaped island with a volcano of Frank’s RedHot, one of their hot-sauce brands, resulting in 1 billion impressions in North America.

With the pressure on pricing actions to drive results across new product launches, geographies, and the revenue split of roughly one-third in business-to-business sales in flavoring and two-thirds in consumer-packaged goods, we expect to identify a robust pricing team.

Research into the quality of McCormick & Company’s pricing team yielded lackluster results.  Pricing professionals were identified with titles of analyst, manager, and director.  Pricing professionals work on business-to-business issues like commercial pricing as well as consumer-packaged goods issues like rebate management.

Unfortunately, McCormick and Company, like many of their consumer-packaged goods peers in the States, appeared to be heavy in pricing analysts and light in pricing decision-makers.

1. It is the role of the analyst to calculate consumer elasticities concerning promotional campaigns but that of the pricing decision-maker to recommend price structures and selling prices to retail channel partners.
2. It is the role of the analyst to track and manage rebate programs and that of a decision-maker to recommend them and guide them toward contributing to profit performance. And
3. it is the role of the analyst to track new product prices but the decision-maker to align pricing with the new-product development lifecycle.

Maybe these pricing decisions are made by product, brand, category, sales, and finance managers. But experience implies McCormick and Company likely has untapped potential to drive profitability through improved pricing practices across product lifecycles, brands, customers, and regions.

Given the importance and capability of pricing at McCormick & Company as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of May ‘23.

McCormick & Company Pricing Spineometer:  3 out of 5 Vertebrae.

MKC (McCormick & Company, Inc.) rose from 74 on the day prior to their earnings call to 85 one week later. FY 2022 revenue of $6.4 B with a 14% operating margin and P/E ratio near 35.

Currently, a 1% improvement in price would yield a 7.4% improvement in EBIT holding all else constant for McCormick & Company.

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