In today’s edition of The Stockout CPG-focused newsletter, I discuss a company that has been dealing with exactly that — stockouts. McCormick & Co., the world’s largest spice company, reported earnings last week (for its first quarter ending Feb. 28) and provided an outlook that was favorable, boosted by continued elevated levels of at-home consumption. During the past year, the company was surprised by the demand for its products, which proved to be a mixed blessing and contributed to supply chain issues, particularly for popular herbs, spices and recipe mixes. The company responded by suspending production and sales of lower-priority items and is about halfway through the process of returning its complete product line to shelves.
In other CPG supply chain news, and making this a distinctly Maryland edition of The Stockout, salty snack maker Utz acquired distribution rights to expand its distribution in Florida, which should lead to market share growth in the Sunshine State. That announcement comes on the heels of a return to Utz’s plan to convert direct-store-delivery routes to independent operators, a model that the company had temporarily abandoned during the pandemic but that should ultimately improve its cash flow.
McCormick temporarily suspended production of some of its products last year due to manufacturing capacity constraints. As more consumers started cooking amid fewer dining-out options during the pandemic, demand for McCormick’s spices and other products designed for at-home consumption took off and greatly exceeded internal forecasts. As a result, consumption exceeded production and shipments during all of last year. The company’s response has been to ramp up manufacturing capacity in an effort to catch up to consumption levels while also shifting production capacity to its core, higher-velocity products while suspending production and distribution of certain lower-priority items. This has been strictly a U.S. phenomenon in which the company enjoys a larger market share; outside of North America, the company has been gaining market share against competitors that were struggling to keep up with retail demand.
About half of the suspended products are now back on shelves. McCormick expects inventory replenishment to continue throughout the year. Aside from supply chain issues, and in keeping with a major CPG trend, the company rationalized its number of SKUs by “a couple hundred units” and does not have plans to return to having as many SKUs as it did before the pandemic.
Inventory issues aside, McCormick is performing well. The company is gaining share in most items that did not have inventory issues, and its adjusted operating margin expanded 160 basis points y/y in the first quarter on 20% y/y currency-neutral revenue growth. While demand will almost certainly be lower compared to last year in the company’s second quarter due to difficult comparables, consumer behavior points to levels of at-home consumption that far exceed levels of two years ago. Greater levels of at-home consumption of breakfast and lunch will likely persist, relative to pre-pandemic levels. With demand exceeding expectations year-to-date, the company increased its fiscal 2021 revenue growth outlook, in constant currency, from 5%-7% to 6%-8% with 4% revenue growth due to recent acquisitions.
McCormick only expects low-single-digit cost inflation in fiscal 2021. This is an issue I am watching closely across the CPG industry, which I believe has the potential to cause negative variance between expectations and reported results for many companies. McCormick’s guidance for a low-single-digit increase in cost inflation was unchanged from the prior quarter despite the emergence of more inflationary pressures during that time. Management attributes its guidance maintenance to having costs locked into place for certain line items, such as packaging. With its product pricing rising a similar level on a percent basis (total company pricing rose 0.8% y/y in the company’s fiscal Q1), the company expects its fiscal 2021 gross margins to be flat with 2020.
McCormick expressed confidence that it can compete well against private-label brands. I agree with management’s confidence on that point. For all the expansion of private-label brands across a wide range of consumer goods in recent years, the categories of products in which private-label brands have struggled to gain share are those where national CPG brands have a distinctive taste — spices belong in that category. I can’t imagine eating hard-shell crabs with something other than Old Bay. The major national CPG brands, in general, gained market share against private labels during the pandemic, and many companies considered the heightened grocery shopping during the pandemic to be a once-in-generation opportunity to engage with difficult-to-reach consumers; that presumably includes many consumers who have rediscovered their kitchens and are now cooking with McCormick herbs and spices.
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