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Morningstar | McCormick Looks to Cook Up Sales Gains by Continuing to Direct Resources to Support Its Brand Mix

McCormick is the leading spice and seasoning player, with around 20% share of the $11 billion global market--4 times the size of its next-largest competitor--making it a valuable partner for retailers. Unlike others, McCormick has refrained from pulling back on its brand spending (with research, development, and marketing around 7% of sales, or more than $300 million annually in aggregate the past few years). Despite the hit to profits, we believe directing resources to these avenues supports its leading competitive edge, as this stands to enhance the stickiness of its retail relationships. In addition, we think the inclusion of RB's leading food brands (Frank's RedHot and French's) will further entrench its position with retail partners reluctant to risk costly out-of-stocks; these relationships, combined with McCormick's existing portfolio of dominant brands and cost edge, underlie our wide moat rating.Beyond its branded mix, McCormick also operates as the leading private-label producer in spices and seasonings. While others have struggled to play in both the branded and private-label space, McCormick has used its positioning to enhance its retailer relationships, solidifying its wide moat. As an example, it gained a foothold in two leading dollar stores (Dollar General and Family Dollar) by supplying each retailers' private-label fare but subsequently added a handful of higher-margin branded products (as it showed category sales for the retailer edged up by increasing its mix of branded offerings). While these are lower-margin sales for McCormick, private label makes up less than 10% of its consumer product revenue (around a mid-single-digit percentage of total sales), so these value-priced products are unlikely to dent McCormick's profits.But even with its edge, McCormick isn't immune to the industry's challenges. Consumer product volume across the center of the store has faltered, as consumers opt to shop the perimeter. As such, McCormick's strategic focus on extracting costs (with plans to shed more than $400 million in costs over the next few years) to fuel brand reinvestment and support its retail relationships is a wise course, in our view.