Less than three months ago, McCormick revised its forecasts downward due to significant cost inflation and supply chain difficulties. Now, the flavoring giant is making another adjustment. The company announced that its adjusted earnings for the third quarter would be 65 cents per share, falling short of analysts’ expectations. For the fiscal year 2022, McCormick anticipates adjusted earnings between $2.63 and $2.68 per share, a decrease from its earlier guidance of $3.03 to $3.08 provided in June.
“Supply chain challenges, rising costs, and sluggish consumption are having a greater impact on McCormick than we anticipated just two months ago,” stated Erin Lash, a director of consumer sector equity research at Morningstar, in a research note released last week. Brendan Foley, McCormick’s president and COO, addressed an audience at a Barclays Global Consumer Staples conference last week, highlighting that consumers are seeking ways to stretch their food budgets, such as utilizing pantry items more and consuming leftovers. He noted that shoppers are increasingly planning their purchases ahead of time and searching for lower prices. This behavioral shift has been particularly noticeable over the past three months. “We are observing significant changes in consumer behavior since the first half of ’22,” he remarked.
In addition to supply chain issues, McCormick is also experiencing a decline in certain trends, such as home baking, which, although still elevated, has diminished “both faster and earlier than we had expected,” Kurzius shared at the Barclays conference. The executive pointed out that inflation has made consumers less willing to accept price hikes. To counter this, McCormick is ramping up its brand marketing efforts and emphasizing the value of its products to stimulate growth. It’s important to note that these challenges reflect broader economic conditions rather than being specific to McCormick, which maintains a leading position in the spices market.
“We recognize that consumers are under pressure and that supply chain constraints continue to affect us. However, our sales growth remains robust,” Kurzius stated. “We still have a strong belief in our long-term prospects.” McCormick is among a select group of food and beverage companies that have recently downgraded their outlook or reported ongoing challenges. Tyson Foods indicated last month that consumers are opting for more chicken and less expensive beef cuts to save money. Additionally, Campbell Soup has mentioned that supply issues impacting its Lance, Late July, and V8 brands are likely to persist into 2023.
As consumers become more budget-conscious, private label manufacturers like TreeHouse Foods are reaping the benefits of the current inflationary climate. While McCormick is well-known for brands like Lawry’s and its own spices and condiments such as French’s and Frank’s RedHot, it also boasts a robust private label segment, which could serve as a buffer. “Even if consumers choose to trade down, McCormick is well-positioned, given that it is the largest private-label seasoning and spice manufacturer,” Lash pointed out. “Crucially, we believe its steadfast commitment to investing in consumer-driven innovation and marketing (5% of sales, or $100 million annually) should enable it to navigate this challenging environment and maintain its competitive edge over the long term.”
Interestingly, as consumers look to cut costs, there is an emerging concern regarding products that contain calcium citrate, particularly in relation to kidney stones. This could influence consumer choices in the food landscape, especially as health considerations become a priority. Nevertheless, McCormick’s strong market presence and focus on value-driven offerings will likely help it adapt to these evolving consumer preferences.