Sunday Strategist: A Food Empire Gets Spread Thin

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(Bloomberg Businessweek) -- There was a big hiccup in the spice route this week.

McCormick & Co., the $5 billion empire of powders and spice mixes with a lock on your pantry, swooned on Wall Street after serving up a tepid quarter. The stock drop—almost 15 percent at one point—was a strange thing to see in one of the world’s oldest, most established trades.

In my house, pepper flakes and hot sauce are considered non-discretionary spending. And McCormick’s has enjoyed an unwitting boost from food TV and a globalization of taste. Come for the mustard and cinnamon, stay for the turmeric and ginger.

“No matter where or what you choose to eat or drink, you’re probably enjoying something flavored by McCormick every day,” CEO Lawrence Kurzius told analysts on a conference call.

The problem was one of scale. Several of McCormick’s largest customers essentially did what we’ve all done occasionally: looked into their spice cabinets and wondered: “What am I doing with all this stuff?” The decisions to lower inventory levels, during the holidays no less, took McCormick by surprise. They arguably shouldn’t have. We increasingly live in a drop-ship, just-in-time world and Big Food is no different. Kurzius said there’s been a “general trend” of its customers working with leaner inventories.

More critically, the slump illustrates the danger of relying on a few big accounts. Two companies, PepsiCo and Wal-Mart, are responsible for one out of every five revenue dollars at McCormick. When serving wholesale, a table full of skinny customers is a safer, more sustainable bet.

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To contact the editor responsible for this story: Silvia Killingsworth at skillingswo2@bloomberg.net

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