Spice maker Mccormick & Co. is looking to increase prices across its consumer and industrial businesses to fight an acceleration in commodity costs.
McCormick is pushing through a price increase on its consumer products on sale in North America of an average of 5%, with a similar hike on its industrial lines.
At the start of its current financial year, McCormick had forecast that its annual commodity bill would increase by 7% to 8%, which it led it to predict lower gross margins. However, chairman, president and CEO Alan Wilson said on Wednesday (28 September) that the company now expects a “double-digit rate of material cost inflation” over the year.
Wilson said the cost of black pepper had “hit historic highs” and said the price of commodities including red pepper, cinnamon and tumeric had “escalated”.
McCormick reported an increase in underlying group profits for the third quarter to the end of August but operating income from its industrial division fell 8% despite an increase in sales.
Wilson said McCormick had a “pricing protocol” to pass through the cost of “major” commodities like dairy ingredients, wheat and soybean oil. However, he revealed that the agreements did not extend to spices and herbs.
“We are working with our customers to adjust pricing for these items and expect to get pricing in place over the next few months,” Wilson told analysts. Nevertheless, the McCormick chief added that the company expects profits from its industrial business to be “under pressure” in the fourth quarter of the year and early 2012.
Operating income from McCormick’s consumer arm increased in the third quarter thanks to higher sales and cost savings from its Comprehensive Continuous Improvement programme.
During the quarter, McCormick acquired US liquid stick firm Kitchen Basics for US$38m. A spokesperson told just-food that the deal met McCormick’s objective to buy “strong flavour brands”. She added: “With Kitchen Basics we are extending our breadth of flavor delivery to a new category. We intend to grow the business through innovation and expanded distribution.”
Analysts questioned the company’s move to increase prices on its branded and own-label consumer products in North America with disposable income under pressure.
However, Wilson argued McCormick had to increase prices and would invest in marketing to support its products. “We are in a little bit of a new world because it’s been more than a decade since we’ve taken pricing as we head into the fourth quarter in our, at least our US consumer business, and we are watching elasticities pretty closely,” he said.
“We felt that we were at a point where we didn’t have a choice because of the increased costs, and our customers have understood that. But we’re going to continue to drive the investment in brand marketing, the display activity and our promotion plans through the fourth quarter. So we think we’re positioned to help deal with that, but we are in a little bit of new territory.”
McCormick, meanwhile, increased the amount of savings it is targeting from its CCI initiative from $45m to $50m in another move to offset the higher costs. This year, the company has already made changes to its transport system in the US and is now “optimising processes” between its recently-combined shared service centres in the US and the EMEA region, a spokesperson told just-food.