McCormick returns fire in spice war

October 16, 1994|By Kim Clark | Kim Clark,Sun Staff Writer

In the late 1980s, as McCormick & Co. Inc. reaped rich profits from its global spice empire, managers at an otherwise unremarkable Australian yeast and hardware conglomerate looked across the water and said: We can do that.

Six years later, Burns, Philp & Co.'s imitation has turned into the sincerest form of competition.

As the resulting fight for shelf space in the world's grocery stores has cut McCormick's once spectacular profits to merely very good levels, McCormick last week announced its biggest-ever restructuring.

The Sparks-based spice giant will close a Hunt Valley plant, cut staff and trim itself for battle in a spice industry that many believe has gotten permanently tougher.

"It only takes a new guy with deep pockets to change the !B landscape," said Jeff Metzger, publisher of Food World, a Columbia-based trade publication.

"And that is definitely what happened."

Burns, founded in Sydney in 1883, mostly traded and retailed hardware and lumber in its first 99 years.

But in 1982, it bought venerable Australian food company Mauri Brothers & Thomson, and then took over many major yeast producers around the world, including U.S.-based Fleischmann's.

In 1988, the world's biggest yeast producer decided to sell its nonfood holdings and looked around for another global food market it could quickly and profitably dominate. Burns executives focused on the spice market, where McCormick held a 40 percent market share and high profit margins because its competition was small and unaggressive.

"They had the field to themselves," said Helen Cameron, a Burns spokeswoman.

Using cash from the sales of its nonfood divisions, Burns bought the San Francisco-based Spice Islands brand -- after a McCormick bid for the company had been blocked by federal antitrust regulators.

Four years later, Burns paid $86 million for America's No. 2 spice brand, Durkee French Foods, which had languished under conglomerate ownership.

Within months, new Burns managers were pumping out new Durkee products to match ones already developed by McCormick, such as seasoning mixes with plastic roasting bags. Burns followed McCormick's package redesign by developing a new look for Durkee spices.

And last year, after a McCormick bid to buy the biggest German spice company, Karl Ostmann Gmbh, was nixed by European antitrust regulators, Burns snapped it up for $105 million.

So far, its strategy has paid off. Publicly traded Burns reported its profits rose 12 percent for its fiscal year ended June 30, to $91.3 million on sales of $2.1 billion. Its global food operations -- including the huge yeast conglomerate -- accounted for nearly 75 percent of its operating profit.

But McCormick, which sells about twice as much spice, benefits from higher profit margins. In its last fiscal year, which ended Nov. 30, McCormick sold $1.6 billion worth of spices and other foodstuffs. And McCormick reported netting $73.1 million after a $26.6 million accounting charge for retiree benefits.

Now the battle has moved to the retail front. Cash-rich Durkee has launched a bidding war to win over grocery chains, which tend to carry only one brand of spices.

Food World's Mr. Metzger said some big chains are being offered more than $1 million to switch.

"The new Durkee management has escalated" the spice retailing business "into a costly enterprise," Mr. Metzger said.

Brian Huff, spice buyer for the Baltimore-based Basics/Metro Food Markets supermarket stores, said that he's agreed for the first time in several years to hear out Durkee managers who want him to switch from McCormick.

Mr. Huff wouldn't say how much McCormick has paid to keep its spices on Basics shelves, or how much he would need from Durkee to switch. "They are being very aggressive," is all he would say.

Now, as Burns takes aim at another McCormick market by preparing to buy Tone Brothers Inc., which sells bulk spices, executives at the Australian company aim to confront McCormick around the globe.

Burns, insisted Ms. Cameron, is pursuing its own, well-established global strategy, not just following McCormick's footsteps.

"Our advantage over McCormick is that our yeast is already in 31 countries around the globe. We've done the globalization," she said.

DTC Burns figures it will succeed by providing the world with high quality, chemical-free spices, Ms. Cameron said.

"We'd like to be the most profitable spice company in the world." But not necessarily the biggest.

"The world spice market is enormous. There's room for several players."

And unlike McCormick's previous competitors, Burns has no plans to give up or sell out, she said.

"We are in this forever," Ms. Cameron said.

H. Eugene Blattman, McCormick's president and chief executive officer, insisted Burns' new aggressiveness isn't the only reason McCormick had to restructure, and that Burns' copycat strategy won't work.

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