McCormick battling back Spices: As it continues to struggle against a number of formidable challenges, McCormick & Co. is glimpsing some signs of success.

June 23, 1996|By Sean Somerville | Sean Somerville,SUN STAFF

Almost a half-century ago, McCormick & Co. Inc. coined a risky strategy that helped it become the world's largest spice company: A store need carry only one brand of spices.

But now, the Sparks-based spice giant is trying to beat back an Australian challenger that is waging an expensive war of attrition to be that one brand.

The emergence of Burns Philp & Co. is just one of the 1990s threats to the 107-year-old company founded in Baltimore that ,, once grew without much effort.

McCormick no longer worries only about grocery stores, but also Wal-Mart stores, gourmet stores and drugstores, which also sell spices.

Historically, when the spice business suffered, McCormick could look to its other businesses to pick up the slack. When the onslaught from Burns Philp came, that didn't happen.

Finally, after spending much of the year announcing changes that it said would turn the business around, McCormick sees some promising signs. The company says its once-paralyzing debt is shrinking. Burns Philp is struggling.

But McCormick, which last week reported its fifth consecutive quarter of poor earnings, will soon be expected to stop posting announcements and start posting numbers.

"They're talking about an improved second half of the year," said John McMillin, a Prudential Securities analyst. "I think Wall Street is in a show-me type period, where they will believe it when they see it."

If McCormick emerges from its current slump, it will have overcome adversity that stretched from its Hunt Valley corporate offices to the grocery store aisles.

The death of Bailey A. Thomas, then chairman and chief executive, from a heart attack two years ago, and the ensuing retirement of succeeding CEO Eugene Blattman in October cut short the Florida retirement of Charles P. "Buzz" McCormick.

McCormick, grandnephew of the company's founder, returned as chairman upon Thomas' death. He became CEO at the beginning of the year.

At the same time, Burns Philp was in the midst of a headlong assault on McCormick. Burns, which entered the spice business by buying the Spice Islands and the Durkee French brands, became the United States' second-biggest spice company in seven years.

The upstart company's tactic was to engage McCormick in a bidding war for shelf space. The idea was to pay stores, which carry one brand, to sack McCormick in favor of Burns. McCormick holds about 40 percent of the U.S. spice market. Burns has roughly 15 percent.

McCormick's current struggle is far tougher than its previous one in the late 1980s, when McCormick sold vast real estate holdings at the top of the market and doubled its return on equity.

"It was a time period when we seemed to be swimming downstream," McCormick said. "Every decision we made worked. This time, we've got a different situation."

For one thing, McCormick said, the company's packaging, food service and dehydrated onion and garlic divisions didn't make up for struggles by the spice business. Also, the company's joint ventures and acquisitions failed to bring the expected returns. That boosted the company's debt level to 48 percent of capital in 1993 to 55.5 percent in 1995.

The reasons? "Competition increased; raw material costs went up; the Mexican economy; it can go on and on," McCormick said. "A lot of these things were completely out of our control, but we had to deal with them."

The company's answer was to focus on its consumer spice business. That meant a heavy investment in advertising, five times the amount spent just two years ago. The ads are intended to boost McCormick in a general way, as well as focus on specific products.

"In the short term, it does cost you against earnings," said Robert W. Schroeder, vice president and general manager of McCormick/Schilling division. "But if we build our customer base long term, we're much better off for it."

The idea: to get consumers to ask for McCormick's products, so the company can reduce what it must pay for shelf space.

That's especially important because McCormick has spent millions to keep its products on the shelves and Burns Philp's off. The company's "prepaid expenses," which mirror multiyear shelf space agreements with retailers, increased by 53 percent from $137 million in 1994 to $210 million in 1995, according to NatWest Securities.

"Our rivals have recognized we're not going to give up shelf space," Schroeder said.

The company also persuaded grocery stores in 11 markets to lower their prices on six to 10 products because the retailers were losing market share to nontraditional competitors. "Their guy across the street these days is different from what it used to be," McCormick said. "It used to be another supermarket. Today, it's a Wal-Mart or a superstore or a drugstore selling spices."

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