Author: Pan Xian (original)
While many condiment companies are still waiting to release their quarterly reports, McCormick's new discussion of China's business has opened a window into the industry. The giant, which has been in China for more than 30 years, supplies restaurant chains such as McDonald's, and its global sales reached nearly 48 billion yuan last fiscal year.
Xiaoshidai noted that at the recent results meeting for the first quarter of fiscal year 2024 (quarter ended February 29, 2024), the company's president and CEO Brendan Foley talked about the B-end and C-end business in the Chinese market, and described it as "basically meeting the forecast for the first quarter".
In addition, he also mentioned China's performance expectations for this year, distribution tactics, and the need to control price increases globally. Let's hear what we have to say.
One cold and one hot
At present, McCormick operates brands such as "McCormick", "Funlewei", "Funraku" and "Daqiao" in China, covering spices, Western sauces, hot pot seasonings, etc., and its business includes B-end flavor solutions and C-end consumers.
In China, these two major business periods continued to be "one cold and one hot". According to the financial report, the net sales of the Asia-Pacific market to which China belongs recorded a decline of 5.4% (note: constant exchange rate), of which the price increased by 0.9%, but the volume/mix fell by 6.3%.
"In the Asia-Pacific region, as we anticipated, the volume performance was affected by the Chinese market environment. Excluding China, the rest of the Asia-Pacific region saw strong sales growth, with prices and volumes rising, Foley said.
On the B side, net sales in the Asia-Pacific region where China is located increased by 4.5% during the period, of which prices and volumes/mix increased by 3.5% and 1% respectively. By market, the China business achieved "strong volume growth", while demand for fast food restaurants outside China fell further. "Some of our fast food restaurant customers are facing a geopolitical conflict that is resisting, which has a negative impact on sales. McCormick's Chief Financial Officer, Mike Smith, said.
McCormick's polarization in the B and C ends is also a microcosm of the industry's recent development.
On the one hand, the catering sector has improved compared with last year, such as Haitian and Chubang and other brands in catering, group meals and other channels of promotion are slightly larger, mainly in the township area to increase distribution channels. However, on the other hand, the demand of the circulation sector is relatively weak, and there are some reasons such as the transfer of C-end demand to B-end, the fragmentation of residential channels, and the low efficiency and operation of a single channel.
McCormick's executives attributed the polarization of business to the once-said cautious consumer spending and the fact that large restaurants were sucking away traffic from smaller stores.
"Our view of China is no different from what we said last quarter. Overall, Foley said, McCormick remains cautious about the outlook for the Chinese market and is making plans to respond to changing consumer trends. Based on observations, McCormick expects a stronger B-end business in China in fiscal 2024, and C-end sales will be the same as the previous fiscal year.
McCormick's President and CEO (file photo)
In fact, in order to promote the recovery of the C-end business, McCormick has also taken action. Foley revealed that the company is expanding its distribution in China, expanding into small stores and third- and fourth-tier cities, which have grown rapidly in recent years, and "we are engaging with consumers [in proximity] to where they live and shop."
One example is McCormick's move into more smaller, neighborhood grocery stores.
For example, at the CAVITY conference in New York in February this year, the company cited "Qingmei Fresh Food" as an example of expanding its small store customers in China. According to the brand's official website, Qingmei Fresh Food is positioned as a "reliable community fresh food store at the doorstep", with more than 260 stores at present, concentrated in East China.
Turning around sales
Let's take a look at McCormick's overall performance.
According to the financial report, in the first fiscal quarter, McCormick's net sales were US$1,602.7 million (about 11.594 billion yuan), a year-on-year increase of 2%, and adjusted operating profit was US$238 million (about 1.722 billion yuan), a year-on-year increase of 5%. Xiaoshidai noticed that McCormick's closing price rose by more than 10% on the day of the earnings release as the performance exceeded market expectations.
McCormick's sales improvement is crucial to achieving this performance.
In the two consecutive fiscal years of 2022 and 2023, the company's sales growth was purely driven by pricing, and the sales volume was negative. Like many large FMCG companies, McCormick was faced with the problem of using price adjustments to absorb inflationary pressures, which inevitably led to the loss of consumers, which in turn hit sales. And in many companies' evaluation criteria, higher sales are often the hallmark of high-quality, sustainable growth.
In Bain & Company's 2024 Global Consumer Goods Annual Report, Richard Webster, chairman of its global consumer goods business, said that on the one hand, prices are rising too fast, and consumer shopping spending is difficult to maintain, and on the other hand, price increases cannot keep up with cost increases, and retailers are pressuring. The company believes that in the coming year, the consumer packaged goods industry must be clear about how to achieve profitable growth through volume growth.
Returning to McCormick, the condiment leader has previously made it clear that its sales will return to positive growth in the second half of fiscal 2024, and try to pull it through promotions, new product releases, and increased advertising expenses.
Looking at the fiscal first quarter results, these measures are already starting to pay off, with volume/mix decline narrowing to 1% from 3% in the previous quarter and pricing growth narrowing to 2.7% from 5% in the previous quarter. The 1% decline in volume/mix was mainly due to the reduction of low-margin businesses and the divestment of canning businesses, while underlying volumes were flat compared to the year-ago quarter, Foley said. Since the fourth quarter of last year, the sales trend of the two major segments of the B and C sectors has continued to improve.
"We remain committed to increasing volume and will continue to refine our plans and prioritize investments to drive impactful results and return to differentiated, sustainable, volume-led growth. That's because the long-term trends driving condiments remain strong, he said, including consumer demand for cooking food, exploring flavors and seeking trusted brands.
Also due to the refocus on sales growth, McCormick has decided to control the price adjustment this year.
"Q2 will be a turning point [for pricing action]. McCormick's pricing growth in fiscal 2024 will be 1 percent, compared to about 2.7 percent in the fiscal first quarter, so pricing increases will decline over the next three quarters, Foley said.
He also said that going into the second fiscal quarter, McCormick will start more work to manage the pricing cap than in the first fiscal quarter, which is expected to put some pressure on profit margins, but is confident that this will help the sales volume continue to improve in the second fiscal quarter and the second half of the fiscal year.
After a "good start" in the first fiscal quarter, McCormick also has greater confidence in its full-year performance. Foley said the company reiterated that its FY2024 guidance remains unchanged, but expects full-year sales growth to be in the mid-to-high range of -1%~1% guidance, given the good momentum in the first quarter.