Internet Spice Wars
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
McCormick (NYSE: MKC) investors probably picked this stock for the 2.2 percent yield, but this spice maker also has an Internet advertising plan that could improve its 2012 sales. Elaine Watson, at Foodnavigator-usa.com, explains that marketing firm MyWebGrocer already works with many supermarkets that sell McCormick's spices, and now MyWebGrocer will help McCormick show recipes to online shoppers. Although Amazon (NASDAQ: AMZN) already helps Internet shoppers pick out spices, spices are McCormick's specialty, and McCormick plans to raise its Internet advertising budget substantially this year.
McCormick dominates the United States spice market, and the company has a well known brand that provides pricing power. Reuters reported that McCormick convinced supermarket shoppers to pay higher prices for its spices in Q2 2012, which helped the spice maker improve its quarterly earnings to 60 cents from 55 cents in 2Q 2011. McCormick needs to convince shoppers to avoid cheaper alternatives to maintain its margins. Supermarkets often place their own store brand spices next to McCormick spices on the shelf, and cheap spices are available from many spice makers on the Internet.
Spices have a few advantages over other supermarket products in an online marketplace. Fresh foods are perishable, which complicates shipping. A bottle of seasoning may last for years. Some spices are expensive, especially if a shopper wants to buy several spices in a single transaction, which provides an incentive to shop around for the best price. A supermarket also has limited space to display its spices, while Amazon's website currently lists 23,496 seasoning products.
Spice market trends illustrate why offering a wide variety of seasonings matters. Kelly Gates, for Supermarket News, reports that United States shoppers are now searching for spices from specific provinces of foreign countries, as well as specific regions of the United States. Some of these blends include multiple exotic ingredients, which increases the appeal of prepared spice blends. Prepared spice blends provide convenience for shoppers, and a bottle of a blend can be cheaper than buying several individual spice bottles, but the spice maker needs to be familiar with regional tastes. McCormick has developed several regional spice blends itself, although Amazon also offers regional spice blends on its own web site.
Grocery retailers have added spice blends to their own private label selections, which makes McCormick's situation trickier. John J. Pierce, at Private Label Magazine, reports that The Fresh Market (NASDAQ: TFM) provides in depth food preparation advice on some of its private label spice packages, and discounter Target (NYSE: TGT) has launched its own spice blends. Customers' broadening tastes could give McCormick an advantage over Target and other discounters, because McCormick sells a very wide variety of spices and lists many recipes on its web site. As for The Fresh Market and other specialty retailers, McCormick's arrangement with MyWebGrocer is very important here, as an Internet recipe recommendation service can provide much more information than a spice container label.
Both Target and Amazon can probably beat McCormick on price, as McCormick currently has a 9.66 percent profit margin. McCormick needs to convince shoppers that paying a premium for its spices is worthwhile, although McCormick's 2Q 2012 results suggest that it's doing okay on that front. Craig Levitt, for Supermarket Headquarters, reports that most shoppers still buy spices at the supermarket and McCormick plans to introduce 37 new spice blends in 2012, so Amazon will have to work harder to convince shoppers to buy spices online.
McCormick's website and supermarket displays don't seem like they will become showrooms for Amazon just yet. A shopper who wants to get food to taste just like her family used to make it, or just like it tasted in a restaurant, may be willing to pay a higher price because of McCormick's brand name. The big box retailers that were the most vulnerable to Amazon sold electronics, books, and other items that were exactly the same as cheaper online products. McCormick's internet marketing efforts seem like they could convince shoppers who weren't buying spices before to start seasoning their food, and shoppers who aren't familiar with other spice makers may stay with the company they know. McCormick is also making a push into less developed countries, where fewer shoppers may be used to buying groceries on the Internet. McCormick seems like it should be able to maintain its sales in 2012, and it may even be able to improve its sales as it introduces new spices recipes to new customers.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, McCormick & Company, and The Fresh Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
