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McCormick expanding into emerging markets

Long known for spicing up American food, McCormick & Co. is taking its food flavorings abroad, with plans to peddle masala powder in the open-air markets of India and borscht seasoning in the stores of Eastern Europe.

Looking for ways to beef up sales in the face of a weak economy and a mature domestic market , the Sparks-based spice maker is increasing its push into emerging nations. McCormick, like other food companies, sees potential for growth in regions where American brands are becoming more commonplace — and gaining market share by expanding their lines to include products demanded by local consumers.

Since 2010, McCormick has committed more than $440 million to acquire and form joint ventures with companies in India, Poland, Turkey and other emerging markets. It expects those regions to contribute 12 percent of sales by 2012. Emerging-market sales last year contributed 9 percent of sales.

"We believe we have the opportunity to bring different types of food and innovation in areas where we don't have a large presence," McCormick CEO Alan D. Wilson said. "The places that are most attractive to us are countries where there is rapid economic growth and the populations are moving up the value chain. One of the first things they do when they get more money is upgrade their food choices."

American companies have long peddled food overseas, but the weak U.S. economy has spurred increasing interest in countries such as India, where a growing middle class is amassing greater disposable income.

Analysts say such countries are attractive to U.S. businesses that find that opportunities to increase domestic profits are limited to a few options: raising prices, challenging competitors for market share and increasing sales volume through population growth.

"If you look at the sum of those things, that is not a lot of growth potential," said Matt Arnold, an analyst with Edward Jones & Co.

Emerging markets, in contrast, give companies access to millions of untapped consumers whose rising incomes fuel increasing demand for products made in the United States.

"The companies who are going into these markets are seeing a customer base that is more sophisticated," said Charles E. Cerankosky, managing director of Northcoast Research in Ohio. "They're getting wealthier. They're getting more educated. As they add more expensive foods to their diet they will add a lot of condiments and Western-style beverages."

Still, there remain challenges to translating domestic experience into international profits. U.S. companies have a long history of going global, but with varying degrees of success.

KFC Corp. has found wild popularity in China, where it offers a menu that combines American fried chicken with Chinese staples such as shrimp burgers and the rice porridge congee. The company hires local managers at its more than 3,700 stores.

But the Campbell Soup Co. announced last month that it would be pulling out of Russia after four years. The company had high hopes for the temperate country, where soup already is a key component of the national diet. And it had a plan: A focus on selling broths because so many families made soup from scratch.

Campbell's executives said sales in Russia never reached what they expected and announced plans to redirect its international focus on China.

The challenges confronting U.S. companies overseas are many. They must deal with different currencies and regulations. And cultural differences can affect business.

In India, for example, people buy their spices and foods from local open-air markets and small food stores, Wilson and analysts said. In the United States, McCormick sells its products at 30,000 to 35,000 distribution points. It recently entered into a joint venture in India with 350,000.

"In India the retail environment is still very much fragmented," Wilson said. "It is very much about being able to reach consumers where they shop."

Wilson said McCormick does nearly 40 percent of its business overseas, which he said gives the company expertise as it expands into India and beyond. He said the company does its due diligence to minimize risks.

"It certainly has its challenges, and we're very cautious about the markets we go into and study them pretty extensively," Wilson said.

Analysts said McCormick is taking the right approach. The company is forming joint ventures or acquiring local companies with established brands. The local products will retain their look; McCormick plans to help them develop new spices and flavorings.

Arnold, the analyst, said the risks can pay off in greater rewards. And the longer a company stays in a foreign market, the more effectively it can evolve the business.

"It's important to invest now and build brand awareness in the early days, before somebody else and establish their brand as the brand of choice," Arnold said.

McCormick announced last month that it was paying $291 million to purchase Kamis SA, a privately held company in Poland that makes spices, seasonings, mustards and other flavors. The company has a 45 percent share of the spice and seasoning market and a 30 percent share of the mustard market there.

McCormick also announced last month that it was acquiring an 85 percent share in Kohinoor Foods Ltd., an Indian company that sells basmati rice and other food products. McCormick will invest $115 million in the company, which has enjoyed double-digit sales growth.

The company formed a joint venture last year with Yildiz Holding to create spices, herbs and condiments in Turkey. It also bought a 26 percent stake last year in Eastern Condiments Private Ltd., which makes food in India and the Middle East.

"Certainly the companies we've seen make successful acquisitions have acquired a family business that has a very good reputation, market share and strong brands in the markets they operate," said Ann Gurkin, an analyst with Davenport & Company.

Analysts said McCormick can also use its expertise to improve the efficiency of the plants it buys.

Wilson said McCormick is planning more overseas expansion, in India and elsewhere. The long-term strategy is for $100 million in acquisitions per year.

"We don't have a specific goal to be in every country because some markets aren't necessarily right for us," Wilson said. "But we will look at markets where we see there is opportunity."

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