McCormick & Co.'s ambitious campaign to boost its brands figured to be expensive. Yesterday, financial analysts found out roughly how expensive.
Greater advertising costs will push profits for the quarter ending this month "significantly" below last year's results, McCormick President Robert Lawless told an investment conference in Naples, Fla.
McCormick plans to double its ad budget this year, pushing the slogan "Flavor Up" in an attempt to boost sales and gain market share, Mr. Lawless said.
The switch, which McCormick-watchers say is a major tactical move for the Sparks-based spice company, may depress profits for awhile before it pays off, Mr. Lawless hinted.
"We're going to look back at 1995 and 1996 as a period of transition," he told the conference.
McCormick's stock dipped by more than $1.50 in the 45 minutes after traders learned of Mr. Lawless' remarks. For the day, it fell 62.5 cents to $22.50.
McCormick hasn't said how much it's going to spend on its advertising, although the budget is in the multiple millions. McCormick officials were unavailable for comment yesterday.
For years, McCormick has trained its marketing fire on the purchase of supermarket shelf space; grocery stores charge food manufacturers for display privileges.
Confronted in the spice aisle with a formidable battery of McCormick jars, customers tended to buy the product even without being prodded by advertising.
But a few years ago, Australia's Burns Philp & Co., which owns the Durkee and Spice Island brands, started bidding aggressively for supermarket space, too. The result not only drove up McCormick's costs, but convinced its managers that they had to do more than just show their products to customers in the store, said Kurt Funderburg, who follows the company for Ferris, Baker Watts, a Baltimore investment house.
McCormick has recently locked up miles of shelf space at grocery stores nationwide for several years to come, Wall Street analysts said. Now it wants to move as many spices and other products as possible off those shelves and into the checkout line. Hence, the ad campaign, which includes much TV and radio time.
"They want to get the McCormick name out there, so when someone goes to a supermarket they're going to want to buy McCormick," said Mr. Funderburg. "They want people to start asking for these products."
In theory, that will not only boost McCormick's volume, but will increase the company's leverage over grocery stores. If more customers ask for McCormick by name, supermarket operators will be less able to wring huge shelf fees from the producer.
Analysts are divided on whether that tactic will work.
"I do think the McCormick brand name is something that's been underutilized for some time," Mr. Funderburg said. "I think they'll reap some benefits from this."
But Merrill Lynch's Bill Maguire said: "I have no idea if it will be good for the long term, but it isn't good for the short."
"The $64,000 question is whether they can get consumer pull," said John McMillan, an analyst with Prudential Securities Inc. "Right now, I don't want to bet on it."
McCormick earned $97.5 million in the fiscal year ended in
November, or $1.17 per share, on $1.86 billion in revenue.
In the first quarter last year, McCormick earned $19.3 million, or 24 cents a share, on revenue of $425.4 million. Analysts had expected profit this quarter of about 23 cents per share.
PD McCormick will release results for the quarter in several weeks.