How maker of French's mustard will use vertical integration to cut costs

Spice and extract company McCormick will remove around $100m in supply chain costs through actions including bringing product packaging operations in-house.

McCormick’s earnings fell by $63.1m in the nine months to 31 August 2022, compared to the same period last year, which the company put down to continuing supply chain issues and increasing inflation.

The company, behind brands including French's mustard, said it would take action to reduce costs, including through vertical integration of packaging operations.

Lawrence Kurzius, chairman and CEO of McCormick, told investors this involved repatriating production from “excessive use” of contracted packaging. The company was also investing in manufacturing capacity, reliability in bottleneck areas, and customer services.

Further action included returning to normal shift schedules and reducing spend on surge capacity, which would reduce expedited freight and shipping costs, among other transportation inefficiencies. The company was also beginning to overcome persistent raw material and packaging supply issues, including in glass and organic spice, by diversifying supply.

He went on: “Through our quick qualification of alternative supply, we mitigated a major disruption during the fourth quarter. And a long-running shortage of French's mustard bottle will be resolved in the first half of 2023 as new models come online as a second supplier. And from an inventory perspective, we're also executing on plans to return to historical safety stock levels, which were raised to protect against supply disruption. 

“We expect the impact of our actions to normalise our supply chain cost, increase our efficiency and ability to meet demand, lower our inventory level, and, importantly, increase our profit realisation beginning in the first half of 2023.”

Kurzius stated the company had absorbed cost increases incurred by supply problems and inflation, and not passed these onto customers. It was targeting elimination of at least $100m during 2023.

“During the third quarter, supply chain challenges continued, and recovery of certain constrained materials is taking longer than expected,” he explained. “We continue to incur elevated costs to meet high demand in our flavour solutions segment… Across the supply chain, we remain focused on managing inventory levels and eliminating inefficiencies. 

“So, the normalisation of our supply chain costs is taking longer than expected, pressuring gross margin and profit realisation in the current period. Over the coming months, we will be aggressively eliminating supply chain inefficiencies. Importantly, as we had expected in the third quarter, our price increases are catching up with the pace of cost inflation in both segments.”

The company also explained it was facing increased cost pressure due to the start-up costs incurred by setting up a new food processing factory in Peterborough in the UK.

McCormick’s earnings for the nine months ending 31 August were $584.5m, down from $647.6m for the same period last year.

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