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McCormick (MKC) Part I - The Spice Trade and Historical Significance of Seasonings

by Alex Mason | Oct 7, 2020 | Companies, Episodes | 0 comments

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Mental Details
  • Aside from the commodities we know them as today, spice and seasonings were once fought for by kings and treasured by merchants. They were the precursor to modern currency and have spanned all cultures across the globe.
  • In the modern era, McCormick is one of those companies that focuses on selling spices, seasonings, and related products.
  • In today's episode we cover the history of the spice industry as well as the history of McCormick & Co.

Transcript:

  • Alex Mason: Okay. It's dinner time. Imagine that favorite meal that you love to cook. You've already got the ingredients and you just need to whip it up. So you go to the kitchen, you rummage through the refrigerator and pull a few things out. Okay. You've got the dishes and little by little, you begin to put it together.
  • [00:00:20] All right. Most of the way done now you can smell the food. It smells so good right? Now just before you plate it, you take a little taste test just because why not? As you put it into your mouth, you notice the texture, the warmth, but something's missing. What is it? It needs just a little something. Well, what is that something? Let's find out on today's episode.
  • [00:00:54] I'm Alex Mason, host of Stock Stories. This is the podcast where we decode investing principles by analyzing the business behind the stock, as well as learning about mental models in order to help you become a better investor. You ready? Let's go.
  • [00:01:40] Intro Music: Welcome.
  • [00:01:42] Alex Mason: Welcome to the show. This is the Stock Stories podcast. My name is Alex Mason, and yes, I am your host for today. Thank you so much for joining me. And this is indeed the show where we decode investing principles by looking at the business behind the stock, as well as mental models. I hope you enjoyed last week's episode, talking about the mental model of utility.
  • [00:02:06] A very powerful mental model. And today we are going to get right back into the companies. Now, if you're new to the show, one of things that we do here on Stock Stories is we're going through the entire S&P 500. Yes, the entire S&P 500 and week by week, we just go through companies and really study them and not get into complex formulas about how to calculate intrinsic value. We don't do any thing of that nature, but we also don't just gloss over things either. We don't just say, well, you know, this is the business, this is what they do. And you know, the stock price is going to go to the moon and then we move on.
  • [00:02:47] We don't do that either. What we do is we thoroughly analyze the business. We look at the business model, we look at the history, we look at the financials and then we try to put those things together and try to make some sense of what the general thesis is for this business. And so my goal here with the show is to empower you with knowledge and insight that I've curated through my research and help you become a better investor.
  • [00:03:16] That's the whole point. So thank you again for joining me for another episode of Stock Stories. And now without further ado, let's get into another company today. We're going to talk about McCormick and company. Let's do it.
  • [00:03:45] Today, we're going to be talking about McCormick and company, ticker symbol MKC. Now, before we get into the episode, I want to tell you, if you're a new listener of the show, the way that we structured these episodes, and if you're using a podcast player that supports chapters, you'll see this in your podcast app.
  • [00:04:04] So first we start with the history, usually the history of the business, and then we move our way into the business model, the business overview. What does this business look like today? Then we move on to financials because financials are very important for any investment. And then we wrap things up in the synthesis.
  • [00:04:24] So that is the general structure of these episodes. Now, for today's episode, we're going to be focusing exclusively on the history because there's a lot going on here. So this is actually going to be part one of a two part series. Now the first part of this episode will be the history of the spice market in general, because that's not something that we've discussed on the podcast before. And so set some of the context I want to discuss kind of where this whole industry came from. And then we'll move into the company specific history, the history of McCormick itself and give you a little bit of flavor for how the business came to be.
  • [00:05:05] Now, first of all, let me say that McCormick. In general, what do they do? They are a maker of spices, seasonings, and condiments that are used to flavor food. They're the ones who create all the flavorings that make our food taste good. So let's first talk about the history of spices before we get into the history of the company.
  • [00:05:29] Let's first, make sure we understand exactly what the products are. This is a unique company from others that we've studied in the consumer space because McCormick doesn't make or sell food. We've talked about a lot of companies that make or sell food of some type. We've talked about Domino's we've talked about McDonald's, we've talked about other types of food producers, like Mondelez international, not too long ago, but this is a different company.
  • [00:05:58] McCormick sells the spices and seasonings that give the food flavor. So, what is a spice spices can come from a seed root bark or fruit of a plant and herbs come from the leaves, flower or stem of the plant itself. Spices have been used for thousands of years and by many different cultures and nations all over the world.
  • [00:06:25] They're pretty integral to the way that we live as humans and always have been. Cinnamon and black pepper were some of the earliest traded spices over in Asia. And what often happened was that Hunter gatherers would wrap their meat from their most recent kill and they would wrap it in leaves of bushes.
  • [00:06:47] And that led them to discovering that the leaves actually enhance the taste of the food. And various spices had these different flavors and aromas, and they became used not just for seasoning food, but people started finding other uses for them such as for medicinal purposes or religious purposes. Now, for example, ancient Egyptians, they were known for using spices for mummification in addition to using them for food.
  • [00:07:17] And particularly they really liked using garlic and onion. And the laborers who worked on the pyramids supposedly consumed them to promote good health. And there's even evidence of wooden figures of garlic, cloves, and some of the tombs. So Egypt really loved garlic and they loved it so much that they created these representations of it to carry with them into the afterlife when they passed on.
  • [00:07:45] And the stories surrounding spices are persistent throughout history. And Egypt is just one of many examples. When I was doing research for this episode, I found so many pieces of evidence of spice use and just this love of seasonings across so many different cultures throughout history. So, for example, in the ancient world, you had Ethiopia, Greece, Rome, India, China, and Arabia.
  • [00:08:17] All of these regions of the world had people who were using spices way back in the day, thousands of years ago. And there's also evidence of spices being used in the Americas too, with the Aztecs adding vanilla, which is native to Mexico, to their chocolate beverages. Now over time, a spice trade developed and spices gradually gained influence actually as a currency and as a form of wealth in medieval Europe. For example, black pepper was used to keep accounts instead of coin currency.
  • [00:08:54] Can you imagine that instead of paying for something with coins or dollar bills or digitally, now you would pay for it with peppercorns. Because they were considered very valuable in the late 14th century Germany, for example, apparently one pound of nutmeg was worth seven grown oxen. So imagine going up to somebody with a bag, a pound of nutmeg and trading it for seven oxen, that's how much spices and seasonings were worth back in the ancient days, they were just considered so valuable because they made food taste good. And they had almost this spiritual aspect to them because they were used in religious ceremonies and medicinally as well. Now as the centuries went on, spice production increased more and more and more, especially with the spread of European imperialism. So has a European countries were going around the world and basically trying to take over everything in their path.
  • [00:10:02] They brought the spices with them. They brought their wealth with them and they flavored their food with it. They continued their traditions that they had from ancient times. And they kept doing this. Now, one of the colonies that existed was an English colony in Salem, Massachusetts, for example, and Salem, Massachusetts was a city that actually became very well known for their spice trade and spice exports.
  • [00:10:31] So what they would do is they would bring spices in from many areas of the world, and then they would ship it back to Europe. So it became kind of this midway port for a lot of spices. And one example is that in the early 1800s, they brought a shipment over of over 1 million pounds of pepper from Sumatra.
  • [00:10:56] And they then exported that to Europe, a million pounds. And you can imagine just this massive ship sailing on the water. Through the port of Salem and carrying all of this pepper. And that was really the height of the value of spices. Things like peppercorn, things like saffron and nutmeg and other types of seasonings.
  • [00:11:23] Now, eventually what happened is that with this imperialism, with this spread, with all of this trade, Eventually all this production led to a decrease in demand, because if we think about the basic economic principle of supply and demand, if you have supply go up way too much and the demand doesn't grow to keep up with it, then that means that prices are ultimately going to fall.
  • [00:11:48] And that's what happened here with the spice. Industry over the centuries, eventually over production and the gradual adoption also of coins and of bills as currency. This made spices less valuable now, however, they still had a great amount of physical utility. Remember what we talked about last week with the mental model of utility?
  • [00:12:13] Because the flavors they produced for food were still valuable as well as the medicinal and religious uses retain their significance. And even to this day, spices are still seen as incredibly valuable, mainly for the benefits that they have as a seasoning and a flavoring agent for food. But that's just a history of the spice industry.
  • [00:12:38] Can you imagine? Spices being worth so much. I mean, now they just cost so little, but that gives you a sense of significance for where these products came from and how historically not just as one culture viewed them, but as many cultures across the globe, have you spices and seasonings and their importance.
  • [00:13:03] Let's now talk about the history of McCormick itself. Where did this company come from? Well, the business was started in the late 1800s by a man named Willowby M McCormick. And he started it when he was just 25 years old. And he was a young man from Baltimore, Maryland over on the East coast of the United States.
  • [00:13:24] And what he did was he started selling juices, extracts and root beer door to door. And though he was focused on flavorings. Initially he eventually moved into the spice market and this happened several years later in 1896, when he bought the F. G. Emmett spice company of Philadelphia, and he had the spice manufacturing machines shipped down from Philadelphia to Baltimore, and he started making spices now by the turn of the century in the 1900s, selling spices and flavors.
  • [00:13:58] It was already an international business for McCormick, which I found really interesting. The fact that they were international all the way back in the 1900s, early, early 1900s, and comparing that to many multinational corporations today, they really just expanded their borders beyond America, like maybe 10, 20 years ago.
  • [00:14:20] So McCormick has been. Working and selling there products across the world for over a century. And what he did, will it be McCormick? Was he set up an export office in New York and began shipping products throughout the Americas, through Europe and South Africa also, but the companies main operations stayed in Baltimore and unfortunately in 1904, something tragic happened.
  • [00:14:50] There was a fire that broke out at a building in downtown Baltimore. And unfortunately the fire raged on and on it went on for over 30 hours before finally being extinguished. In fact, it took over 1200 firefighters, not just from Baltimore, but from surrounding counties and cities to come over and help to combat the fire.
  • [00:15:12] Just in order to put it out. And the fire blazed on it destroyed multiple buildings. And unfortunately, McCormick lost a lot of materials in the fire and their building burned down. Also. Now the reason this happened well back in the early 1900s fire-fighting standards were not that great. And also the building code standards were not that great either. So he had this combination of just bad, bad standards and the fire hydrant fittings, for example, they wouldn't fit on the fire hydrants from one city to another because every city had their own manufacturers making their own pipe fittings for their fire hydrants. And so when the firefighters from one city came over to help Baltimore, they couldn't attach their hoses to the fire hydrants because they wouldn't fit just silly things like that.
  • [00:16:02] But this event, although tragic was one of the things that actually helped standardize a lot of the firefighting codes in the United States. So some good things did come from it, but it was a tragic event. And McCormick lost a lot of materials. Now, McCormick, along with the rest of the city, they dusted their shoulders off and they said, okay, we're going to rebuild.
  • [00:16:26] And in fact, just 10 short months later, they had built a new McCormick building on the old site. And I want to take this moment to say that sometimes in business risks that are significant are realized, but if you can recover in a short period of time, the sooner you'll be able to return to growth. So imagine all the businesses that ended that day, the day of the great fire that weren't restarted.
  • [00:16:54] Many people didn't make it, but McCormick decided he would continue on. Now later in the decade in 1910, McCormick became one of the first businesses to produce tea, actually tea in little pouches. And that became the modern day product of teabags. We still know this today. So McCormick was not just making spices and seasonings and shipping them.
  • [00:17:20] They were trying to innovate, trying to find new ways to package their products and get them to customers. Now, fast forward a couple of decades. In the great depression, obviously times were very hard and like they were for many businesses, but McCormick persevered, he ended up adopting this concept of multiple managements.
  • [00:17:42] And this was a really interesting concept when I came across it, because it was just this management philosophy that this is a little bit different than a lot of the things that you hear about now, what the company leadership decided to do was. Instead of simply having a single board of directors at the top who ran everything, which is pretty much how every company is run.
  • [00:18:02] What they did was they established multiple boards of employees at lower levels. Now, the reasoning behind this is they did this to elicit input from more employees and get better feedback about how to improve the business. So how did this work? There was a junior board which consisted of young executives.
  • [00:18:23] There was a factory board. And this board represented the Forman, the laborers, and then there was another board made up of salesmen. So we had these three boards reporting to the main board and what this did was in effect, it gave several thousand suggestions for improvement up to the top level. The board of directors, and many of these suggestions were implemented.
  • [00:18:48] It was a way for people to actually speak up about their business because they were on the ground. They knew what the problems were and they had ideas and management was listening, and this was transformative to McCormick. They were able to really thrive because of this feedback. And the philosophy proved very successful.
  • [00:19:08] And in fact, Charles Perry McCormick even wrote a book about it in 1937, called multiple management and hundreds of large companies ended up adopting similar practices. So it's an idea that spread beyond the business itself. It actually affected other industries, which I think is pretty cool. So they really developed some management philosophy there.
  • [00:19:31] And then the end result of this was not just that the workers felt that their feedback was being taken seriously and it wasn't just improvements. In the day to day operations, this affected the bottom line too. This affected the top line too. So the result was that the company grew significantly over this time.
  • [00:19:52] And between 1932 and 1948 sales grew from just about $3 million to over $26 million. Now that's a 16 year period and. They almost increase their sales by a factor of 10. So they had this really powerful growth phase during this time coming out of the great depression. Now throughout the 1950s and 1960s McCormick gradually expanded and they were buying out smaller spice firms around the country.
  • [00:20:23] They partnered with foreign companies to expand their international distribution. So remember how they started exporting to other countries back around the early 1900s will by mid century, McCormick was really getting into it with. Other countries, as far as their distribution was concerned. So they expanded it to Mexico, Canada, Sweden, Costa Rica, Nicaragua, France, yeah, Germany and even more countries.
  • [00:20:52] And by 1960 sales were $50 million. And then they doubled that by the end of the decade in 1969 to a hundred million dollars. So around this time sales were growing around 8% annually. As we moved on into the 1970s, they kept growing and McCormick strategy for growth. I noticed historically has basically been, they just keep acquiring other spice and flavor producers, and that's exactly what they did in the seventies.
  • [00:21:20] And then by 1987, they raised a billion dollars in sales. So the rate of sales growth actually accelerated during this period rising to 13% annual growth over nearly two decades. So they really. Found their stride during this time. And not only were they able to acquire businesses successfully, but they were able to increase the rate of sales faster than they had been able to.
  • [00:21:46] In the past in 1999, the Cormack began trading on the New York stock exchange. And a few years after that in 2003, they were added to the S&P 500. And they're still in the S&P 500 today. Another notable aspect of their history is that in 2007, they created the McCormick science Institute. And the purpose of this Institute was to help research the health benefits of spices and herbs.
  • [00:22:13] I think this was a really smart move because especially as more scrutiny. Gets placed on food in general and the food industry. It's really important to have a thorough understanding of the nutritional properties and the health properties of anything that you're putting into your body. And especially now, I think in 2021, as I'm recording this more and more people are becoming very conscious of, what exactly is in their food and what are they eating? And so to understand the health benefits of seasoning spices and herbs, that's really beneficial for McCormick in order to be able to sell that and back their stories and their marketing by science. So I think that was really encouraging as far as them actually creating that Institute.
  • [00:23:14] Okay. So what have you learned studying the history of the spice market and the history of McCormick? Well, there's a couple things that I take away from this. Just thinking about it now, the first we know that historically spices have always been there. Spices have always been there and always been desired by us as human beings.
  • [00:23:33] They're things that cross cultural barriers, cross national or ethnic barriers. Everybody loves to eat and everyone loves to eat good food. Right? We love to flavor our food with different things, even if it's just salt and pepper, but of course there's many more spices out there. And if you haven't experimented with many flavors outside of a couple of different spices, I highly encourage you to try it.
  • [00:24:00] I think that personally you're missing out, but there's a lot of great flavorings and seasonings out there, but these are not new products. These are things that have been around, not just for centuries. I mean, they've been around for centuries in the corporate form that we know now, but they've been around for millennia, literally millennia, and they were very hard to get.
  • [00:24:24] Back in the day, but because of the modern production systems that we have, and the global demand for flavorings and seasonings, they're widely available and they're pretty cheap. So going to the store and buying a little canister, a pepper or salt is very affordable. Whereas back in the day, you might get killed if you stole someone's peppercorn, literally because it was more valuable than gold.
  • [00:24:52] So I think one of the lessons is that the values of commodities can change drastically over time, even though we still desire seasonings and flavorings and spices, it's not nearly as valuable as it used to be. And that just is because of the changing economics of supply and demand. I mean, if the world's supply of vanilla Strunk significantly overnight, You better believe that vanilla extract prices would skyrocket.
  • [00:25:22] And in fact, vanilla is I think one of the rarer raw materials out there as far as flavorings go, but think about things like salts, their assault minds, all over the world. And if for some reason we started running out of salt mines, we would have to turn to other sources of production, like getting it from the ocean or, or things like that, but all this to say that spices and seasonings have drastically increased in price over time. They're seen more as commodities, but they've maintained a lot of significance over the years. And I think that's pretty powerful when we think about now the modern corporate structure coming in, something like a McCormick and kind of taking over that industry and becoming a key player in the industry.
  • [00:26:11] So that's just something that I wanted to share here as we close. So that's going to wrap it up for today. That's the history of McCormick. That's the history of the spice industry in general. And I hope you learned something from this episode. Now, what we're going to be talking about next week is the business of McCormick today and how it's working, how the finances work.
  • [00:26:37] And synthesizing all the information we've learned in order to understand the investment case of this business. But that's a story for another day. Thanks. And we'll see you next week on Stock Stories.
  • [00:26:53] Alex Mason: The information presented here on Stock Stories is for informational, educational, and entertainment purposes only. You and you alone are responsible for your investment and financial decisions. Please consult an appropriate tax, legal, or financial advisor that can analyze your specific situation in the context of your goals and circumstances.

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