Photographer: Craig Giammona/Bloomberg

French’s Deal Sets Up Epic Mustard Battle

Updated on
  • Investors concerned that company overpaid for Reckitt products
  • Kraft Heinz has taken market share in mustard in recent years

McCormick & Co.’s $4.2 billion deal to buy French’s mustard thrusts the spice company into direct competition with a far-larger rival: Kraft Heinz Co.

In acquiring French’s and other food products from Reckitt Benckiser Group Plc, McCormick is getting a business that’s been under more pressure in recent years. Long dominant in ketchup, Kraft Heinz has rolled out a yellow mustard in supermarkets and taken market share. Until now, McCormick has been best known in the U.S. for seasonings, such as Grill Mates and Old Bay.

The looming showdown between McCormick and Kraft Heinz is the latest flashpoint for a food industry that’s had to work harder to keep customers loyal. Sales have slowed for the biggest U.S. packaged-food companies, including Kraft Heinz. That means they either have to fight for market share or rely more heavily on overseas markets to fuel growth.

With McCormick eager to justify the hefty price of French’s, the deal could bring a wave of new products and offshoot brands, said Ken Shea, an analyst at Bloomberg Intelligence.

“It should ramp up competition from an innovation standpoint,” he said. “They bought it because it’s a market leader.”

In addition to acquiring French’s mustard, McCormick will gain the Frank’s RedHot and Cattlemen’s BBQ sauces as part of the Reckitt deal. Frank’s is the No. 1 hot sauce in the U.S., and McCormick aims to achieve the same standing globally.

But McCormick faces concern that it overpaid for the food properties. Its shares tumbled as much as 7.1 percent to $90.25 on Wednesday after the acquisition was announced, underscoring investors’ qualms about the deal.

That was the biggest intraday tumble since early 2014 and erased McCormick’s gains for the year.

Too High?

The surprisingly high price of the Reckitt business increases pressure to do something big with the new products. The food lineup was originally expected to fetch about $3 billion, more than $1 billion less than the eventual price tag.

“This seems pricey for a business that has only been growing sales at 3 to 5 percent in recent years,” Sanford C. Bernstein & Co. analyst Alexia Howard said in a note. Plus, the division already has a high earnings margin: 28.7 percent before interest and taxes. That means there may not be easy ways to bolster profit.

The mustard war with Heinz Kraft raises other questions. French’s remains the top-selling brand in the U.S., but the product faces its biggest threat in years.

Since Kraft Heinz was formed in a 2015 merger orchestrated by 3G Capital and Warren Buffett, the company has sought new growth opportunities. Over the last two years, it’s been heavily promoting its yellow mustard in a bid to dominate traditional barbecue condiments.

Heinz mustard had previously been sold through its food-service business, but the product didn’t have much of a presence on grocery shelves. When that changed in 2015, the company began gaining market share.

Market Share

Kraft Heinz, which also owns the Grey Poupon brand, now controls about 19 percent of the U.S. mustard industry, Euromonitor estimates. French’s market share has slipped to roughly 36 percent, with sales falling each of the last five years, according to the research firm.

“It’s going to be a mustard rumble and shirts are going to get stained,” said Asit Sharma, an analyst at the Motley Fool. “It’s tough to compete against Kraft Heinz.”

McCormick also will be taking on Kraft in the barbecue-sauce aisle. The Sparks, Maryland-based company previously bought the Stubb’s brand in 2015, and now it will add Cattlemen’s to that lineup. That brand is typically sold to restaurants and other food-service clients.

Frank’s, meanwhile, has 13.9 percent of the hot-sauce market in the U.S., according to Euromonitor. That puts it ahead of Tabasco, which has 13.7 percent. But Tabasco, owned by Louisiana’s McIlhenny Co., has the edge worldwide.

For Kraft Heinz, a more ambitious competitor could bring another headache to a company trying to reignite growth. After a failed bid for Unilever earlier this year, it posted disappointing quarterly sales in May.

The Reckitt sale also could help spark the next round of deals in the food industry, said Erin Lash, an analyst at Morningstar Inc. U.S. packaged-food companies, struggling with slumping sales, are trying to shed brands to focus on core businesses.

“Given tepid growth of the category, consolidation is likely to continue,” she said.

— With assistance by Jonathan Roeder

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