Big Hot Sauce
Wants More Hot Sauce

Minutes up the road, at McCormick & Co.’s headquarters in Hunt Valley, Md., Chief Executive Officer Lawrence Kurzius has been plotting to send reinforcements to Walmart’s shelves, which accounted for 12% of McCormick’s $5.6 billion revenue in 2020. The 132-year-old company is best known for the crimson-capped seasoning and herbs sold up the aisle, in A12, Walmart’s spice section. But Kurzius, looking for growth beyond spices, has been aggressively targeting the hypercompetitive condiments business. In recent years his company has bought up French’s mustard, Stubb’s barbecue sauce, and Frank’s RedHot, a Louisiana-style pepper sauce that’s been dousing Buffalo wings since the 1960s.

The addition of Frank’s, in particular, was a coup. Acquired with French’s in 2017 for $4.2 billion, it’s the biggest hot sauce in the U.S. (ahead of Tabasco) in the hottest condiment category, according to researcher Euromonitor International. Globally, hot sauce sales are up 54% since 2015, to about $5 billion, with China’s Lao Gan Ma—a savory chili oil that’s huge in Asia and has a cult following in the U.S.—outselling both Frank’s and Tabasco worldwide. Kurzius, who’s gotten in on the trend himself, dumping the stuff on his eggs and even injecting it into his Thanksgiving turkey, wanted more than a stake in a growth market. He wanted total world hot sauce supremacy. And so, just two years after the Frank’s deal, he set his sights on another powerhouse in the space: Cholula.

Cholula, then No. 3 in the U.S. after Tabasco and Frank’s, had grown popular thanks to its distinctive rounded-wood cap and piquancy, which makes it spicier than Frank’s but just mild enough for American tastes. (On the Scoville Heat Unit scale of hot sauce hotness, Cholula scores as high as 2,000 SHUs, a bit less than a jalapeño pepper.) Brand-wise, Cholula also offered an authenticity to McCormick that Frank’s and its 900 SHUs seemed to lack, even if the made-in-Mexico sauce was actually owned by a Connecticut-based private equity firm, L Catterton, and run by executives in Stamford.

Kurzius’s mergers-and-acquisitions team had been meeting with L Catterton over tea and Zoom since mid-2019 to feel out what a sale could look like. Things got more serious when L Catterton put Cholula up for auction in September 2020. Naturally, there was competition: A slew of food conglomerates went after the brand, including Kraft Heinz Co., according to two people familiar with the negotiations. If McCormick was to become Big Hot Sauce, it would have to fight off Big Ketchup first. Kurzius asked McCormick’s board for ­permission to make a cannonball offer that would clear the field of competitors. Director W. Anthony Vernon, who’d been CEO of Kraft Foods before it merged with Heinz, says the board’s response was blunt: “Go get it.”

McCormick’s $800 million bid beat out Heinz that November. “When I read that, I said, ‘Oh my gosh! That’s a lot of red peppers!’ ” recalls Luis Saavedra Jr., chief operating officer of Tapatío, a family-run rival to Cholula based in Southern California. Between Frank’s and Cholula, Kurzius suddenly controlled about a third of the U.S. market, according to Euromonitor, with lots more room to expand.

McCormick already has wholesale relationships with many of the world’s largest retailers and restaurant chains through its condiments and spice business, the same international network of buyers who are now adding Cholula bottles and squeeze packs to their bulk orders. “They want to see their hot sauce on every tabletop in the world,” says Sharif Rod, who previously oversaw Cholula’s Latin America exports. “It’s the next ketchup.” (Kraft Heinz spokesperson Jenna Thornton declines to comment on the Cholula deal, but notes that the company’s “Taste Elevation platform” is experiencing significant growth. She points to advances such as Buffaranch, a spicy buffalo sauce mixed with ranch dressing. “Our innovation agenda is beginning to take hold,” Thornton says.)

McCormick’s hegemonistic ambitions were catalyzed, in part, by the Covid-19 era. Although its sales to restaurants declined in 2020, revenue from consumers shot up in the early months of the lockdowns as shoppers frantically replenished their pantries. Overall, customer purchases of McCormick products at U.S. stores jumped 55% in the spring quarter of last year, a wild swing for a company accustomed to single-digit growth and known for selling your grandmother a tiny jar of paprika once every couple of decades. The company, which reported record annual sales growth on Jan. 27, has seen its stock soar to all-time highs during the pandemic. It’s worth roughly double what it was in 2016, when Kurzius took over.

To keep the growth going, he’s betting on products you might not even realize McCormick owns or touches. That includes seasonings and condiments sold in stores, but also the foods and drinks that McCormick develops for PepsiCo Inc. and other food brands. The company won’t comment on which convenience-store concoctions it’s had a hand in, but sources familiar with the operation, who requested anonymity to speak candidly about the secretive industry, say McCormick has helped craft top-sellers including Bud Light Lime and Cool Ranch Doritos. Just weeks after the Cholula deal, Kurzius pushed deeper into this world by acquiring FONA International LLC, a flavor manufacturer, for $710 million.

“Not until Lawrence did McCormick go after these bigger acquisitions to put it on the map as a major food player,” says Vernon, adding that the company’s goal is to evolve beyond “vanilla McCormick,” a reference to the company’s formerly restrained approach as well as its extract business. That means going up against the likes of Kraft Heinz and Hellmann’s, owned by Unilever Plc, to invade more grocery aisles. “I remember saying to Lawrence: ‘We’re in an arms race with far bigger players with far deeper balance sheets,’ ” Vernon says. “ ‘How do we ensure this doesn’t get away from us?’ ”

The situation grew worse after he got home to Maryland. McCormick’s three factories in China, where seasonings to be sold in the country are mixed and packaged, were unable to reopen after the holidays because of lockdowns, threatening sales in the company’s second-largest market. McCormick’s supply chain is vast, with about 14,000 raw materials procured from 80 countries, including China. The entire ecosystem—farms, factories, shippers—was imperiled as the pandemic gathered force. So was its food-service business; restaurant sales had historically accounted for a fifth of revenue.

From February to early March, McCormick’s stock price lost over a quarter of its value. But then store sales took off. After Purell and toilet paper, panic buyers went for groceries. In the week ended March 15, consumer purchases of those vanilla vanilla products shot up 54%. “It was like Thanksgiving and Christmas, with the amount of baking going on,” Kurzius says. Retail sales of broths and recipe mixes (such as taco or chili seasoning kits) more than doubled. The following week, it was all about Frank’s and French’s, with sales leaping 90%.

Some of the enthusiasm was about stockpiling, but Kurzius says the stay-at-home era brought a cultural shift. A generation was suddenly trying to learn how to cook for the first time. “On our Ask McCormick helpline, we got the most basic questions you can imagine,” he remembers. “No lie: We’d get questions like, ‘What is a teaspoon?’ ”

The sales growth, which continued into the summer, further strained the company’s supply chain. To triage, Kurzius suspended hundreds of less popular items, some of which are now permanently discontinued. (R.I.P. Grill Mates Carolina Gold sweet & tangy seasoning.) The company hired an additional 1,400 workers. Some factories moved to 24/7 production. This was partly about meeting demand, but it was also a way to adapt to Covid safety protocols that required workers to be spaced apart from one another and do additional cleaning and sanitation during shift changes.

There was only so much that could be done. Whereas electronics giants try to cultivate multiple sources of components in case of geographic bottlenecks, McCormick is ultimately dependent on an extensive network of farms in places such as Indonesia, which supplies most of the world’s cinnamon, and Turkey, home of the bay leaf. “We can’t move the equator,” says Donald Pratt, managing director of McCormick’s global ingredients subsidiary. Complicating matters, the sales volatility made forecasting a nightmare. “It was taking analysts hours to make sense of the signals,” he recalls.

Then came the great turmeric crisis. The Indian spice has taken off among Instagram foodies who herald its antioxidant powers. Sold as a ground powder, turmeric has become a rare hashtag-worthy hit among McCormick’s red-capped seasonings. It’s also responsible for the bright yellow color in French’s mustard. When McCormick’s U.S. turmeric supply started running critically low around grill season—blasphemy in the land of the Ball Park Frank—in part because ocean freight was so overburdened, the company’s sourcing group had to charter an emergency cargo plane full of the stuff to the French’s factory in Springfield, Mo. Unfortunately, the plane was somehow erroneously directed to Maryland, forcing McCormick to hire truckers to transfer the goods overnight, a 1,000-mile drive, in time for a scheduled production run.

U.S. stocks of jarred turmeric were running out, too, due to extreme demand, leading McCormick to fast-track a sample from a different Indian supplier in late July. The partner, who already supplied turmeric to McCormick’s European markets, promised it could add enough capacity for the Americas. But it still needed to go through stateside auditing to ensure its spices met U.S. Food and Drug Administration import standards and had the right color consistency to mix properly with local ingredients. “Uniformity is super important,” says Zoe Wood, a global buyer for McCormick based in the Cayman Islands. “We don’t want red-capped turmeric sitting on the shelf next to different-colored turmeric.”

With many employees working remotely and McCormick research labs operating with a skeleton crew, a company scientist in Maryland had to test the color palette of the new turmeric in her home kitchen after rifling through her cupboards for materials she could use as control samples. Wood logged into a videoconference with the scientist to see that she’d put together “a lovely dinner plate” of mayo, the new supplier’s exported powder, and McCormick’s original ground turmeric for comparison. She was swirling them into the mayonnaise in yellowy blobs to make sure they resulted in the same hue. “She’s like, ‘This is a match, perfect, we can make this work,’  ” Wood says. The scientist’s thumbs-up allowed the sample to jump the queue at McCormick’s backlogged lab, where it was soon tested and approved for levels of curcumin, its main chemical component. After it passed the lab work, McCormick placed a large order with the Indian supplier on Sept. 15.

With U.S. mustard reserves secured, the company announced results for its third quarter two weeks later. Consumer sales were up 15% from the same period in 2019, but down from the prior quarter’s 26% bump. Analysts wondered whether the pandemic gains were decelerating and would prove to be fleeting or whether the continued double-digit growth represented a new normal.

Kurzius judged the bottle of hot sauce half-full. It was time to go after Cholula. “There were a number of opportunities we had to do more boring things, like shore up our capital structure,” he says. “But we thought if we take this on now, we can really blast it out in food service when we get past this crisis and restaurants start to reopen.”

The company boomed through the 1920s. After the Depression (and Willoughby’s death in 1932), it was C.P. who rebuilt McCormick and orchestrated acquisitions of seasonings and extracts companies that transformed McCormick into a global spice empire. C.P.’s now-out-of-print business book, published in 1949, includes a chapter on defeating communism; jarringly, its paperback cover featured a mushroom cloud pluming over the planet, apparently a reference to his description of the inventiveness of future generations as “atomic.” The book captures C.P.’s unusual flair for leadership, detailing how he erected a model grocery store at McCormick’s offices so executives could compare packaging designs with those of competitors. He cut weekly production hours from 56 to 45 while raising wages by 10%, which unexpectedly boosted output.

Most lasting was his organizational philosophy of “multiple management,” a bottom-up approach that had McCormick create mini-boards of directors among factory operators and junior employees. The premise was to build a pipeline for ideas that higher-ups might otherwise ignore. The policy led to the decision to replace 5% of production shifts with tea breaks—tea was another product line, and C.P. argued that caffeinated workers would be more productive—and to kill a plan for a rooftop neon sign that would cost $4,000 a year to light. But the larger goal was to stop McCormick from growing stale, like forgotten sage, an implicit criticism of his uncle, who C.P. felt never understood the company’s full potential. He decried “deadheads” and “yes men” who “degenerate into a fixed, self-perpetuating group.”

Subsequent CEOs, including C.P.’s son Buzz, tried to carry this structure forward, with varying degrees of success. A 1990 Fortune story noted that a turnaround at the company from the preceding decade was primarily because of Buzz “freshening the look of its products by replacing the familiar red and white tins with clear plastic bottles”—like the ones consumers recognize today. It was also the result of a pricing war with a now-vanquished Australian rival—and an unlawful pricing scheme in which McCormick allegedly offered grocery chains big discounts in exchange for as much as 90% of the spice-aisle shelf space. (The company agreed to settle antitrust charges brought by the U.S. Federal Trade Commission in 2000 without admitting wrongdoing.)

Kurzius gives out C.P.’s book to new board members, keeps the old man’s top hat on display, and is still friends with 93-year-old Buzz. He joined McCormick through its 2003 acquisition of Zatarain’s, maker of Cajun seasonings and microwaveable gumbo, where he was CEO. A marketing veteran of Quaker Oats and Uncle Ben’s, he then rose through McCormick’s executive ranks, becoming chief operating officer in 2015. With a Vincent Price mustache and buttoned-up manner, the 63-year-old often wears a blank expression in meetings that can make employees second-guess themselves. “He takes copious notes in this monster book and writes in 0.01 font, so even if you’re sitting beside him, it’s impossible to read,” says Angela Francolini, the former head of consumer strategy. “I remember thinking, ‘What are you writing?!’ ” (A corporate spokesperson responds: The notebook “is not huge. In fact, it’s pretty small.”)

Kurzius disliked it when McCormick was referred to as a mature business dependent on its legacy red-capped portfolio. The company had a history of expanding through mergers, including the 1990 purchase of Baltimore’s beloved Old Bay seafood seasoning and the $604 million deal to acquire rival Lawry’s in 2008. But Kurzius didn’t think the moves were bold enough. A shareholder presentation he co-authored in 2010 called for McCormick to go after more emerging markets and “deliver fewer, bigger” new products.

Buying Frank’s hot sauce and French’s mustard, the latter then a declining brand, from Reckitt Benckiser Group Plc was one of Kurzius’s first big moves after taking over the top job. “We had looked at some larger acquisitions over the years but never pulled the trigger,” he says.

McCormick’s analysts saw that French’s still had life and that Frank’s could help the company capitalize on millennial love for low-calorie heat. Noah Chaimberg, founding hot sauce sommelier of the retailer Heatonist, notes that the food trend is as much about culture as flavor. Mexican cuisine had exploded in popularity, and there’s an audience of aspiring chili sommeliers in the millions who tune into Hot Ones, a YouTube show where guests answer questions over scorching wings. But as competing bids drove the price for the two brands above $3 billion, Vernon, the board member, says there was “bedwetting” among his fellow directors. At one point, he asked Kurzius whether he was getting in over his head. Kurzius vowed “to win this,” Vernon recalls, and promised to deliver a return on the investment faster than the skeptics thought feasible. The deal closed in August 2017.

The following year, consumer store sales of French’s dropped 3.1%, slightly smaller than the previous year’s decrease. Sales rose in 2019, and French’s stayed in its dominant position, with 12% of the $2 billion global mustard market, according to Euromonitor. This was a consequence, Kurzius says, of McCormick’s distribution muscle, defending French’s from “being pushed around the shelf” by mustards sold by Heinz and Hellmann’s. Retail consumption of Frank’s, meanwhile, grew almost 15% that year.

McCormick’s might has helped Cholula become the No. 2 player in the U.S. even as the company has sought to make the division more profitable. Two people familiar with the transition say that McCormick supply managers showed up at Cholula’s factory in Jalisco, Mexico, to hunt for cost savings. Analysts also see huge potential in boosting single-packet servings, known as “sachets,” which are sold in bulk and, of course, include a picture of the bottle’s wood cap.

Still, McCormick has a way to go before it can make hot sauce as big as ketchup. The latter market is nearly $2 billion larger worldwide, according to Euromonitor. Whereas Heinz faces relatively little competition for its flagship product, the hot sauce business is full of small-batch sellers, private labels marketed by grocery stores, and family-led brands with loyal followings such as McIlhenny’s Tabasco, Huy Fong sriracha, Baumer’s Crystal, and Tapatío, all of which seem to have the same objective as McCormick. “We want to be the Heinz ketchup of the hot sauce world,” says Tapatío’s Saavedra Jr.

A former longtime McCormick scientist says it’s more about branding than anything else. McCormick’s clients want their customers to believe they pioneer their own goods, as opposed to outsourcing deliciousness to third-party chemists. “Maybe 20 years ago, we had 100 cherry flavors, and now we have a library of 100,000 cherry flavors,” this person says of the broader industry. With the acquisition of FONA, Kurzius is pushing into developing more flavors for beverages, confections, and even health products (think of the tastes in supplements like Flintstones Vitamins).

McCormick also sometimes does cross-promotions with outside brands. Frank’s and Cholula are now featured on menus at fast-food chains Subway and Chopt. And grocery stores sell Stubb’s frozen pulled pork, Old Bay potato chips and popcorn, and French’s-flavored craft beer. “Some people thought it sounded gross, but it was a pretty big hit,” says Jill Pratt, who oversees McCormick’s marketing in the Americas.

In other ways, the brand extensions help McCormick diversify from those dated red caps. As in its partnerships with big food brands, a bottle of Cholula doesn’t even mention McCormick. The sauce’s packaging only says that it’s imported from Mexico, as if it were still a family shop, which it hasn’t been for many years. (Prior to McCormick and L Catterton, Jose Cuervo oversaw Cholula.) Consumers “don’t have to know French’s and Frank’s and Cholula come from McCormick,” Kurzius says. “Now, I’d love for investors to know, but for consumers what matters is the loyalty.” It’s the same reason in recent years that General Mills, Hershey, and Unilever have respectively acquired Annie’s (organic packaged foods), SkinnyPop (healthy popcorn), and Sir Kensington’s (fancy ketchup and mayo). The acquisitions are all designed to appeal to younger consumers who are moving away from the processed foods churned out by conglomerates.

Still, the big brands have plenty of firepower. At the Walmart near McCormick’s headquarters, Heinz is selling blends such as Kranch, Ketchili, Mayochup, Honeyracha, and Tarchup. Depending on your perspective, the danger or promise is that McCormick might follow suit and die-hard Cholula stans will be confronted with Frenlula spicy mustard or StubbsBay barbecue sauce. “The temptation of marketing teams worldwide is to jump into having a Taco Bell Special Edition Cholula chimichanga,” says Sharif Rod, the former Latin America exporter of Cholula.

Brand dilution. Point taken. On the other hand, a Taco Bell meal smothered with delicious Cholula hot sauce could be, as C.P. McCormick would say, atomic.