McCormick's Margin Recovery Playbook: How Tariffs, CCI, and Mexico Set Up 2026
- Hardik Shah
- 5 days ago
- 4 min read
McCormick’s latest earnings did not hinge on whether demand held. That question was largely settled. Instead, the quarter clarified how the company is choosing to rebuild margins after a year shaped by tariffs, commodity inflation, and deliberate reinvestment. The results point to a margin recovery strategy that is paced, internally driven, and anchored in volume durability rather than short-term price maximization.
Volume First, Margins Second
In the fourth quarter, McCormick reported 3% net sales growth, including 2% organic growth, supported by both pricing and volume across Consumer and Flavor Solutions. Adjusted earnings per share increased 7.5% year over year to $0.86, while adjusted operating income rose about 3%. The pressure surfaced at the gross line: gross margin declined roughly 130 basis points year over year (120 basis points on an adjusted basis).
For the full year, the same pattern held. Gross margin fell 60 basis points, yet adjusted operating income increased 2.3%, and adjusted operating margin expanded 10 basis points. The divergence underscores a sequencing choice—protecting demand and operating leverage while absorbing near-term cost pressure.
Chairman and Chief Executive Brendan Foley framed the approach succinctly on the call:
“We delivered differentiated, volume-led organic growth and share gains, powered by continued investment in our brands, expanded distribution, and innovation across our portfolio.”
What Pressured McCormick's Gross Margins—and Why
Three forces weighed on gross margin in 2025.
Commodity inflation accelerated late in the year across a broad input basket.
Tariffs flowed through cost of goods sold more heavily than anticipated as higher-tariff inventory cleared in the fourth quarter.
And McCormick continued to fund capacity, technology, and brand investments ahead of demand rather than waiting for cost relief.
Pricing offset only part of these pressures by design. Management avoided broad price actions that could undermine elasticity in categories where frequency and value perception matter. The trade-off showed up in gross margin but preserved volume momentum.
“Despite inflationary pressures and rising costs from a shifting global trade environment,” Mr. Foley said, “we achieved operating profit growth while continuing to invest for future growth.”
Tariffs: Reduced Exposure, Targeted Pricing
Tariffs remain a measurable headwind, but the exposure is shrinking. McCormick reduced its gross annualized tariff exposure by roughly 50%, to about $70 million, from roughly $140 million earlier. Even after mitigation, the company expects around $50 million of incremental tariff-related cost to impact fiscal 2026.
Rather than fully passing through those costs, McCormick applied selective pricing. The evidence is in demand: the Consumer segment posted volume growth again in the quarter, extending a run to seven consecutive quarters, even after inflation-related pricing actions. The restraint weighed on near-term gross margin but preserved the demand base entering 2026.
CCI and SG&A: The Earnings Backstop
What kept earnings growing despite thinner gross margins was execution below the gross line. McCormick’s Comprehensive Continuous Improvement (CCI) program—spanning sourcing, manufacturing, logistics, and overhead—continued to deliver savings. In the fourth quarter, selling, general and administrative expenses declined year over year, offsetting part of the gross margin pressure while supporting brand marketing and digital investment.
Chief Financial Officer Marcos Gabriel emphasized managing the income statement as a system rather than a single lever:
“We are focusing on managing the P&L holistically, not only the gross margin line… driving SG&A savings while increasing investments to drive growth.”
That discipline supported cash generation. Operating cash flow reached $962 million in fiscal 2025, up from $922 million in 2024, reinforcing balance-sheet flexibility as the company navigates cost volatility.
Mexico: Structural Margin Accretion
Margin recovery in 2026 is not framed as normalization. It is being engineered. In early January, McCormick completed the acquisition of a controlling interest in McCormick de Mexico, adding scale and improving mix. For fiscal 2026, management guided to 13%–17% reported sales growth, with 11%–13% attributable to the Mexico acquisition, and adjusted operating income growth of 16%–20%.
The Mexico business is expected to be accretive to operating margins, even as earnings per share absorb headwinds from higher interest expense and the elimination of minority interest income. Guidance for adjusted earnings per share of $3.05 to $3.13—up from $3.00 in 2025—does not assume commodity deflation, underscoring reliance on internal levers.
The Path to 2026
The margin recovery McCormick is outlining rests on four drivers: pricing carryover, CCI productivity, SG&A discipline, and the margin profile of Mexico. It does not depend on tariff relief or a favorable turn in input costs. The sequencing—defend volume first, rebuild margins second—is visible in the numbers.
The earnings signal is not that margins declined. It is that McCormick chose how to absorb the decline—and set conditions to recover with a stronger demand base and a more durable cost structure as 2026 unfolds.
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