IT WAS THE BEST OF TIMES, IT WAS THE worst of times. The divergent fates of two rival condiment businesses — the best of times for McIlhenny Company, maker of well-known Tabasco-brand hot sauces, and the worst of times for Huy Fong Foods, originator of the U.S. version of the popular Sriracha pepper sauce — highlight the power and perils of diversification. While McIlhenny took strategic steps to diversify with future performance and risk in mind, Huy Fong failed to capitalize on its wild initial success, making missteps that ultimately rendered the former market leader an also-ran in hot sauce, even in the subcategory Huy Fong itself created.
The cases of McIlhenny and Huy Fong illustrate the right and wrong ways to diversify.
150 Years of Hot Sauce
Hot sauces, used to spice up a wide variety of main dishes, sides, and snacks, are simple products containing a limited set of ingredients such as pepper mash, vinegar, salt, garlic, and sugar. With the exception of the peppers, these are typically commodity inputs. Thus profit in this industry is realized by selling a unique product at scale with strict control over input costs.
McIlhenny, now in its fifth generation of family ownership, has been producing food products since the late 1800s, starting with its best-known “original” line of hot sauce. The business carefully manages the particular kind of peppers its contract farmers must grow and source from multiple suppliers on multiple continents, as we’ll discuss below. In 2014, McIlhenny started producing its own brand of Sriracha sauce based on the growing demand for these products.
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