How Cholula plans to get more Americans hooked on its hot sauce - CNN

Right now the hot sauce, which is being acquired by spice maker McCormick, can only be found in about 4% of US households.

But it appeals to a coveted demographic — the college-educated Millennial who has a "very strong appreciation for food and loves to talk about food," in Cholula CEO Maura Mottolese's words. And the brand has been gaining share at a steady clip for the past few years, according to Euromonitor International and to Nielsen figures provided to CNN Business by Cholula.

That's in part because America's appetite for hot sauce has been growing. But it's also because Cholula has a playbook for introducing its product to new customers — albeit one that has been upended by the pandemic.

Restaurants aren't just important to Cholula for the hot sauce they buy — they're a way for the company to introduce itself to new customers. Those restaurants placed the recognizable bottle — slender, with a wooden top and a smiling, dark-haired woman on the label — on the table, where customers can potentially encounter it for the first time and then, if they like it, go buy a bottle of their own. About 40% of consumers learn about Cholula at restaurants, according to McCormick.

But when restaurants closed their doors and cleared their tables of shared items because of the pandemic, sales of the bottle "fell off dramatically" at first, Mottolese said. So Cholula had to figure out a new way to reach customers.

"We had to shift gears," Mottolese said. "It was like 'OK, how are we going to restore this business?'"

On its own, it came up with a number of solutions, including restaurant partnerships and new packaging. With the force of McCormick behind it, the brand has even more options — and, potentially, new opportunities for growth.

A spicy trend

The hot sauce market has been growing, making Cholula an attractive acquisition target. L Catterton, whose portfolio includes restaurant chain Noodles & Company and fitness upstart ClassPass, bought Cholula for an undisclosed amount in April 2019. Mottolese, an industry veteran, became Cholula's CEO soon after. Prior to this position Mottolese led Tate's Bake Shop, helping triple the size of the business before it was sold to packaged food maker Mondelez (MDLZ).

Overall, US hot sauce sales have grown an average of 9.7% annually for the past four years, according to Nielsen. The category got a boost during the pandemic: In the twelve months ending on November 7, sales surged by 24.6%, per Nielsen.

The pandemic strengthened Cholula's supermarket and e-commerce businesses as more people started cooking at home. To encourage people to buy the sauce at grocery stores, it rolled out a 2-ounce bottle at Walmart (WMT) in May to give people a chance to try out new flavors without committing to a full bottle. (The packaging was available before, but in a very limited distribution.)

Cholula's retail sales began to surge in March, and have been enough to fuel double-digit growth in overall sales year over year, Mottolese said in an interview with CNN Business.

But "on the foodservice side of our business it's been a more challenging year," she said. When the pandemic hit, restaurant sales declined. Before the crisis, foodservice accounted for one-third of the company's sales, compared to two-thirds at retail. Since the crisis, foodservice sales have made up just one-fifth of the total.

In a bid to restore those lost sales, Cholula has worked with restaurants on branded menu items and introduced new packaging.

Cholula chicken sandwiches and tiny packages

Recently, Cholula struck partnerships with restaurant chains on branded menu items.

Partnering with restaurants on products is a good way to raise awareness and secure sales, said David Henkes, senior principal at the market research firm Technomic. If restaurants highlight Cholula as a featured ingredient on their menus, they'll need a steady supply of the product.

Those deals are good for restaurants, too. They can leverage Cholula's popularity to help promote their own brands and bring in Cholula's customers.

Golden Chick, a Texas-based fried chicken chain, decided to partner with Cholula because it's "a strong brand that's very recognized in the markets that we operate in," said Golden Chick President Jim Stevens. So the company is using Cholula on its fried chicken sandwich and plans to sells Cholula mac and cheese as well.

For Del Taco, a fast food chain that serves American and Mexican food, it was mostly about finally getting "spicy" right.

"Spicy is an area that's become more popular with guests," said the brand's chief marketing officer, Tim Hackbardt, noting that Del Taco had struggled to find success within the category.

Hackbardt, who said he's been cooking with Cholula personally for years, liked the flavor and versatility of the sauce — you can have it for lunch or on eggs for breakfast. And he liked that the brand has its own following, with room for growth.

Del Taco is selling several menu items made with Cholula, including a Cholula crispy chicken taco, breakfast rollers and loaded fries. Del Taco launched a dedicated ad campaign for the Cholula menu items, including TV commercials featuring a mock metal band fronted by Crys P, a fictional rocker who loves crispy chicken tacos and, of course, Cholula.

Such partnerships have already helped Cholula stem the decline in its restaurants business. In October, Cholula's foodservice sales had improved to being flat year-over-year, Mottolese said.

McCormick plans to expand restaurant partnerships.

"Branded foodservice is a fundamental growth opportunity for Cholula," said Kurzius during a Tuesday call discussing the deal. "We plan to both expand Cholula's distribution in its existing foodservice channels and increase new restaurant penetration."

New packaging and products

Cholula has also rolled out new packaging to encourage trial and work with restaurants during the pandemic.

Once Cholula saw that its five-ounce bottles no longer made sense for restaurants, it shifted to individual packets and miniature bottles that can be added to delivery orders. Those have temporarily replaced many of the five-ounce versions, according to Mottolese.

It also recently announced a new touch-free dispenser, made by the smart home appliances company Simple Human. The contactless dispenser should help restaurants, cafeterias and other food sellers reintroduce condiments to dining rooms, said Mottolese.

McCormick, which also owns the hot sauce category leader Frank's RedHot, has its own plan to increase Cholula's reach.

It can negotiate more shelf space on grocery shelves, try to increase the brand's e-commerce sales, and double down on those restaurant partnerships.

Another possibility: Going beyond hot sauce.

"One of the things that we've been able to do with Frank's is extend it beyond hot sauce," said Kurzius. McCormick has launched Frank's frozen buffalo wings, among other things. "We can do the same with Cholula," Kurzius said. "There are a lot of opportunities to extend this brand."

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