A Tale of Two Hot Sauces: Spicing Up Diversification

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.

Huy Fong, a relatively new entrant to the category, was founded by Vietnamese immigrant David Tran in Los Angeles in 1980 and rose to prominence with its Sriracha sauce, a complex combination of spicy, garlicky, and sweet flavor notes — a condiment Tran introduced to the U.S. Also called “rooster sauce,” based on the Huy Fong logo (a symbol of Tran’s zodiac sign), sales grew rapidly as the product’s hot-sweet taste resonated with contemporary palates. By 2020, sales were over $130 million, and the business was valued at $1 billion. Huy Fong helped meet rising demand with a long-term arrangement with Underwood Ranches, its single, local source of the jalapeño peppers essential to the product — one of multiple critical errors the company would make.

A Story of Diversification

Given Huy Fong’s rapid rise on the back of its Sriracha sauce, it may be surprising to hear that the product disappeared off shelves in the early 2020s (with ongoing uncertainty about its availability), essentially ceding the Sriracha market to rivals including McIlhenny, the current leader. The simple explanation is diversification strategy — or the smart moves McIlhenny and others made in the face of Huy Fong’s misguided efforts.

These key dimensions of diversification determined these businesses’ highly different fates.

Supply Chain

In 2016, Huy Fong sought to diversify its pepper sources, largely due to a disagreement with and lawsuit against Underwood, its sole supplier until then, regarding overpayment for peppers. With Underwood no longer a partner, the business contracted with pepper suppliers in California, New Mexico, and Mexico. But over the period from 2020 to 2022, the new suppliers faced climate challenges that severely limited their ability to produce.

These supply chain issues compromised Huy Fong’s production capacity, as outlined in the company’s communications with key customers. Meanwhile, multiple parties with better access to peppers, including Underwood, entered the hot sauce market with a Sriracha product. Not only was the formulation unprotected, but Huy Fong’s branding focus on the name Sriracha, a geographic term, limited the trademark protection, inadvertently creating opportunities for others in the hot-sauce supply chain.

When Huy Fong ceased production of its Sriracha sauce, it began to lose all associated market share, yet McIlhenny’s multi-sourcing strategy positioned it well to fill the market shortage. The business strategically sourced peppers and other inputs from multiple continents to avoid the very challenges that Huy Fong had overlooked — such as the vagaries of local climates. By October 2023, Tabasco-branded Sriracha was the market leader.

Products, Customers, and Channel

Huy Fong put all its proverbial eggs in one basket by relying almost solely on its flagship Sriracha sauce for revenue, running the risk of losing business if and when customer tastes shifted.

McIlhenny, meanwhile, steadily built a portfolio of hot sauce products, extending the brand to nine sauces including the original. “We need to branch out with the brand,” said Harold Osborn, CEO and fifth-generation family member. That conferred key advantages to the business: The company could cater to multiple segments of customers with different taste preferences, such as with jalapeño- and chipotle-pepper-based sauces. Unlike Huy Fong, McIlhenny was less susceptible to ingredient shortages and could ramp up production of alternative products in the face of supply chain issues. Moreover, if customers couldn’t find a given Tabasco product on the shelf, they could try a different one, potentially expanding growth and profits.

Importantly, McIlhenny diversified to selling wholesale products as inputs as well, driving more value while reducing risk. McIlhenny made the smart decision to diversify from B2C to B2B products, selling peppers and other inputs to other food makers. Huy Fong, too, provided Sriracha to fast-food and other restaurants, but it wasn’t sufficient to offset its supply chain challenges and limited product selection.

Diversification on key dimensions drives value while reducing risk. Supply chain, products, customers, and channel are elements of diversification that led to McIllhenny’s rise alongside Huy Fong’s decline. Diversification is critical, but it has to be done right. Huy Fong limited its own success by primarily focusing on one product and demonstrating a “too little, too late” approach by waiting too long to diversify its supply chain. Lack of diversification on these fronts failed to protect Huy Fung against the possibility of a supplier becoming a competitor.

The bottom line: If you’re aiming for long-term success, diversification is a must. We hope the ideas here help you strategically diversify your way to the best of times for your business.