Diamond still in the rough

by Monica Watrous
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Diamond is taking a crack in new categories of ready-to-eat popcorn and salad toppings.

 

SAN FRANCISCO — Central to multiyear turnaround plans at Diamond Foods, Inc. is a strong innovation pipeline positioned to deliver on top consumer trends across the company’s four brands. New products from the Diamond of California and Emerald nut brands tap into demand for convenient protein, clean label and gluten-free products. Kettle Brand’s portfolio of potato chips and ready-to-eat popcorn benefits from natural and non-G.M.O. positioning with on-trend flavors such as sriracha and maple bacon that appeal to millennial consumers. And Pop Secret recently entered the rising ready-to-eat popcorn category with family-friendly merchandising.

“We are presently competing with products addressing the trends in convenient protein, natural, organic, gluten-free and non-G.M.O,” said Brian Driscoll, president and chief executive officer, during a Sept. 25 call with financial analysts to discuss fiscal year performance. “We plan to deepen our participation through new product innovation and via acquisition if the right opportunity presents itself.”

For the fiscal year ended July 31, the company widened its loss to $164,702,000, which compared with $159,911,000 for the previous year.

Net sales for the year increased slightly to $865,207,000 from $864,012,000 the year before.

Distribution and market share gains drove growth in both nut and snack segments during Diamond’s fourth quarter, but cost inflation, particularly tree nut cost increases and higher logistics expenses, continued to pressure the company. Diamond said it has taken measures to counter the higher costs and improve margins going forward, which include price increases in walnut and almond products.

“Overall, we’re pleased with our top-line results in the fourth quarter and the continued progress against our multi-year turnaround plan,” Mr. Driscoll said. “Our top-line growth of 9.6% was driven by 11.1% growth in our snack business and 7.5% growth in our nut business. This growth was achieved primarily as a result of greater market penetration and merchandising effectiveness as well as higher net price realization.

“With that being said, we are disappointed with our gross margin performance in the fourth quarter.”

The company reported a loss of $1,856,000 for the quarter, a significant improvement over a loss of $143,741,000 in the comparable quarter.

Net sales for the quarter advanced to $219,070,000 from $199,801,000.

“I’m encouraged with the progress that we’ve made to date on our turnaround effort, and I’m excited about the robust opportunities ahead of us, but there is more work to be done,” Mr. Driscoll said.

Cracking into new categories

In the snacks segment, sales increased 11% for the quarter and 8.2% for the fiscal year. Pop Secret led the microwave popcorn category during the most recent 12-week period.

“This strong performance was achieved through good quality merchandising support, improved shelf positioning and a growing distribution base,” Mr. Driscoll said. “We believe that this formula can continue to help us deliver good growth on this brand despite weakness in the category.”

Diamond recently launched Pop Secret ready-to-eat popcorn with a Nickelodeon Teenage Mutant Ninja Turtle license. Varieties include kettle corn, home-style butter, salted and white cheddar.

“After just a few weeks, this launch appears to be off to a solid start, driven by a fun differentiated positioning, and a simple and transparent ingredient panel,” Mr. Driscoll said. “As we move into (fiscal year 2015), we believe Pop Secret can continue to bring this fun positioning and permissibility into other snack segments. At the same time, we will continue to drive per share growth in the microwave category, as we have the past two years, through innovation and increased media investment.”

Under the Kettle brand, Diamond is expanding the potato chips line with new pepperoncini, roasted garlic and red curry flavors.

“We believe that Kettle’s big authentic and great tasting flavor offerings, combined with the Non-GMO Project verifications we have, are central to the appeal the brand has with millennial consumers,” Mr. Driscoll said. “And will only grow in importance over time. Based on this insight, we’ve launched or will be launching authentic Kettle flavors into ready-to-eat popcorn, which appears to be off to a good start, oven fries, and snack nuts in this fiscal year.”

The company is phasing out its unprofitable canister line and capitalizing on growth in convenient package options.

 

In the nuts segment, sales climbed 7.5% for the quarter but dropped 8.1% for the fiscal year. Driving growth in the segment was the Emerald 100-calorie pack platform, capitalizing on rising consumer demand for protein-rich snacks.

“To strengthen our participation in the convenient protein trend, beginning in January, we will be transitioning our canister line into standup re-sealable bags with simple and transparent ingredient panels,” Mr. Driscoll said. “Positive consumer feedback and major customer support on this new positioning indicate that we are on the right path, and the brand will benefit greatly from our company experience and scale in tree nuts and seasonings.”

The company also plans to carry the Diamond of California brand into new categories with innovation in the baking aisle and beyond.

“I’m not ready yet to reveal what categories we’re thinking about,” Mr. Driscoll said. “I don’t want to give the keys to the kingdom to our competition, but we’re thinking about along the lines of baking, produce, breakfast, as the areas that are most attractive at this stage.”
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