Diamond Foods challenged by walnut supply and Emerald relaunch

by Monica Watrous
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SAN FRANCISCO – Relaunching its Emerald brand and rebuilding its walnut supply are the two most significant challenges for Diamond Foods, Inc. as it moves into the fourth quarter of fiscal 2013.

Transformation efforts for the Emerald nuts line have included improving net price realization, eliminating unprofitable s.k.u.s (stock-keeping units) and transitioning production to its Stockton (Calif.) plant, but the critical next step of relaunching remains, the company said during a June 10 call with financial analysts to discuss third-quarter earnings.

“With the development of a new and impactful brand-positioning approach, new packaging, new offerings and a pricing architecture that is not discounting-dependent, we are gearing up for a relaunch this summer,” said Brian Driscoll, president and chief executive officer. “It is difficult to predict the timing of Emerald change in trajectory; however, we have now lapped most of the significant promotional spending and will begin cycling our s.k.u. reduction work in November. All told, while challenges remain, we believe the Emerald relaunch is promising.”

The Emerald brand strategy is part of a larger business improvement process to revitalize the company following an accounting scandal that led to the ouster of its chief executive officer and the restatement of earnings for a period covering more than two years. An earlier focus on driving growth in the Emerald nuts business through heavy promotional spending and s.k.u. proliferation “significantly impacted the financial contribution of the brand,” Mr. Driscoll said in November, when the company revealed plans to eliminate more than 170 Emerald s.k.u.s, which represent about 65% of the brand’s total s.k.u.s and about 20% of the brand’s revenue.

With regards to its walnut supply, Diamond Foods expects to continue its contracting process with growers through the end of July.

“We are seeing positive signs from the grower community, but it is difficult at this stage to determine if these positive sentiments will translate into an increase in supply in the short term,” Mr. Driscoll said. “That said, the work we have done to provide contract terms, services and pricing to growers that are competitive with alternatives they may have appears to be resonating. … As I’ve indicated before, it will take time to rebuild our position, but doing so can produce attractive long-term economic benefits to Diamond.”

Improving its supply position would poise Diamond Foods to develop product innovations outside of its core culinary line. Cost savings initiatives have allowed the company to invest more in research and development, but Diamond’s “new product pipeline is not ready for prime time yet,” Mr. Driscoll said.

For its Kettle brand, the company will release new varieties in August with plans for more robust innovation in fiscal 2014.

“We will continue to refresh the line, which is what this flavor variety innovation does,” Mr. Driscoll said. “And, believe that the steps we’re taking will begin to set the brand in the direction we wanted to go in as we prepare for a launch of bigger and better things in the back half of the year.”
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