Diamond Foods CEO: Heavy discounting on Kettle Chips damaged its brand equity

By Elaine WATSON

- Last updated on GMT

Diamond Foods CEO: Heavy discounting on Kettle Chips damaged its brand equity
Excessive discounting on Kettle Chips has damaged its premium positioning and hit margins, bosses at brand owner Diamond Foods have admitted.

Speaking on the nuts and snack maker’s Q3, 2012 earnings call yesterday, CEO Brian Driscoll said: “This extraordinary brand ​[Kettle] continues to have potential for top-line growth and margin expansion.

“However, for Kettle US, the prior strategy to rapidly accelerate growth and mainstream penetration relied heavily on inefficient discounting. This approach to top-line growth was inconsistent with Kettle's premium positioning and was margin dilutive.”

More brand equity inspired activity and innovation with less discounting

Kettle Chips, which were the first potato chips in the US to be certified non-GMO by the non-GMO project, have “natural, authentic and premium quality credentials”, ​he added.

“We believe that this brand can grow, expand and maintain its inherent premium price positioning best by staying true to and investing into what it stands for. So… we've already begun to refine our Kettle brand marketing strategy, which features more brand equity inspired activity and innovation with less discounting.

“We've reduced our promotional spending on Kettle from last year and yet, in the most recent 12 weeks scanning period in US grocery, Kettle grew its non-promoted sales 14.9% and gained 50 basis points of market share in non-promoted retail sales dollars.”

He added: “The approach we want to take though is one that provides us with the potential of being more margin accretive and more true to what the brand stands for and not try to grow on an accelerated basis, relying on discounting to do it, because I don't think that's sustainable.”

The white space opportunity on Kettle is significant

But Diamond would also invest in innovation behind the Kettle brand, he said. “Natural savory snacks… have been expanding at a 20% growth rate as consumers continue to look for better for you snacks with a great taste profile. This is an area where the Kettle brand promise could potentially play more broadly.

“The white space opportunity on Kettle, we believe, is significant. We don't have a great presence in our single-serve offerings, and we don't have great distribution in big parts of the country.”

Chief marketing officer Andrew Burke said last year’s “high-end discounting, high-end couponing” ​had “subsidized current users and then brought the wrong households into the category and into our brand”.

He added: “So what our focus is going forward is what you'll see from us is you'll see us get much more targeted with that spend to make sure that we're bringing in the right households into the category and into the brand”.

Emerald nuts: Less is more

There will also be a strategy change for Emerald nuts, revealed Driscoll.

“Our prior focus on driving growth through heavy promotional spending and SKU proliferation significantly impacted the financial contribution of the brand.”

Meanwhile, investments in packaging and product innovation “did not translate into premium price realization and the rapid volume build never achieved acceptable scale of economies”, ​he admitted.

“Therefore, we have made a significant shift in strategy and are confronting these issues with a number of measures which include a more streamlined and differentiated portfolio positioning, which leverages our more competitively advantaged offerings like Cocoa and Vanilla Roast Almonds, Sweet and Salty Mixed Nuts and 100-calorie packs.”

The firm will also cut more than 170 SKUs “which, while representing less than 20% of the brand's revenue, comprised approximately 65% of the SKUs​”, he revealed.

“While the brand is getting smaller, our goal is for Emerald to play an important and innovative role in the category.”

Pop Secret: A standout performer

However, Pop Secret popcorn had put in a strong performance in fiscal 2012 to date, said Driscoll.

“Pop Secret is our standout performer in the first 3 quarters of fiscal 2012. This brand has delivered both greater financial contribution and has grown its market share by 220 basis points versus a year ago.

“To build on this momentum, there remain many opportunities to enhance this performance, including improved net price realization, distribution growth and expansion and increased levels of innovation.”

Financial update: Diamond has now restated accounts for 2010 and 2011

Last year, Diamond saw its shares plummet after improper accounting was revealed in its walnut business. After a three-month investigation, an audit committee found that $80m of payments to growers were unaccounted for, leading the company to remove its CEO Michael Mendes and CFO Steven Neil.

The accounting scandal was also cited as a reason for the collapse of Diamond’s $2.35bn bid for Pringles, which was snapped up by The Kellogg Company instead.

However, the company has now restated its accounts for 2010 and 2011, said Michael Murphy, acting chief financial officer.

Adjusted EBITDA for the restated fiscal 2011 was $111.5m, compared to $146.2m as previously reported and $68.2m as restated in fiscal 2010 versus $84.9m as previously reported.”

In the first three quarters of fiscal 2012, net sales were up 3.5% to $757 million, he said. “Snack sales overall were up 10%. Culinary sales were up 11%, primarily due to higher pricing. International Non-retail sales were the largest drag to the top-line performance as they were down 47.7% ​[owing to Walnut supply issues].”

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