When Diamond Foods announced its plans to acquire Pringles from P&G it seemed like a great move to this blog. So it comes as quite a shock that the deal is off and Kellogg's is acquiring Pringles , trying to expand its snacking line for salted foods in emerging markets as P&G , the Pringles owner continues to try and divest itself out of foods.
Delving deeper it seems that Diamond Foods was originally a walnut farmer owned co-operative as recently as 2005 in Stockton,California. A farmer co-operative is essentially about looking out for farmer (i.e. owner) interest and marketing first tries to ensure that there is good demand and prices for the farmer produce. In the process of building a market,Diamond Foods became a great market force and brand. Everyone must have thought: why not become a listed company and change over from the co-operative and enjoy stock market capitalization? Except now – instead of the farmer and maybe consumer as master of the organization- the leadership probably became a slave to shareholders and stock analyst expectations. A highly leveraged buyout plan for Pringles seemed like a great idea.
It turns out that the farmers walnut payments were shown in different years to dress up the numbers and both the CEO and CFO had to resign after an audit committee of the Diamond Foods Board discovered the irregularities. These alleged irregularities gave P&G the chance to walk out of the Diamond Foods deal and tie the knot with Kellogg's.
While everyone seems to have their own lessons from this fiasco – this blog would like to offer the following lessons for agricultural or producer co-operatives thinking of going public and changing their organizational form:
- Understand that a producer co-operative tries to maximize the owners' (producers) benefits. Marketing is first about getting the product to the market and consumed. This becomes more and more important in perishables like fruits,vegetable,milk. Even walnuts need to be consumed before they start turning rancid.
- In the process of marketing produce, co-operatives realize that branding helps realize better margins. Profits are shared with the co-operative owners at this stage.
- Going public is a great idea but everything changes – the owners change from the supply chain to shareholders and it becomes all about the stock price and performance with its usual hazards. Farmers becomes just suppliers and not owners.
A better appreciation of the above might have helped the Diamond Foods business deal better with farmer payments and the Pringles episode. Farmer co-operatives worldwide will do well to learn from Diamond Foods before they go public with the stock markets rising again. Contact StratoServe.