Can Diamond Do for Pringles What It Did for Pop Secret?

Nut Company Poised to Become the No. 2 Player in the Snacks Category Following Acquisition

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Long known for nuts, San Francisco-based Diamond Foods is poised to become an all-around snacks powerhouse with yesterday's announcement of a $2.35 billion deal to acquire Pringles from Procter & Gamble.

It's a big leap for a company founded by California walnut growers a century ago -- but one that has been in the making since 2008, went it got into the popcorn business with its acquisition of Pop Secret from General Mills. The marketer followed that last year with the acquisition of Kettle Foods, maker of the Kettle potato chip brand, a premium niche player in the chip market. But Pringles is its biggest bet yet. The deal, expected to close at the end of the year if approved by regulators and shareholders, will triple the size of Diamond's snacks business and vault it to No. 2 in the global sweet and savory snacks category behind PepsiCo, owner of Frito-Lay, according to analyst firm D.A. Davidson & Co.

"This is a transformative deal," D.A. Davidson said in a research bulletin, noting that Diamond's international business will jump from 20% of sales to 49%. "Pringles brings scale in markets that matter and should provide the opportunity for Diamond's existing portfolio."

Janney analyst Mitchell B. Pinheiro said: "It's generally a good thing when a food company buys a food asset from a nonfood company" because "so often times these food brands, they are a little neglected."

But the acquisition will come with challenges, for sure. In the U.S., Frito-Lay has a large lead with nearly 60% of the market with brands such as Lay's and Ruffles, whose sales grew by 3.3% and 11.3%, respectively, from 2009, according to SymphonyIRI data cited by Mintel. Pringles, meantime, ended 2010 on a down note with sales dropping by 4.3% and market share declining from 8.7% to 8%. Recent line extensions such as Pringles Multigrain have posted decent sales gains, but the increases have come at the expense of flagship brand, Mintel noted in a recent report.

Still, Diamond executives noted that Pringles sales have been trending up as of late across the globe, thanks in part to increased brand investment of roughly $20 million in fiscal 2011. "P&G has actually increased their advertising level in 2011 vs. 2010, which will be consistent with our disposition out the gate, which will be to invest in the brand," Diamond CEO Michael Mendes said on a call with analysts. In 2010, P&G shoveled $30.9 million in measured media spending against the brand in the U.S. -- including $12.9 million behind the new multigrain line -- up from $27.7 million the year before and $8.7 million in 2008, according to Kantar Media.

Diamond spent $8.3 million in measured media on its brands in 2010, which include Diamond almonds and walnuts, Emerald nuts, Kettle and Pop Secret, according to Kantar. The marketer's agency is Deutsch, Los Angeles. Pringles is currently handled by WPP's Grey Global Group, New York, with help from siblings MediaCom, New York, on communications planning and Possible Worldwide, Cincinnati, on digital.

Diamond executives did not outline specific marketing plans, but said Pringles will bring a younger customer base compared with existing brands. The acquisition is "going to be beneficial to our product line to really get our arm around that demographic," Mr. Mendes said. At the same time, executives expect greater penetration at convenience stores, where Pringles has more presence than Diamond brands. "We would like to expand that and at the same time enter with many of our products in that same area, so we will be concentrating more in that segment," Mr. Mendes said. The acquisition also brings Diamond a bigger international footprint. Pringles is sold in more than 140 countries, while Diamond operates in roughly 100.

D.A. Davidson said it expects Diamond to follow the game plan it used for Pop Secret, which was to "take a mature orphan brand and lever it though greater marketing and distribution." Under Diamond, measured media spending on the popcorn more than tripled from 2008 to 2010 to $4.1 million. The brand gained a full point in market share to 15.7% in 2010, while most major competitors lost ground, including market leader ConAgra whose brands including Orville Redenbacher and Act II dropped from 40.4% share to 38.5%, according to Mintel.

But in the U.S., Diamond could be battling headwinds in the chips category, which shows signs of softening. "Chip sales did really well during the recession ... as consumers were eating out less and at home more," said Bill Patterson, a Mintel analyst. But as the economy improves, the category is expected to grow by only low-single digits, compared with its recent peak of 11.8% in 2009.

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