Workers package cashews at Diamond Foods in Stockton.
Workers package cashews at Diamond Foods in Stockton. (Gina Halferty - Staff)
STOCKTON - THERE ARE NO Oompa Loompas or chocolate rivers, but Diamond Foods Inc.'s Willy Wonka-like production facility is filled with awe-inspiring wonders — monstrous machines in constant motion, large silos that can store more than 50 million pounds of walnuts and mound after mound of ground-up nut shells that resemble sand dunes.

But the biggest corporate wonder for the Stockton-based nut company didn't start in its 550,000-square-foot production facility — not even in the nut glazing room that's off limits to outsiders.

Rather, two moves the upper brass made in the span of just eight months starting in 2004 — moving into the snack food market and going public — revamped the very nature of Diamond's business. For a company that had been cruising along at the top of its game as a supplier of walnuts for more than 90 years, some thought the move at the time was a little, well, nuts.

Powered by a high-cost campaign to get its newest brand name, Emerald Nuts, in the public eye, the company completely — and quickly — reshaped itself.

"I think there was some danger whether it would work or not at the beginning, because they were entering a new area where they would have zero percent market share," said Barry Sine, an analyst with financial service firm Oppenheimer & Co. "It was aggressive moves they were making, but logical."

Since its founding in 1912, Diamond Foods, which is not related to Blue Diamond Almonds, was primarily about walnuts — halved, chopped, finely diced, in-shell, raw or glazed.


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Diamond was the top player in the culinary nut and in-shell market, holding more than 35 percent of the overall market — more than four times higher than the next largest company, Planters nuts, according to research group Information Resources Inc.

But Michael Mendes, 43, Diamond's president and chief executive, felt the company needed a spark. He and company officials believed the culinary and in-shell markets were slowing and the time was ripe to position Diamond Foods for a new opportunity. With fewer Americans cooking from scratch and instead looking for food-on-the-run options, Diamond officials decided to change with the times.

In August 2004, Mendes announced the company would take a swing at the snack food market and simultaneously launched its newest brand name, Emerald Nuts.

"When I became CEO 10 years ago, we were doing about $190 million in sales. We were pretty much only selling walnuts in the baking area," Mendes said.

Differnt demands

But the snack food market requires a much more aggressive marketing and branding approach than the culinary market.

The product demographics are also very different. Culinary nuts are typically used for cooking and are found in the grocery store baking and produce aisles. The target demographic is older, usually age 45 and up.

Snack nuts, typically found in grocery store aisles next to potato chips, candy and popcorn, target a much younger audience — those who want something to snack on between meals but who also remain health conscious.

Also, the Emerald line required Diamond to bring in eight new types of nuts, including peanuts, pecans and almonds.

"Even though we were only doing one nut, we felt we had the infrastructure in place to launch an entire line of snack nuts," Mendes said.

The snack nut market is about $1.5 billion, with annual revenue growth in the 7 to 8 percent range, Sine wrote in a research report for Oppenheimer.

Two ofthe line’s products -- Pecan Pie glazedpecans and chipotle oven roastedpeanuts -- are produced at Diamond Foods in Stockton.
Two of the line's products -- Pecan Pie glazed pecans and chipotle oven roasted peanuts -- are produced at Diamond Foods in Stockton. (Gina Halferty - Staff)
In contrast, the in-shell and culinary product market segment is less than $500 million annually with slow growth potential, the report said.

"The culinary business of selling walnuts to grandmothers making brownies is nice, but the question really is, 'How much is that going to grow?'" Sine said. "Selling snack nuts to athletes running in a 10K who are looking to eat healthier is a business that shows much greater potential."

Still, Diamond officials knew aggressive action would be needed to enter the snack market. They decided the only way to do it without risking extreme debt was to access as much capital as possible.

In March 2005, the company converted to a corporation from a walnut growers' cooperative owned by more than 1,700 farmers with orchards in the Central Valley. In July 2005, Diamond completed an initial public offering at $17 per share. The stock now trades in the $18 range.

In addition to the $102 million raised from the IPO, the company also felt comfortable that cash flow from the walnut line was healthy enough to allow it to build a snack division quickly.

Diamond's corporate turnaround was executed quickly, which may seem wildly aggressive, but it was actually very calculated.

It had to be if Diamond wanted to put a dent in a market dominated for decades by Planters, owned by Kraft Foods Inc.

"I think we are aggressive, but we also spend a great deal of time keeping focus," Mendes said. "The companies that have trouble when they do something new are ones that feel they need to try to do everything they conjure up. We put our list of things we need to do through a tough filter process."

The company also tries to anticipate market wants, he said. New ideas, such as its recently introduced line of wasabi-flavored peanuts, aren't created in a vacuum, he said. The flavors were developed with help from Foster City-based Mattson.

"If it's 'me' research and not 'we' research that drives us, then it has not been well thought out, and we'd be in trouble," Mendes said.

Diamond's market capitalization is about $290 million, compared with about $54 billion for Kraft. And Planters owns about a 32 percent market share of the snack nut segment, while Emerald had 4 percent in 2006, according to IRI.

Diamond has an uphill battle if it plans to take on Planters in a one-on-one battle.

Instead, Diamond will likely try to take the market share away from the 38 percent of the market comprised of small independent players and generic in-store labels in the snack nut industry with little branding strength. If consumers who typically buy labels that most people haven't heard of convert to Emerald, then Diamond can penetrate the market more without having to worry about Planters.

"If Kraft were to set its sights on Emerald, it would not be a fair fight," Sine's report said. "However, Kraft is such a behemoth, with so many brands in so many markets globally, that it does not appear likely to direct its full attention to the snack nuts category."

For the first two years, Diamond's goal was to bring as much brand value as possible to its Emerald name.

"You either have a brand people recognize, or you don't," Mendes said. "So in order to build a substantial consumer franchise, you need to work at getting your name out there aggressively from the beginning. We wanted people to see the green-type packaging and the ergonomically shaped canister and immediately recognize it as Emerald."

No holds barred

The company didn't hold back. It sponsored marathons in New York, Boston, Chicago and Los Angeles, as well as the Emerald Nuts Across the Bay 12K race in San Francisco. In December, it sponsored the Emerald Bowl college football game in San Francisco.

Diamond also ran ads during major sporting events, including the Olympics, the World Series and the last three Super Bowls.

The first advertising blitz revolved around a clever "EN" campaign that featured characters — such as "Egomaniacal Normans," or "Egyptian Navigators" — playing on Emerald Nuts' initials. San Francisco-based Goodby, Silverstein & Partners, creators of the successful "Got Milk?" campaign, headed the advertising effort.

Officials felt the ads helped bring name recognition to the Emerald brand, so the company's latest campaign, included in Super Bowl ads last month, focuses on what the Emerald Nut line has to offer.

Using singer/entertainer Robert Goulet, the campaign pushes nuts as a source of energy when people need a boost.

Even though the Super Bowl spot cost $86,000 per second, the company felt it would pay off.

"We realize that the Super Bowl costs a lot of money to advertise on, but it is also a rare opportunity to get your product's name out to a huge audience worldwide immediately," said Andrew Burke, Diamond Foods' vice president of marketing.

The company saw 68 percent increases in retail sales in the first 10 days after the Super Bowl, and Web site traffic since the Super Bowl ad tripled in comparison with the same time last year, the company reported. Also, views of its Super Bowl commercial exceeded 1 million on the video-sharing site YouTube.com.

"The Super Bowl is great because it is one of the few events where people actually watch and care about the ads," Mendes said.

Between the 2004 and 2006 fiscal years, the company spent about $55 million on advertising just to launch the Emerald brand.

With brand awareness spreading, the company in 2006 added a management team comprised of a "who's who of marketing," Sine's report said.

"With its entry into the snack nuts business, the company has built a team of consumer marketing professionals with experience at some of the top-consumer marketing campaigns in the world such as PepsiCo, Dole, Frito-Lay, Gallo and Kraft," the report said.

The company hopes such an experienced team, with its expertise in marketing products directly to consumers, will help build brand recognition.

Acquisition

In perhaps the company's most striking symbol of its eagerness to penetrate the snack nut market, in May the company acquired Harmony Foods Corp. for $18 million. Diamond acquired Harmony's trail mixes, which are sold in snack packages as well as self-serve bins in the produce sections of grocery stores. More importantly, it also picks up Harmony's 187,000-square-foot plant in Indiana that will allow greater distribution opportunities nationwide.

In fiscal year 2006, Diamond's sales grew 3 percent to $477.2 million. The Emerald snack line had sales of $40.7 million, up 89 percent from $21.5 million in 2005. The culinary line grew more than 15 percent from $164 million in 2005 to $189.4 million in 2006. Its in-shell business grew about 5 percent in 2006 year-over-year to $44.7 million.

Only the ingredient and food service segment dropped in 2006 from $107 million to about $84.5 million, a 21 percent decrease.

Diamond's ingredient and food service segment provides nuts to restaurant chains and packaged food companies. Diamond provides the glazed walnuts used on McDonald's salads and the peanuts used in some Panda Express dishes.

While Diamond officials focus on driving the company's success through sponsorships and advertising, they also focus on details that please the customer, as well.

For example, Emerald Nuts' green canisters fit in automobile cup holders and the lids measure out the recommended daily 1.5 ounces of nuts. Its newest product line of flavored oven-roasted peanuts is advertised as "napkin free," since the seasonings are baked into the nuts and don't come off on hands and clothes.

In two years, the company's line has grown from 14 to 23 products, which can be found in 60,000 retail locations.

Diamond has about 825 year-round employees nationwide, with the majority of them in Stockton. It also has about 15 administrative and executive employees who work out of a San Francisco office.

Sine, who has a "buy" rating on Diamond shares, believes all the company's moves will continue to pay off. He predicted the company will see 12 percent revenue growth in 2007 and 8 percent in 2008. Of the $57 million increase in revenue, about 70 percent will come from the company's snack food segment, the report forecasted.

Mendes said the nuts are falling exactly as he envisioned.

"We are a company that takes calculated risks, and we recognized staying still is a risk," he said. "Our feeling is if we are not moving, we are losing ground as a company."

Contact David Morrill at (925) 416-4805 or dmorrill@angnewspapers.com.