Frito-Lay's Dips

? How would you characterize the dip category in general?

Dips are a complementary product; they are served along with chips, crackers, or raw
vegetables. The market for dips is highly fragmented and difficult to measure. More
than 80% of all dips are accounted for by supermarkets, with a total dip retail dollar
sales volume of $620 million (in 1985).

The dip category became more popular in late 1983 and early 1984, an explanation
for this increase is the growing popularity of Mexican food, including nachos, which
stimulated the trial and acceptance of Mexican-style dips. Even though the market for
dips is large, it is estimated that about 20% of all dip volume consumed by
households in the U.S. is homemade. Also many consumers use refrigerated salad
dressings for dips, especially for vegetables, which can be considered the main dip
substitute.

? How might the dip category be segmented?

The main segments in the dip market are the "chip dip" category and the "vegetable
dip" category. The total dip market is divided in two product types, segmented on its
usage; prepared dips (2/3 of total) and dip mixes for at-home preparation (1/3 of
total). More than half of the prepared dips sold in supermarkets require refrigeration,
and the remaining 45% are "shelf-stable", which means that they are packaged in
metal cans, don't require refrigeration and can be placed anywhere in the
supermarket. Dips are segmented in four different flavor categories: sour cream-
based dips (50%); cheese-based dips (25%); bean and picante dips (10%); and cream
cheese-based dips (15%).

? What is Frito-Lay's competitive position within the segments it pursues?

Frito-Lay is the major competitor in shelf-stable dips; with a total market share of
21.77%. They carry a highly profitable product line and had phenomenal sales growth
between 1981($30M) and 1985 ($87M).
In the last two years (1984 and 1985) however, competitive activity accelerated; well-
financed companies began to pursue the dip market (e.g. Campbell Soup and Lipton),
numerous new products were introduced and advertising expenditures increased by
nearly 600% (1984-1986).

The major competitors in the prepared dips category are Kraft (mainly cheese dips),
Borden, a large number of regional dairies, and numerous store brands. It is estimated
that 35% of refrigerated salad dressing volume is used for dips; the competition in this
area includes brands such as Marie's, Bob's Big Boy, Marzetti's, Walden Farms, and a
few local brands in different areas of the country.

Frito-Lay established their competitive advantage in the dip market because of that
they are the nationally recognized leader in the manufacture of salty snack foods.
Since dips are most frequently used with salty snacks, such as potato ships and corn
chips, Frito-Lay's distinctive competency is the distribution and location near the salty
snacks.

? What sales volume and market share(s) will be required of the dip line to preserve
its profit contribution given budgeted promotion expenses?

Sales in 1985
Profit contribution in 1985
Total fixed costs in 1986
Advertising and merchandising
General and administrative overhead costs = $
=
=$
=$
= $ 87,336,000
10.3 %
11,300,510
6,527,000
4,728,510
1986 sales requirement = = $ 109,713,757.30; increase 1985 ? 1986 = = 25.62 %

? What are the pros/cons of focusing attention on the "chip dip" segment?

+ Frito-Lay already has a strong competitive position in the chip dip market, and the
dips complement their existing product-lines (salty snacks).
+ There's a major opportunity in the chip dip segment to build penetration: research
indicated that only 20% of chips were currently eaten with dips, and that only 45% of
the all U.S. households used dips (1985) whereas 97% used salty snacks.
+ The chip dip is the larger segment (67%).
+ The frequency of shelf-stable dips purchases can be increased through promotion.
+ Increased competitive activity; a lot of new styles of dips had been introduced
since 1983.
+ Frito-Lay didn't aggressively promote their dips yet.
+ Frito-Lay could spin off other products from its sour cream-based dip.

- Increased competitive activity; Kraft will be introducing additional products that

will compete with Frito-Lays dips. For this reason it will be difficult enough to hold
their current position in the market.
- It requires a lot of effort and expenses to increase penetration and/or increase
purchasing frequency.
- Frito-Lay's recent sales growth in dips was due to new products, it is not clear that
further product line extension could produce continued growth.
- Significant potential for cannibalization of existing cheese dips in this segment.
- The new sour cream dip doesn't fit in the existing Mexican-style dips; it is more
suitable for vegetable dipping.
- Research indicated that consumers are becoming concerned about the nutritional
value and salt content of prepared foods; most likely consumers will prefer vegetables
over chips in the future.

? What are the pros/cons of focusing attention on the "vegetable dip" segment?

+ Frito-Lay will have a ?bridge' to this segment, because of their sour cream-based
French union dip.
+ Research showed that 33% of dip sales were linked to vegetables.
+ Only ¼ of vegetable dipping is accounted for by refrigerated salad dressings. The
remainder was accounted for by dip mixes and refrigerated dips, and no major
competitors have a strong competitive position in the market.
+ Trend data indicated that consumers are becoming concerned about the
nutritional value and salt content of prepared foods; this will affect their preference
for vegetables and salty snacks and, as a result, dips.
+ Frito-Lay didn't start promoting their sour cream-based dip for vegetable dipping
yet.
+ No competitor introduced a shelf-stable dip for vegetables yet; Frito-Lay can take
the opportunity to pioneer in this segment.
+ A cost analysis indicated that the gross margins would be largely unaffected.

- Lately well-financed companies began to aggressively pursue the vegetable dip

market and introduced new products and product lines in this segment.
- Research showed that supermarkets prefer that the dips are handled by their
produce warehouse; this doesn't favor Frito-Lay's front-door delivery system and
might require a new sales approach.
- Estimated selling expenses will increase to 25% of sales (current is 22.7%).
- Frito-Lay's dip will lose some economies in advertising and merchandising.
- New product-lines (added flavors) will be necessary to compete in this segment,
this results in higher R&D expenses and promotional support.
- Vegetable dip consumers may not like the shelf-stable dip.

Background
In 1985 dip popularity had rose in the past years as a result of the convenience of use,
multiple users, and popular trends in the United States. Dips are typically used as an
appetizer, snack, or accompaniment to a meal.
Dips can be served along with chips, crackers, or raw vegetables. The market for dips
is highly fragmented and difficult to measure, although 80% of dip sales are
accounted for by supermarkets. Industry estimates state that total dip retail dollar
sales volume through supermarkets was $620 million in 1985. Two-thirds of this dollar
volume was captured by prepared dips; the other one third was accounted for by dip
mixes for at home preparation. The major competitors in this segment were Kraft,
Borden, a large number of regional dairies, and numerous store brands.
Exhibit 1 on page 119 shows a breakdown of the $620 million sales of dips in
supermarkets by product type. Prepared Dips accounts for $420 million of
supermarket dip sales while Dip Bases only account for $2oo million of the market.
Under the Prepared Dips category there is the Shelf-Stable Dips ($185 million) and
Refrigerated Dips ($185 million). Frito-Lay accounts for $135million of the Shelf Stable
Dip category and competes directly with all others in that category which amount to a
total of $50 million.
During a planning meeting at Frito-Lay Inc., a division of PepsiCo Inc. the issue was
raised about where and how Frito Lay’s Dips could be developed further. One of the
two viewpoints expressed was that the dip line should be more aggressively promoted
in its present market segment that had been broadly defined as the “chip dip”
category. The other view point was that Frito-Lay should also actively pursue the
“vegetable dip” category. This new dip was the first sour-cream based dip introduced
by Frito Lay. Many people thought that this dip could provide a bridge into the
vegetable dip category.

Recommendations
• Frito-Lays should focus attention on the chip dip segment as opposed to the
vegetable segment.
• The sour cream dip should be positioned as a chip dip as it is the most popular.
Rationale
• Being that Frito-Lays competes almost exclusively in the chip market it would not
make sense for the brand to try to make its way into the vegetable market to
compete with salad dressings along with other dip companies.
• As exhibit 5 states in the packet the sour cream potentials for the three estimates
are: for chips, $207.7mm, 147.4mm, and 46.5mm; for vegetables, $102.3mm,
172.6mm, and 9.3mm.
• From an average of all three estimates as each is just as likely as the others: chips
are projected at $133.86mm, and vegetables at $94.73mm.
• Usage segmentation is also separated at 67% for chips and 33% for vegetables,
giving more potential in the chip market according to exhibit 1.
• According the case 35% of refrigerated salad dressing is used for vegetables,
adding to competition.
• As shown in exhibit 4 the profit % of sour cream being 35.6% makes it a good
candidate to cannibalize some of the other Frito-Lays dips in the chip market.

Problem Statement
We are currently faced with the dilemma of how to market or Frito-lay's line of dips.
Should we categorize our dips only in the "chip and dip" category or should we
actively pursue the "vegetable dip" category as well? With the significant raise in
sales growth from 1981- 1985 with an increase of $57 million dollars, it is obvious that
the Frito-Lay's Dips are a highly profitable product line. With the upcoming budgets
for 1986 for both sales and advertising media, we are troubled with the possibilities
for our company to misrepresent our product and potentially lose revenue if we make
the mistake of not furthering the development of the vegetable dip market.
Moreover, at this particular time, it is crucial that we truly identify a well thought out
plan and execute it efficiently to the best of our ability. By deciphering between which
market will have the most promising benefits to our company.

Analysis
Frito-Lay is given the opportunity to profit from their most recent powerful position in
the dip market by expanding their product line to include vegetable dips that will
harmonize their successful cheese and Mexican dip lines. With the accurate launch
and positioning, Frito-Lay, Inc. could penetrate and venture into a large and
undefined, yet extremely feasible, vegetable dip market. We can opt to produce a
new product line consisting of vegetable dips. The more products we have, the more
acknowledgment we could receive, and the profits will highly increase.
We switched our marketing strategy to consumer promotions in 1985, such as product
sampling and coupons to generate "trial" of new products that could raise awareness
of our new products that we are offering that compliments are established line of salty
snacks. They have already developed an understanding for the industry as well as the
technological "know-how" of survival within it. Frito-Lay inc. has flat lined its
expansion and there is no real growth in our current industry and we are risking the
chance of incurring decreased profits if we stay where we are.
Even though the phenomenon of cheese dips spread insanely fast from $5 million
dollars in 1983 (when it was introduced), to $55 million in the following year, and then
a decrease in 1985 to $48 million dollars and is forecasted at the same sales for
1986. Our company is facing a fully saturated market for cheese dips. The market for
shelf-stable sour cream dip is not near being at its capacity yet and as of right now
there are no competitors that have marketed self-stable sour cream dips, which
means that great opportunities exist for our company. We have forecasted our first
years of sales in 1986 at $10 million dollars when we execute our launch. Sour cream-
based prepared dips and dip mixes account for approximately 50% of the total dip
sales in the salty snack segment. These sour cream based dips are the majority
elements that are used for vegetable dipping. Because the vegetable dip market has
not been fully developed and there are very few direct competitors with a competitive
position besides salad dressing and dip mixes, the unit gross margin is a little bit
lower than cheese dips and Mexican dips and its' total gross margin is almost the
same. The vegetable dip market is estimated at $23 million in sales per year and the
gross margin on the sour cream dip will be a healthy 45%, which makes it very
attainable to create a cash cow product line. The overall potential of the vegetable dip
market is outstanding and it makes it very easy to want to tap into this segment and
make a large profit. There isn't a shelf-stable sour cream-based dip offered by anyone
and consumers are willing to buy these shelf-stable dips.
Our Advertising and merchandising expenditures will naturally increase as the
demand for dips increases as well, considering the in 1983 it was $447,800 an in 1985
it was $2,350,196 a 19% increase. In 1986 it jumped to 49% increase in expenses to
$4,728,510. With launching a vegetable dip, there would be an increase in expenses
because these dips will have to be positioned in another area of the store making it
separate form the salty snacks that accompany the dip. We would need to make
different ways to advertise and think of new ways to showcase the product without
taking up floor space and yet increasing shelf space.
Frito-Lay uses a "front-door store" delivery system that is suited the 270,000 non-
chain outlets. The supermarkets, which are chain-store accounts, were not favored by
the front-door store delivery system. A Frito-Lay region or division manager always
required participating. This is necessary because the chain-store buyers responsible
for the outlets in the chain also approve in-store merchandising plans as well. This
service is essential and a crucial part of how we handle are sales. Product placement
could make or break merchandise. Since we do have dips that do not need to be
refrigerated we have the luxury to put them in the dry storage isles next to our
complimenting products. With the vegetable dips, it would be that more convenient
for our consumer to be able to grab it and go, instead of wondering aimlessly around
the supermarket. It's considered a win-win situation for both our consumers and us.

Recommendation
All of these statistics reconfirm my recommendation of tapping into the vegetable
dip segment because without any major competitors competing in this market yet and
also with the saturation of cheese dips, we have allowed our company to resuscitate
from our flat lining sales and break into the billion dollar range. Frito Lay, Inc. should
elect to extend its sales effort into the sour cream vegetable dip market. To give us an
opportunity to broaden our options and increase our revenue