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Frito-Lay

Summary Frito-Lay, Inc. is a division of PepsiCo, Inc. a New York-based diversified consumer goods and services firm. Other PepsiCo, Inc. divisions include Pizza Hut. Inc., Taco Bell Corporation, Pepsi Cola Company, Kentucky Fried Chicken, and PepsiCo Foods International. PepsiCo, Inc. recorded net income of $1.077 billion on net sales of $17.8 billion in 1990. Frito-Lay, Inc. is known as a worldwide leader in the manufacturing and marketing of snack chips capturing nearly 50% of all retail sales in this area. It houses well-known brands such as Lay's brand and Ruffles brand potato chips. Fritos brand corn chips, Doritos brand, Tostitos brand and Sanitas brand tortilla chips, Cheetos brand cheese-flavored snacks, and Rold Gold brand pretzels. The snack chips industry accounts for approximately 26% of the snack-food industry Doritos brand tortilla chips and Ruffles brand potato chips have the distinction of being the only snack chips worth $1 billion in retail sales in the world. Frito-Lay, Inc. accounts for 13% (half of total sales) of sales in the United States snack-food industry which is approximately worth 3.5 billion per annum. 1. Industry Analysis The snack chip industry is clearly a matured industry, but showing signs of growth. This is evidenced by the steady growth in both dollar sales as well as volume of snack chip pounds sold: (a) The snack chip industry has grown 5% since 1989 to 1990 in terms of sales. The snack chips retail market was worth $9.8biliion in 1990. (b) Since 1986 to 1990, the US bought 3.5 billion pounds of snack chips, or nearly 14 pounds per person. In 1986 snack chips per capita consumption was slightly less than 12 pounds. Frito-Lay is a major power-house in the snack chips industry. It accounted for 50% of all snack chips retail sales in 1990. Of the top ten best-selling snack chips in the United States, 8 of them are Frito-Lay brands and the top 5 selling chips are all Frito-Lay brands. We can consider FritoLay to be major player it not the monopolistic leader in this category. Categories in the snack food industry include candy, cookies, crackers, nuts, snack chips, and assorted other items. This classification consists of establishments primarily engaged in manufacturing potato chips, corn chips, and similar snacks. Establishments primarily engaged in manufacturing pretzels and crackers are classified in SIC 2052: Cookies and Crackers; those manufacturing candy covered popcorn are classified in SIC 2064: Candy and Other Confectionery Products; those manufacturing salted, roasted, cooked, or canned nuts and seeds are classified in SIC 2068: Salted and Roasted Nuts and Seeds; and those manufacturing packaged unpopped popcorn are classified in SIC 2099: Food Preparations, Not Elsewhere Classified. The "salty snack" industry includes potato chips, corn chips, tortilla chips, ready-to-eat popcorn (except candy-coated), pork rinds, potato sticks, and extruded snacks such as cheese puffs. According to the Snack Food Association, Frito-Lay was the undisputed champion of this industry category, with Tostitos, Ruffles, Rold Gold, Fritos, Lay's, Cheetos, Sun Chips, and many more top sellers under its umbrella. Potato chips and tortilla chips controlled the snack foods market. Some 84 percent of American households eat potato chips, which had one-third of the salty snacks market.
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2. Competition The snack chip industry contains mainly three types of competitors namely, the national brands, regional brands, and private brands. National brands are those that distribute products nationwide include Frito-Lay, Borden, Procter and Gamble, RJR Nabisco and Eagle snacks. Regional competitors consists of regional brand firms which distribute products in certain parties of the United States. Private brands are produced by regional or local manufacturers on a contractual basis for major supermarkets chains. The competition in the snack food industry is very intense. As many as 650 different types of snack chip products are introduced into the market each year by both national and regional brand companies. Most of the products are new flavors for existing snack chips. It is reported that the new-product failure for snack chips is very high. Pricing is often very competitive and snack chip manufacturers often resort to price deals to attract customers. 3. Sun Chips Multigrain Snacks Sun Chips Multigrain Snacks is a crispy, textured snack chip consisting of a specific blend of whole wheat, corn, rice, and oat flours with a lightly salty multigrain taste and a slightly sweet after taste. The product contains less sodium than most snack chips and is made with canola or sunflower oil. The chip is approximately 50 percent lower in saturated fats than chips made with other cooking oils and is cholesterol-tree. According to a Frito-Lay Inc. executive, it is a "thoughtful, upscale classy chip. Interestingly, Frito-Lay has had previous experience in marketing a multigrain snack in the 1970s. But its experience was not successful. The possibility of a multigrain product was explored in the early 1970s when corporate marketing research studies indicated that consumers were looking for nutritious snacks. Frito-Lay developed a multigrain snack chip under the brand "Prontos and it was first introduced in 1974. The snack was sold on the premise that it was "a different, delicious new snack made from nature's own corn, oats and whole grain wheat all rolled into one special recipe". The Prontos brand of multigrain snack chips was not well received and eventually terminated. The lack of success was due to: (a) A product type that was ahead of its time. It did not possess product attributes that appealed to a sufficient majority even though it was marketed towards to main stream of snack chip consumers; (b) Poor branding; Frito-Lay executives agreed that the product had a confusing name, a poor advertising copy and appealed to too small a market; (c) Manufacturing problems: Production for multigrain snacks did not run as smoothly as other more established product types. Manufacturing problems contributed to the demise of the product. The latest Sun Chips line of multigrain snacks would involve very large risks to Frito-Lay because of a huge capital investment (the product required a new manufacturing process) and an equally huge marketing investment (it was also a new brand) that could be financially justified only with a product that could be sustainable for an extended period. The challenges are therefore plain to Frito-Lay to see. With the product development of SunChips, Frito-Lay took the correct decision to undertake proper market testing with a test

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market exercise in the state of Minnesota-St Paul. This would give Frito-Lay an idea of the product's potential without extensive risks or costs. 4. Sun Chips's Consumer Acceptance Level and its Sales Potential A premarket test was carried in April 1989 and conducted by an independent marketing research firm. Purpose of the test was to find out about consumers attitudes and usage behavior of Sun Chips. Two flavors were introduced and three advertising and merchandising expenditure levels were tested. Results from the premarket test were extremely unexpected. It indicated that Sun Chips Multigrain Snacks would produce a likely first-year sale of $113 million at manufacturers prices given the marketing plan set tor the product, including a $22 million advertising and merchandising expenditure. The estimated first-year sales volume exceeded the $100 million Frito-Lay sales goal for new products. The natural and French flavor combination produced the lowest cannibalization of other Frito-Lay bands. The Premarket test gave clear indication that there was potential for Sun Chips that needed further exploration. The next logical step would be a test market as it would give the product a more rigorous test. 5. Test Market Frito-Lay executives chose Minneapolis-St. Paul. Minnesota metropolitan area as the test site because it had a social and economic profile representative to the United States. It also represented a typical competitive environment in which to test consumer acceptance and competitive behavior. 1.98 million of the 90 million households or 2.2% were identified as users of snack chips in this area. 5.1. Product strategy Frito-Lay executives chose both the natural and French-onion flavors and three sizes: 7 ounce, 11 ounce, and a trial size of 2 ounce. Design was heavily emphasized as they wanted it to communicate a new, different and fun image. 5.2. Pricing strategy Sun Chips'" Multigrain Snacks would have the same retail prices as Doritos brand tortilla chips. Package size(ounce) 2 7 11 Suggested retail price $ 0.69 $ 1.69 $ 2.39 FritoLays selling price to retailer $ 0.385 $ 1.240 $ 1.732

5.3. Advertising and Merchandizing strategy The primary audience chosen was adults between the ages of 18 and 34 as they were the principal purchasers and heavy users of snack chips. The secondary audience were chosen 34-49 years olds who were appeared to be more receptive to healthier snacks. The advertising message was meant to convey subtle messages including wholesomeness, fun and simplicity. TV advertising, in-store display, free-standing inserts in newspapers and coupons were part of the marketing strategy.
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5.4. Distribution and sales strategy Sun Chips Multigrain Snacks would be sold at supermarkets, grocery stores, convenience stores and other retail accounts that already stocked Frito-Lays snack products. 5.5. Manufacturing costs considerations Since a multigrain product required different product and process technology than corn or potato products, an investment in one new production line would be necessary. The test-market budget was set at $22 million. Approximately 70% of the budget would be spent during the first six months of the test period. 6. Test Market Results 6.1. Type of purchase It was revealed that approximately 90% of purchases were made in supermarkets and convenience stores. The 2 ounce package accounted for 15 percent of purchases, the 7 ounce accounted for 47 percent of purchases, and the 11 ounce package accounted for 38 percent of purchases. 55% of purchases were for the French onion and the rest was for the natural flavor. 6.2. Trial and repeat rate Almost one in five households in the test market had tried the product, and 41.8% of these households had repurchased the product at least once over the 10 month trial. Repeated purchasers purchased Sun Chips Multigrain Snacks an average of 2.9 times. 6.3. Product Cannibalization The incidence of product cannibalization revealed that 30% of Sun Chips Multigrain Snack pound volume resulted from consumers switching from Frito-Lay's potato, tortilla, and corn snack chips. About one-third of the cannibalization volume from Frito-Lay's products came from Doritos brand tortilla chips. From the cannibalization results, Frito-Lay executives noted that the gross profit of Sun Chips Multigrain Snacks was higher than that for its other snack chips. 6.4. Test Market Results Analysis In the test market analysis, the following results were concluded: (a) Consumption of Sun Chips was measured in terms of pounds consumed, rather than dollar value purchased, (b) Looking at the manufacturer's prices of the three different sizes of Sun Chips, the average dollar per pound is $2.65. The results indicated that the test market for Minnesota-St. Paul is immensely successful. Revenues at manufacturers prices indicated that Sun chips will exceed the $l00 million mark considerably if launched nationwide.

7. Planning considerations After conducting the test-market on Sun Chips Multigrain Snacks, a review of the findings was being presented to the management. Firstly, timing and competitive reaction were the key
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elements of the results. Riskey felt that national and regional competitors were monitoring FritoLay's test market. This was also a high probability that these competitors were examining the chip with the intention of developing their own version. Riskey was concerned especially with the timing factor. He felt that if he were to continue testing Sun Chips MuItigrain Snacks, a competitor might launch a similar product nationally or regionally and upstage Frito-Lay. Thus, the chance to be the first-to-market would be lost. Secondly, if an expanded test-market or a national introduction was considered, a decision would be needed quickly to ensure adequate manufacturing capacity was in place and operating efficiently. Besides, manufacturing capacity expansion would require a significant capital investment. 8. Strategy considerations Riskey presented a few strategy options tor Sun Chips Multigrain Snacks to the management of Frito-Lay. An increase in advertising and merchandising expenditure was advocated if the brand was test further or launched nationally. They believed that brand awareness would increase with additional spending and felt that spending the national introduction equivalent of $30 million could stimulate brand trial as well. A large package size was also recommended. This would result in additional volume as a larger package size is being purchased. They believed that a forth, larger package could add about onehalf ounce to the average annual purchase per repeat purchase occasion. Some felt that another package size would only be more applicable after the brand is established in the market. The option of building household repeal and depth of repeat business was also recommended. Using a flavor extension, it could increase the repeats per repeater to an average of 3 times per year given greater variety for consumers. The test market for Minnesota-St. Paul was an immense success. There was no need to extend the test market exercise as with such results, it was only a matter of time before competitors would get wind of these test results and proceed to launch a similar product. Any delay in launching the product proper would result in a likely loss of the first mover advantage. There are 2 possibilities that Frito-Lay has in order to capitalize on the strong test market results (a) Move with a nationwide launch using the tactics and strategies of the Minnesota-St. Paul test market as a template (b) Move with a partial launch in selected states, hence minimizing all possible risks of failure In the light of these results, the team recommends that Frito-Lay adopt the second option and begin a partial launch of Sun Chips. We recommend the launch to be held at another 5 states, whose demography is most similar to that of Minnesota-St. Paul. This will give a higher rate of success as well as minimize the costs of failure.

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