The snack food industry has been steadily growing over time, increasing 5% in 1990 with corresponding retail sales of about $37 billion as well as a 5% increase in retail dollar sales amounting to $9.8 billion. More specifically, the chip sector has had a great impact on the industry as a whole, generating an overall increase in per capita consumption.
Consumption of chips in the United States has reached 3.5 billion pounds, increasing the amount bought by consumers by about two pounds to fourteen pounds since 1986.Frito- Lay, Inc.Frito-Lay, Inc.
(“Frito-Lay”) is the worldwide leader in the snack chip industry with sales of $3.5 billion in the 1990. Frito-Lay’s parent company, PepsiCo, Inc., reported net sales of $17.
8 billion in 1990. PepsiCo, Inc. is the leading manufacturer in the snack industry, enabling Frito-Lay to be a leader within the chip industry, especially with regard to the marketing and manufacturing of chips. Under the Frito-Lay brand there are numerous brands, including: Doritos, Tostitos, Rold Gold and Cheetos.
Frito-Lay also has brands in several other snack categories including dips, nuts, peanut butter crackers, beef sticks, Smartfood brand popcorn and Grandma’s brand cookies. Frito-Lay Inc. has been a powerhouse within the snack industry, and has shown great success over the years.Frito-Lay has been so successful in operating in the chip industry due to their participation in all aspects of the manufacturing of their products, which includes being involved in the production ranging from agriculture to filling supermarket shelves.
They have thirty-nine manufacturing plants, over 1,600 distribution centers, and a 10,000 person route-sales team which sells to over 400,000 retail stores per week. With that being said, Frito-Lay has accounted for 13% of sales within the snack food industry and has become the leader in the snack chip category gaining 50% of retail sales within it.Along with this, Frito-Lay brand chips are comprised of eight of the top ten selling chips within the industry. These eight brands (more specifically, Doritos and Ruffles) have generated sales of $1 billion during 1990.
Frito-Lay has strong positioning within the industry and has, thus far, been able to successfully compete with its competitors.Frito-Lay Inc.’s CompetitorsOverall, the snack chip category is very competitive due to the abundant amount of different snack products that are offered by competing firms. There have been as many as 650 snack chip products offered by national and regional firms across the United States, with most new products introduced as additional flavors of existing chips.
Due to significant competition in the industry, there is a very high failure rate for the introduction of new products by firms, causing less than 1% of new products to produce $25 million within the first year sales. Lastly, pricing is extremely competitive in this industry, causing manufacturers to rely on media and print advertising as well as price deals to attract a consumer to their product. The increased technology has also helped the snack chip manufacturers to better suit the needs of their consumers through price deals at a faster rate.Competition within this industry is separated into three different categories, as follows:National Brand Firms* Includes firms who distribute nationwide, such as Frito-Lay, Borden, which includes the Wise and Guys brands, Proctor and Gamble, which includes Pringles brand, RJR Nabisco which includes Planters brand, Keebler Company, and Eagle brand which is a division under Anheuser-Busch Companies, Inc.
* National brands have a extensive sales and distribution systems which allows them to place products at different grocery stores where demand is high, at a very fast rateRegional Brand Firms* Includes firms that only distribute products in certain geographical parts of the U.S., such as Snyder’s, Mike Sells and Charles ChipsPrivate Brand Firms* Includes firms that have products which are produced by regional or local manufacturers based on different contracts for large supermarket chains such as Kroger, Publix or SafewaySWOT ANALYSISThe following is a SWOT analysis of Frito-Lay:Strengths* Frito-Lay has a strong presence in the chip and snack food industry* Frito-Lay is an internationally recognized brand name* Frito-Lay has been in the industry for a very long time and has built a strong relationship with loyal consumers* Frito-Lay is subsidiary of PepsiCo, Inc., which is a very successful firm in the snack food industry, allowing for brand spillover effects to Frito-LayWeaknesses* Frito-Lay only has one method for manufacturing it’s products and may not be able to deal with the changes involved in manufacturing Sun Chips* Frito-Lay already has a strong associated with unhealthy snacks and may not be a trusted brand in the “healthy snack” industryOpportunities* The Sun Chips test market has proven to be effective, signaling a potential move into the healthy snack industry and success with the introduction of Sun Chips* Strong product marketing strategies where Frito-Lay:o Can extend their line by offering more of a variety to their current productso Has a powerful marketing research team that can track the needs of their consumers and better fit the needs with regard to snackingo Has the ability to develop new products rapidly to suit the changing needs of consumers, due to the marketing team’s close watch on consumer preferenceo Has the ability and opportunity to move into different international markets due to the promising snack food industryThreats* The industry within which it competes is highly fragmented* Very high failure rate of new product launches* Very competitive pricing strategies among competition, as price is the major driver of consumer demandBACKGROUND INFORMATION ON FRITO-LAY MULTIGRAIN SNACKSFrito-Lay first began its experiment with multigrain snacks in the 1970s when they introduced a multigrain snack chip called Prontos in 1974 in order to target consumers looking for a nutritious snack.
However, this product was unsuccessful due to its confusing name and appeal to only a minimal segment of consumers. Despite Frito-Lay’s strong advertising and promotional support of the multigrain snack, Prontos was pulled from the shelf in 1978.The idea of a multigrain snack was again revisited in the 1980s with what Frito-Lay named the “Harvest” project where the project’s main objective was to create a multigrain snack that would have consumer appeal. Frito-Lay conducted numerous product concept tests and in-home product-use tests that failed to create consumer excitement about a “healthy” snack.
These two failed attempts by Frito- Lay to introduce a “healthy” multigrain snack to consumers indicated that the snack chip market was just not ready for a wholesome snack. The Prontos product was seen as “too early” for its time in the 1970s, as were multigrain snacks in the 1980s as well.Efforts to create and sell a tasty, multigrain snack were again revisited in late 1980s. Frito-Lay used consumer taste tests and product concept tests to study different formulations, positioning and branding concepts they had developed.
The studies revealed that customers want a rectangular chip with ridges and great taste. Further testing resulted in consumers liking the Sun Chips name and three main flavors, original, French onion and mild cheddar. These studies also served as a confirmation for Frito-Lay that the multigrain snack was seen by consumers as a “healthy product” and an “everyday snack” after consumers tasted the product.With positive consumer feedback, Frito-Lay launched a premarket test (PMT) of their Sun Chips Multigrain Snacks.
The PMT simulated a test market, asking consumers how they felt about the product, and after trial, if they would repurchase the product. The PMT was very successful, and indicated that Sun Chips Multigrain Snack’s first year volume would be $113 million at manufacturing price and including a $22 million advertising and merchandising marketing plan.With successful consumer feedback in both the developmental and premarket stage of the multigrain product, Frito-Lay could see that the market for a healthy snack was now stronger and growing (as compared to the past). Consumers were more susceptible to the idea of a wholesome snack chip as an everyday snack chip.
The potential of this market now seemed more successful and lucrative, with potential volume sales of Sun Chips Multigrain Snacks exceeding the $100 million sales goal for new products that Frito-Lay strives to reach.The successes of the PMT lead to a complete test market scheduled to run for 12 months in the Minneapolis-St. Paul, Minnesota metropolitan area due to its social and economic profile representative of the United States. Beginning in October 9, 1989, Frito-Lay introduced the natural and French onion flavor Sun Chips to the test market.
The snack would be packaged in a 2 1/4-ounce package, 7-ounce package and 11-ounce package selling for $.69, $1.69 and $2.39, respectively.
The package design was a metalized flex bag with black (natural flavor) and green (French onion flavor) as primary colors.Sun Chips Multigrain Snacks targeted adults between the ages of 18-34 since they were the principal purchasers and heavy users of snack chips. Adults between the ages of 34-49 were targeted as the secondary audience because they seemed to be receptive to healthier snacks. A third audience for the snack would be household members under the age of 18 since they would be exposed to the produce through in-home usage.
These audiences would be exposed to the product through television commercials, in-store displays and free-standing inserts in newspapers, along with coupons and free samples in supermarkets.Frito-Lay would distribute Sun Chips Multigrain Snack through their store-door delivery system. The snacks would be sold at supermarkets, grocery stores, convenience stores and other retail accounts that already stocked Frito-Lay’s snack products. The results of the test market were monitored by an independent research firm.
They saw that 90% of purchases were made in supermarkets and convenience stores and that the coupon program held during the trail held a positive major impact on purchases. 47% of purchases were for the 7-ounce package followed by the 11-ounce package with 38% of purchases and the 2 1/4-ounce package accounting for 15% of purchases. More than half (55%) of the purchases were for the French onion flavor; 45% of purchases were for the natural flavor.Test market results also stated that 41.
8% of trier households repurchased Sun Chips Multigrain Snacks at least once over the 10-month period. Repeater purchasers purchased the product an average of 2.8 times with an estimated average purchase amount for triers was 6 ounces. The independent research firm also indicated that 30% of Sun Chips Multigrain Snack pound volume resulted from consumers switching from Frito-Lay’s potato, tortilla, and corn snack chips.
One-third of the cannibalized volume from Frito-Lay’s products came from Doritos brand tortilla chips.STATEMENT OF THE PROBLEMDr. Riskey, Frito-Lay VP of Marketing Research and New Business, must decide how to proceed with the future product launch of Sun Chips. More specifically, the decision revolves around whether to continue product testing or to introduce the Sun Chips nationally.
QUALITATIVE ASSUMPTIONS1. With regard to national introduction, increased manufacturing capacities deal with distribution intensity, not geographical distribution.DISCUSSION OF ALTERNATIVESAlternative 1: Continue Test MarketThe first alternative addresses the question of whether or not Frito-Lay should continue testing Sun Chips for another six months, either in the same location or in another city. These options have been further broken down into sub-alternatives 1A and 1B:Alternative 1A: Continue Testing in Same MarketExtending the test market in the Minneapolis-St.
Paul, Minnesota metropolitan area for another six months would provide more accurate information to make better placement decisions and to determine whether or not to introduce the snack nationwide. It also gives the opportunity to extend advertising during the test period which would increase brand awareness. However, extending the test market would provide competitors, who are tracking the company, to get a head start and introduce their competitive products before Frito-Lay, this eliminating the first-mover advantage.Alternative 1B: Expand Test Market GeographicallyFrito-Lay could potentially extend the test market geographically using the same strategy employed in St.
Paul/Minneapolis. Such an expansion would test the product in a different location, therefore allowing for more accurate forecasts as to the success of a national introduction. Frito-Lay can alter the previous strategy by testing a different size package or flavor which would work on building household repeats and depth of repeats. They could test out the 15-ounce package and/or the Mild Cheddar flavor to see how that would affect customer purchases and the future product introduction.
However, if the product is tested in a new market, manufacturing capacity must also be expanded, which requires a significant capital investment ($5 – $20 million). Should they decide to introduce a bigger size in this test market, it would mean additional manufacturing and production costs that may be unnecessary since data from the first test market shows the natural and French onion flavors would do well. Furthermore, the introduction of a new flavor would increase the cannibalization rate to 35%. An additional issue is that larger packages or more flavors would increase the need for shelf space and resulting costs.
Alternative 2: National IntroductionA second alternative is a recommendation for Sun Chips to be prepared for a national introduction. As previously mentioned, Sun Chips has the opportunity to be first-to-market if the snack is introduced nationally in the near future. Timing and competitive reaction are of high importance, as Riskey believes that national and regional competitors of Frito-Lay have been monitoring the Sun Chips test market and are likely developing their own version of a similar, new chip type. In order to mitigate the risk of a competitor upstaging Frito-Lay, Riskey could recommend that Sun Chips be introduced nationally as soon as possible in one of two ways: utilizing the strategy employed in the test market or making some modifications to this strategy for the national introduction of the snack chip.
These options have been broken down into sub-alternatives 2A and 2B (see below).Manufacturing capacity is an important issue that needs to be addressed as expanding capacity would be a significant capital outlay:* Capacity capable of serving 25% of U.S. snack chip households = $5 million* Capacity capable of serving 50% of U.
S. snack chip households = $10 million* Capacity capable of serving 100% of U.S. snack chip households = $20 millionThe marketing research that Riskey requested demonstrates that Sun Chips sales will be successful and sustainable intro the future, since Sun Chips has already fared better with regard to brand-awareness than O’Grady’s brand potato chips in the market test.
Moreover, the depth of repeat for Sun Chips in the market test was 2.9 times on an annual basis, compared to 1.9 times for O’Grady’s. Such research indicates the potential success of Sun Chips Multigrain Snacks, and therefore why the manufacturing capacity expansion is justified.
Alternative 2A: National Introduction with Test Market StrategyIf Sun Chips are introduced nationally using the same strategy as employed in the Minnesota test market, both the natural and French onion flavors of the chip will be launched across the United States. As discussed in the analysis of the test market, Sun Chips would be packaged in three different sizes: 2 1/4-ounce, 7-ounce, and 11-ounce packages, sold for $.69, $1.69 and $2.
39, respectively.The primary target would be adults aged 18-34, followed by adults ages 34-49, and finally household members under age 18 as the tertiary target. If Frito-Lay follows the test market strategy, advertising would primarily include television commercials, in-store displays, and free-standing inserts in newspapers. Distribution of Sun Chips would be achieved through Frito-Lay’s store-door delivery system, and the chips would be sold at supermarkets, grocery stores, and convenience stores.
As mentioned above, manufacturing capacity expansion would be necessary in order to introduce Sun Chips nationwide.Alternative 2B: National Introduction with Modifications to Test Market StrategyThere are numerous modifications to the test market strategy that Riskey could recommend, including the possibilities of increasing advertising, adding another package size, and adding a flavor extension. Some product management team members believe that increased spending on advertising would in turn boost brand awareness and brand trial for consumers. They trust that spending the national introduction equivalent of $30 million would suffice this goal.
Others believed that the best way to increase sales would be to introduce a fourth package size, such as a 15-ounce bag of Sun Chips, which would be priced at the same price per ounce as the 11-ounce package.Proponents of this recommendation believed that adding a fourth package size could add up to 1/2-ounce to the average annual purchase amount per repeat purchase occasion by consumers. On the other hand, other team members felt that it would be best to wait to introduce an additional package size until the Sun Chips brand was well established in the marketplace; especially because of the effects this addition would have on production capacity, inventory, and retailer shelf and display space.Finally, some team members believed that in order to raise depth of repeat, a flavor extension should be introduced, such as launching the mild cheddar flavor of Sun Chips nationally (along with the natural and French onion flavors).
Advocates of this strategy believe that depth of repeat per consumer could be increased to 3.5 times per year as a result of this added variety. The downside to this option, however, is that it could increase the cannibalization rate of other Frito-Lay products to 35%. What is more, adding both a larger package size and flavor extension at the same time would create significant manufacturing difficulties, which was agreed by all to be a considerable negative to these recommendations.