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Frito Lay


Veer Raghava Kumar Marthy

on 30 November 2012

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Transcript of Frito Lay

Analyze and Record Problems and
Their Core Elements
Introducing new product lines creates cannibalization

Frito-Lay has a lot of different varieties of chips to pick from and costs associated with production Weaknesses Two flavors

Three sizes

Re-strategize based on feedback and consumption

Have promotional offers Description of Implementation Justification Selected Strategy
Selected Strategy


Description of Implementation Strategic Alternative and Implementation Benefits:
Higher gross profit for multi-grain snack chips ($1.30 vs. $1.05 per pound)
Higher brand awareness (33% for Sun Chips vs. 28% for O’Grady’s)
Higher than average depth of repeat purchases (2.9 vs. 1.9 on an annual basis)
Pre-market tests most likely indicate a first-year sales volume of $113 million
First-to-market advantage National Introduction (cont’d) Costs:

Large capital investment of $20 million

Marketing budget estimated between $22 and $30 million

Increase in advertising to increase trial rate and benefit from high depth of repeat purchases National Introduction Costs

$5 million investment to reach manufacturing capacity to serve 25% of snack chip households in the U.S.

$10 million investment to reach 50% of the market

Allows competitors more time to catch up or even beat Frito-Lay with a multigrain snack chip Expanded Test Market Costs:
Additional $132,000 (2% x $22 mil x 30%)
$22 million annually

Better decide optimal package size/flavor combinations for most profit
Less capital expenditures because production capacity is already met to meet the requirement of the target market Continued testing for 6 month period Part III: Strategic Alternatives for Solving Problems Continue market testing

Expanded test market/regional introduction

National Introduction

Discontinue Sun Chip efforts Short run/long run implications of continued problems Cheddar flavor’s creation might increase the number of repeat purchases, but along with that cannibalism rates of their other chips would increase, and the flavor had not been perfected for large scale production.

Adding a fourth packaging size was considered, since it would be attractive to repeat buyers. However, both considerations would increase the number of stock keeping units from six to twelve.
Secondary Problem: Expanding Flavors and Package Sizes In the short run, if Frito-lay takes long time to test the product, competitors might take the first place in the market, Frito-lay would have to be a follower to the competitors.

In the long run, it will not only impact Frito-lay multigrain chip market, but also influence Frito-lay other snack market because of the product cannibalization.
Short run/long run implications of continued problems Expansion of Test Markets vs. National Introduction

Competitive snack chip market

High probability of national and regional competitors “clone” Frito-lay Sun chips.

Technology allows snack chip manufactures reacting swiftly to new product (flavor) introductions by competitors ,placing competing products quickly in supermarkets.

Inherent risks of the Sun chip introduction to the expanded test market and nationally market Primary Problem Competitors

Fierce competition

Sun Chips failing Threats U.S. snack food industry had retail sales of $37 billion in 1990, which is a 5% increase from 1989

Innovative product: multigrain

Sun Chips during their testing phase were projected to make $113 million

Growth in the snack chip division comes from increased per capital consumption and this has increased over the years Opportunities
Division of PepsiCo; Frito-Lay accounts for 13% of sales in U.S snack industry

$35 billion in sales in 1990

Bigger budget for advertising, marketing , and manufacturing

Net income of $1.077 billion on net sales of $17.8 billion in 1990 (PepsiCo) Strengths Sun Chip Marketing Strategy Pre-Market Test conducted in Minneapolis-St. Paul over a 12 month period
Indicated that Sun Chips had potential to produce first year sales volume of $113 million
Results led to the Sun Chip marketing strategy

Product: Sun Chips flavor combinations of Natural and Mild Cheddar or Natural and French Onion
Packaging sizes of 2.25 oz., 7 oz., and 11 oz. – possible addition of 15 oz. Sun Chip Marketing Strategy Pursues four main growth strategies

1) Frito Lay grows their established brands through line extensions

2) Create new products to meet changing consumer preferences and needs 

3) Develop products for fast-growing snack-food categories

4) Reproduce Frito-Lay successes in the international market

Sun Chips follows Strategy # 2 Current Marketing Strategy Frito Lay, Inc. is a division of Pepsi Co
17.8 billion in revenue in 1990, net income of $1.077 billion
Frito-Lay U.S. sales = $3.5 billion in 1990

8 of 10 of the top selling U.S. snack chips are Frito Lays
13% of the sales in the U.S. snack food industry, leading manufacturer of snack chips in the U.S. (50% market)

39 manufacturing plants, 1,600 + distribution facilities, 10,000 person route sales team, and services 400,000 retail stores Situational Analysis
Organization 1990’s, U.S. Demographics changing
Earliest baby boomers reaching 50’s

Sales growth derived from increased consumption
Future consumption pattern changes

Multi-Grain chip efforts didn’t succeed in 1980’s
Emphasis was on flavor line extensions and low fat versions Situational Analysis
Environment MBA 7600
November 27, 2012

Samuel Frescoln
Cameron Goubeaux
Kristina Hawkey
Justin Henry
Qiufang Luo
Kumar Marthy Case Analysis, Group #2 Questions Costs:
No additional monetary costs
Sunk costs from the premarket testing
Opportunity costs if it chooses not to pursue

Reduce risk by not pursuing a new product line
Less than 1% of new products in industry generate more than $25 million in sales
Save the estimated $22 million marketing budget
Save the $5-$20 million expenditure to gain production capacity Discontinue Sun Chip Efforts Benefits

Reduce risk as opposed to a full national launch

Save money with lower capital expenditures and marketing budget

Hone the marketing mix based on the test market results Expanded Test Market (cont’d) Competitors might launch a similar product nationally or regionally and upstage Frito-lay.

If an expanded test market or a national introduction was considered, the decision to assure adequate manufacturing capacity would be needed urgently

There is possibility that Sun Chips’ national introduction may turn into a financial disaster Primary Problem 8/10 best selling chips

Doritos : $1 billion in retail sales worldwide

4 different types of marketing strategies

Test market for Sun Chips Strengths U.S. snack food industry recorded sales of $37 billion in 1990
snack chips account for $9.5 billion

3 main competitors in the snack food industry
1) National brands 2) Regional brands 3) Private brands

650 snack chip products are introduced every year by national
High Failure Rate

Snack Chips companies rely heavily on advertising and promotions
Fierce price competition, quick reaction to new products Situational Analysis
Industry Frito Lay Introduction Situation Analysis Marketing Strategy SWOT National Introduction

Results indicate a strong inclination towards success

Frito-Lays best interest to take the advantage Strategic Alternative and Implementation First to market

Delay could lead to decreased sales

Competitors may launch a new product

Expect to reach Break-even in the first year Price: Frito-Lay placed at price parity with Doritos, research indicated this would be perceived as a good value / aligned with consumer’s preconceptions
Allowed for higher gross margins for Sun Chips

Promotion: $22 M Advertising budget:
Electronic/print media, consumer promotions, coupons, and trade allowance
Message: wholesome, fun, simplicity
Target Groups: adults age 18-34 (Heavy Users) and 34 to 49 (health conscious)

Placement: distribute through their existing channels of distribution (supermarkets, grocery stores, convenience stores)
Also utilize store-door delivery system (this included a delivery and salesperson combination). Introducing a new flavor and package size would cost a lot of money in the short run

The production process for the new flavor would need to be perfected and the manufacturing process for the new package size need to be updated.

Short run problems might turn into long-term difficulties

On the other hand, introducing a new flavor and package size would be able to attract repeat business in the long run.
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