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Frito Lay Case Analysis Term Paper

Summary- Frito-Lay is a division of PepsiCo, a New York-based diversified consumer goods and services firm. Frito-Lay is a nationally recognized leader in the manufacture and marketing of snack foods. The company’s leaders in the snack industry include potato chips, tortilla chips, cheese puffs and pretzels. Frito-Lay not only had net sales in 1985 of three billion but also captured about thirty three percent of the snack foods sold in the United States. When Frito-Lay first got into the dip industry they introduced two dips, the Jalapeno Bean Dip and Enchilada Bean Dip.

These two dips were generally viewed as a complement to the companies Fritos corn chip. In 1978 a Picante Sauce Dip was introduced to complement the newly introduced Tostitos chips. These three dips were the only Frito-Lay dips sold until 1983. The growing dip popularity accelerated the extension of the dip product line in 1983. In the early 1984 Frito-Lay introduced a number of cheese-based dips all of which were produced in the same nine ounce cans as the Mexican dips were sold.

According to the marketing director Ben Ball “Cheese dips were a extension of Frito-Lay’s tortilla chip business and were a response to the Mexican food phenomenon sweeping the country. ” From 1983 to 1985 the Jalapeno Bean Dip and Picante Sauce Dip showed steady although slow growth, despite this they were dropped from the Mexican Dip line in mid-1985 as a result of falling sales. When the line was dropped Frito-Lay anticipated that consumers would switch to the other types of Mexican dips that were sold, but the consumers did not and Frito-Lay ended up losing customers.

Nevertheless, dips were a highly profitable product line. Prior to line until the introduction of the cheese dips in late 1983. After the introduction of the cheese dip line, Frito-lay began promoting all of their dips, but almost all of their marketing efforts were steered toward retail-store snack food buyers in the form of trade-oriented promotions. In 1985 the emphases of marketing shifted from Trade Promotions to Consumer promotions. Such consumer promotions included product sampling and couponing to try and promote the trial of new products.

Due to Frito-Lay’s new product effort, along with increased competitive activity caused Frito-Lay to further increase consumer activity and promotions in 1986. Dips are typically used as an appetizer or accompaniment to a meal. Over the past dip popularity has risen as a result of the convenience of use, multiple uses, and snack trends in the United States. Since the dip trends began to rise large, well financed companies began to aggressively pursue the dip market. Companies that expanded into the dip industry include Campbell Soup and Lipton.

The other major competitors in the dip industry are Kraft, Borden, and a large number of regional diaries. Competitive activity in the dip market accelerated in 1984 and 1985. Other problems in the dip industry include that about 55 percent of prepared dips sold in supermarkets require refrigeration. In these years the numbers of new products were introduced along with rising advertising expenditures. Industry sources estimated that dip competitors combined (Not including Frito-Lay) spent $58 million for advertising alone in 1985.

Problem Definition- The problem first arose in 1986 when Ben Ball, Marketing Director and Ann Mirabito, Product Manager had just completed the planning review line of dips sold by Frito-Lay Inc. Frito-Lay’s dips were a highly profitable product that had shown incredible sales growth during the past five years. Sales forecast in 1985 were $87 million, compared to $30 million 19981. The major issue that arose during the meeting was where and how Frito-Lays Dips can be developed further within the dip industry.

One of the main views is that the dip line should be more aggressively promoted in its present market segment. This market segment was broadly defined as the “chip dip” category. The second view is that Frito-Lay should actively pursue the “Vegetable Dip” category. Both views provide a solution to the problem but is still a tough decision to make. Frito-Lay executives were still unsure to how much emphasis to place on each market segment. More aggressive marketing would require a larger marketing investment or there is the option of allocating funds.

While at the same time the gross margin and profit contribution of dips would have to be preserved, expense budgets would need special consideration. Expressed at the planning meeting was that Frito-Lay should capitalize on its standpoint in the dip market and build market share. Many arguments were made for this strategy. Research had shown that only 20 percent of chips were eaten with dips at this time. Along with this research showed that only 45 percent of all U. S households used dips in 1985.

Another argument in support of focusing more attention to the chip dip market was that there was a great increase in the competitive activity; forty new Mexican-style dips were launched into the market since 1983. The last argument was that in the past Frito-Lay was not big on the promotion of dips and did not go after the promotions in an aggressive way. The other executives that did not agree with the arguments that were just addressed disputed that the opportunity for Frito-Lay in the chip dip market was less promising. They based their arguments on three main points.

The first is that competitive activity was such that Frito-Lay could only hope to hang on to its position, not improve it, in the chip dip industry. They also felt that the amount of money and time that would have to be put into increasing its position could be better spent on going after the vegetable dip market, where competition was not as strong. The second argument was that Frito-Lay’s recent sales growth in dips was due to the introduction of new dip lines and that it was not clear if putting more effort into product line extension would produce growth.

Executives who had concerns about focusing on the chip-dip category also raised a number of points in support of the vegetable dip opportunity. The first major point they noted was that 33 percent of dip sales were linked to vegetables. Industry research had also indicated that only one-fourth of the dollar volume associated with vegetable dipping came from salad dressings. The rest was accounted for by dip mixes and refrigerated dips, also no other competitors had their hands in this market.

The second argument was that researches showed that sour cream based dips were more popular than cheese dips for using vegetables for dipping. The third point was that national trend data indicated that consumers were becoming concerned with the nutritional value and salt content of prepared foods. This was seen as a opportunity to go after the vegetable market and a more healthy way of snacking. The fourth and one of the best arguments was that no major competitor had introduced a shelf stable dip for vegetables.

Frito-Lay was the creator and innovator of the self stable business for chips, and some executives felt that this same opportunity could be captured in the vegetable dip market. The executives who were not in favor of the vegetable dip idea had their own view points about going after this market segment. The first concern was that to go after the vegetable dip opportunity Frito-Lay would have to adopt a totally new sales approach. Even though extensive cost analysis was not conducted, it had been estimated that selling expenses would rise to 25 percent of sales.

Also the sales people for Frito-Lay had never really dealt with merchandising practices having to deal with the product section of the supermarket. A second concern was that arose was that by going this rout Frito-Lay Dips would lose some economies in advertising and merchandising. In the past Frito Lay Dips had been promoted in conjunction with the companies chips and thus created the “Halo Effect” of Frito-Lay snacks. The though process was that with vegetables dips, they would have to “go at it alone” because the halo effect might not be able to translate over to the vegetable dips.

The third and final concern that was expressed was that if they were going to get into the vegetable dip category it would require more than a single item. What is meant by this is that in addition to their already popular French onion flavor, other flavors such as ranch for example would need to be added to the dip line. Such line extensions require additional research and development expenses along with promotional support. This is what was defined as the problem during the planning meeting, and resolutions needed to be sought. SWOT ANALYSIS Chip Dip: Strengths Strong market share •No potential cannibalizationWeaknesses •Historically, Frito-lay have not promoted dips aggressively Opportunities •Only 20% of chips currently eaten with dips •Only 45% of all U. S households use dip in 1985, but 97% use salty snacks •They can spin off other products from these dipsThreats •40 new Mexican style cheese dips had been introduced since 1983 •Believed that Kraft will be introducing additional products in the chip dip market •High competitive activity Vegetable Dip: Strengths •33% of dip sales were linked to vegetablesWeaknesses Distribution through the produce warehouse would involve dealing with supermarket produce buyers and managers •Total new sales approach would be necessary •Frito-Lay dips would lose some economies in advertising and merchandising •Would require more than a single item. Opportunities •Consumers are becoming concerned about the nutritional value of prepared foods. Threats •People consume salad dressing as an alternative Environmental Scan- The estimated total dip sales for 1985 is $620 million. Two-thirds of those sales come from prepared dips. 80% of dip sales come from supermarkets.

The major competitors in the chip dip segment are Kraft, Borden, a large number of regional dairies, and numerous store brand products. 67% of dips are most frequently used with salty snacks and almost all Mexican flavored dips are eaten with chips. The popularity of Mexican food has also shown in the chip dip industry, there have been a number of different Mexican inspired dips released in the market lately. Competitive activity in the dip market has been intense in 1984 and 1985. Numerous products have been introduces and millions has been spent on advertising chip dips to consumers.

Suggested Alternatives- An alternate course of action that could be taken would be to venture into the Vegetable Dip line. It is noted that 33% of dip sales were linked to vegetables. Another opportunity that would further enhance the reason to pursue into the vegetable dip category would be the rising consciousness of health conditions and that consumers are becoming more and more concerned with nutritional value of prepared food. It is also stated that there are no signs of major competitors and would have a strong competitive position in the market if pursued upon.

Recommendation: We have decided to further penetrate the chip-dip market. We are going to develop a brand line called Fiesta Dips. These dips will be a Mexican themed product line and will be promoted together with the Tostitos brand tortilla chips. We have developed the following marketing mix to address how to market this new line. Product: The product will be Frito Lay’s new chip dip brand line called Fiesta Dips. The Fiesta dips will be an array of Mexican inspired dips ranging from guacamole, bean dips, cheese flavored dips, salsas, and other Mexican flavored dips.

These dips will be shelf stable dips. Place: The Fiesta dip product line will be offered at all of the current 350,000 outlets across the nation that currently carry Frito Lay dips. The outlets are made up of 34,000 supermarkets, 47,000 convenience stores, and 20,000 non-food outlets. The other remaining outlets are small grocery stores, liquor stores, service stations, and a variety of institutional customers. The large grocery stores will be the ones selling the most volume though. Price: We will implement a comparable pricing strategy.

Although the prices will be comparable to the completion we will strive to achieve market penetration through our promotional efforts, with the BOGOs and such. The price of the Fiesta dips will range from $0. 18/oz, which currently falls into the industry standard of $0. 15-$0. 20/oz. All of the different varieties of dip will be the same price to make BOGOs and other promotions with the Tostitos chips easier for the consumer to mix and match their chip and/or dip selections. Promotion: For promotion strategy we will implement a push strategy.

We will have high distribution and generous discounts for the consumers. As in introductory offer we will have various sales promotions on the Fiesta line of dips. BOGOs on the dips themselves as well as pairing a BOGO with two bags of Tostitos chips the consumer will get a free dip. We will also set up POP displays in all of the major grocery stores showcasing the Fiesta line with recipe pamphlets showing consumers ways they can use the dips as well as other Frito Lay products in recipes. We will also set up free sample tables in select grocery stores.

Frito-Lay is a “perennial rock” in PepsiCo’s portfolio, as described by Judy Hong, a stock analyst at Goldman Sachs, and that has helped cushion the company as its cola business struggles.

One major investor, Donald Yacktman of Yacktman Funds, has suggested that PepsiCo rename itself Frito-Lay to reflect the growing importance of that business, and others like Nelson Peltz and Relational Investors have agitated for it to uncouple the snacks business from the drag of its beverage operations.

But Frito-Lay’s traditional business — Doritos, Tostitos, Lay’s, Rold Gold and other middle-market brands — has slowed as consumer tastes migrate to nuts, dried fruits and snacks made from whole grains.

While the overall $22 billion salty snacks market is losing sales, its $2 billion premium end has grown on average about 7 percent over the last two years, according to Goldman Sachs. Goldman expects sales of snacks in the bottom end of the market to grow about 4 percent a year for the next few years. The vast middle, however, is forecast to grow at just half that rate.

“The challenge for them is how to continue to grow their core business when some of their mainstream brands are losing share to some of the smaller premium and value brands as well as to other snack categories,” said Ms. Hong. “Pretzels and snack bars and energy bars, trail mixes and nuts are also growing at a faster pace.”

Those other snacks are where Frito-Lay’s large competitors like General Mills, Kellogg and Kraft are increasing their activities, which makes the two extremes of the salty snacks market even more attractive.

Frito-Lay has until now largely left the premium end of the market to niche competitors like Pop Chips, Pretzel Crisps and Pirate’s Booty and ceded the bottom to grocery store brands.

“These traditionally have been niche markets dominated by small players and regional brands,” said Harry Balzer, the chief food industry analyst at the NPD Group, a research firm. “That leaves a lot of room for a mass player like Frito-Lay to come in and gain market share.”

The company has begun introducing items like Olive Coast, kettle-cooked chips with a Mediterranean twist, and Taqueros, a low-priced tortilla chip to be sold in places like dollar stores.

Existing brands that appeal to more upscale customers are getting new emphasis as well, like Stacy’s Pita Chips and Sabra, a line of refrigerated dips that are often packaged with crackers and pretzels that is a joint venture with the Strauss Group. And Cracker Jack is being recast as a brand aimed primarily at Frito-Lay’s value shoppers.

“Whether you look at it in terms of price points or customers, there’s just more happening on the edges of the market than in the middle right now,” said Daniel Naor, senior vice president for growth ventures at Frito-Lay North America.

Mr. Naor’s unit operates as a distinct business within Frito-Lay. Started 18 months ago, it already generates roughly $400 million of Frito-Lay’s $13.2 billion in North American sales and has expectations of adding another $100 million in revenue this year.

Mr. Naor compared it to Toyota’s Lexus brand.

“In the background, there are some common elements — the same factories make both products — but the materials used may be different and they are sold in different outlets,” Mr. Naor said.

Not only is the unit coming up with new brands, it also is introducing Frito-Lay’s first resealable bags and using a different distribution system.

Ms. Mukherjee said, “What makes this proprietary is the way we’ve operationalized it to be a business strategy and not just about marketing.”

In the past, Frito-Lay might have pushed new products using its “direct store distribution” system, which relies on Frito-Lay truck drivers to deliver products directly to stores.

Mr. Naor’s unit is instead cultivating grocery store deli managers and brokers who sell niche snacks and using warehouses to supply them, relying on relationships that Frito-Lay has already established with outlets like schools and vending machine operators.

That, Ms. Hong said, “will allow them to nurture these brands with more patience as they grow.”

Some new premium products are already being sold in Citarella, a high-end food market with stores in New York City, for instance, as well as in the deli sections and so-called natural aisles of major grocery chains. Later this summer, Taqueroswill go on sale in dollar stores,bodegas and other discount outlets.

Referring to Taqueros, Mr. Naor said, “It will have different packaging than our mainstream brands and be heavily aimed at the Hispanic market, where we are targeting it more as part of a meal occasion than a snack.”

Mr. Balzer said it was not just Hispanic families who were adding chips to their meals as side dishes.

“They are the easiest side dish to serve with the No. 1 dinner tonight, which will be the sandwich,” he said. “Snacks aren’t just snacks anymore.”

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