Frito-Lay, Inc.Sun Chips Multigrain Snack

Hassan Danekqua Yonatan Samara Chaoyang

Frito-LaySnack Food Global Giant

Leading manufacturer of snack chips in the U.S operating as a division of PepsiCo.

Commonly known for their popular snack chip brands including Doritos, Lay’s, Cheetos and Ruffles.

Strategically positioned with 8 of their snack chip brands ranked in the top ten best selling.

Highly successful accounting for over half of retail sales in their market

Snack Chip Industry

•$37* Billion industry, Highly competitive in regards to products and pricing

Industry Competitors:–National brands - distributes nationwide includes Wise, Borden, Proctor and Gamble and Nabisco–Regional brands – distributes in certain geographic locations i.e.. SNYDERS–Private brands - contract based and mainly distributes through supermarkets

Industry DataHigh failure rate with as many as 650 chip products rolled out annually.

Industry wide print and electronic media are main sources of advertising

Snack chip customers are generally attracted through discounts

Commonly used Snack Chip technology and manufacturing facilitates fast paced, high competitive market

Provides manufacturers with the ability to respond relatively quickly to competitors offerings, important benefit in an industry where timing is crucial.

Birth of Sun Chips

•1970’s marketing research indicates consumers want nutritious snacks•1974 -Frito introduces the unsuccessful multigrain chip Prontos which is removed from the market shortly after due to low sales and difficult manufacturing process,•Late 1980’s - months of development, consumer research and product tests produces the multigrain, rectangular SunChips product

Sun Chips’ Premarket Success•Product -Natural and French Onion flavored rolled out•Size- 2 ¼ trial, 7 and 11 ounce packages•Pricing- Based off consumer research, Sunchips offered at same price as Doritos•Advertising and Merchandising ––Target audience for tv ads 18-34 demo, expanded to include up to 49–Ad message is to deliver the idea of “ wholesomeness, fun and simplicity”–Coupons used for the the critical trial and repeat sales•Distribution- sold through supermarkets, grocery convenience and retail stores.

Sun Chips’ Premarket Success (contd)

•Manufacturing considerations: –Mass production – multigrain products used a different production process technology and large scale production required investment into a production line to package 1 million pounds of the multigrain product•Budget- Test market had a budget of 22 million which was equivalent to a nationwide distribution base

Prontos

Frito-Lay previously introduced a similar multigrain product to the snack chips segment Prontos in 1974. Unfortunately, the product did not do very well and was ultimately discontinued in 1978 because of the following reasons:

The name was confusing and did not convey the proper message of a healthier alternative

There was too narrow of a market The manufacturing process was difficult.

Problems + Marketing Challenges

Expansion of test markets vs national introduction

Frito-Lay decided to run a test market in the Minneapolis-St. Paul metropolitan area.

10 months is not a very long time to test a product. The numbers and information gathered could be misleading for long term sustainability.

A nationwide SunChips introduction could result in completely different numbers and a financial disaster.

If expanded test market were considered, the decision to assure adequate manufacturing capacity would be needed urgently.

Problems + Marketing Challenges

Product Cannibalism: After the test market, it was found that 30% of Sun Chips’ pound volume resulted from consumers switching from Frito-Lay’s potato, tortilla, and corn snack chips and about 1/3 of this cannibalism came from Doritos.

Sustainability: There was much concern with the sustainability of Sun Chips in the long run. While the test market numbers were good, management was not entirely sure that this new product would be sustainable over time.

Timing: Competitors may launch a similar product nationally or regionally to upstage Frito-Lay

Alternative#1 - Pre-Production

•As the case noted, SunChips failed in the 70’s due to a decrease in sales and then again in the 80’s due to a lack of consumer excitement•We suggest Frito-Lay conduct a comprehensive survey prior to going to the test market. The survey would be conducted across a wide age and geographic range hitting the primary and secondary audience.

Assumptions

A.We are assuming previous surveys were not conducted before to gain a knowledge of whether a health chip was wanted or needed.B.We are assuming that the survey would provide an insight to knowledge that was previously unknown.

Advantages

1.The survey conducted would help Frito-Lay gain an insight to the wants and needs of your target audience.2.The survey conducted provides a SWOT analysis. The survey would show Frito-Lay the strengths of their product, the weaknesses as to where they can improve, the opportunities the market may provide and the threats of competition.3. The survey conducted would help Frito-Lay save money/cut unnecessary costs. If the survey shows that the product would be a flop Frito-Lay would be saving money by not putting it through a test market stage and the various other testing phases.

Disadvantages

1.Time-This alternative will take time to distribute, collect the data and to analyze the data.2.This alternative may not provide any knowledge that was unknown.3.This alternative will cost money to distribute, collect, analyze and a lost of money if the survey provides no new information.

Alternative#2 - Competiton+Product Cannibalism

•The case noted that the chip industry is highly competitive and has a failure rate of 99%.Additionally,30% of SunChips pound volume resulted from consumers switching from Frito-Lay’s potato, tortilla and corn snack chips and about 1/3 of this cannibalism came from Doritos. •We suggest Frito-Lay realign the placement/position of the SunChips product. Sunchips should be labeled as health product rather than as a chip and placed in health aisles and health stores.

Assumptions

A.We are assuming that SunChips qualify by the FDA to be listed as a health product.B.30% cannibalism is an above average rate and this will cause an overall decrease in profits for Frito-Lay over time.

Advantages

1.By not marketing SunChips as a chip but rather a health product, you decrease the competition substantially.2.This alternative will help Frito-Lay save money since they do not have to spend as much capital on advertising due to not going up against as much competition had they marketed the product as a chip.3. This alternative increases the chances of the success rate of this product since you are realigning the placement of the product and will not get lost amongst a highly volatile, competitive and high failure rate market+decreases cannibalism.

Disadvantages

1.With this alternative, you are targeting a very small niche which may hurt sales growth of the product.2.Frito-Lay with this alternative may be spending money where there is no need or want for a health chip product=Wasted capital.3.Re-Branding Fear-Frito-Lay has done so well with their “Junk” products that if they come out with a health product they may lose their main audience with fear that Frito-Lay is re-branding.

Alternative#3 - Test Marketing

According to the case, the testing sample for Sun Chips was in Minnesota. A suggestion is to have Sunchips tested in multiple states in the US. Instead of focusing its target market in Minnesota, Frito Lay could widen its testing to other neighboring states or select highly populated states that better represents the population.

Assumptions

A.A larger sample will offer better resultsB.Wider diversity of tests or potential consumersC.There is a need for the product in target areasD.Sample is a proper representation of the populationE.Market segmentation (targeting other states) will reap more benefits than concentrated marketing (targeting Minnesota only)F.Product is not a first mover, so research is available in other states/markets

Advantages1.Saves on cost – mistakes can be corrected in sampling phase2.Exposure – making customers aware of the product (increases chances of referrals), allowing them to test the product risk-free3.Increased customer feedback – larger sample, more variety of customers, more feedback4.Ability to see how sampling affects consumer behavior - does it peak their interest? do they want more?5.Market segmentation would increase customer feedback6.With this chip marketing strategy, Frito Lay could enhance its product life cycle depending on consumer demand.

Disadvantages

1.Increased cost – costs associated with production and distribution of samples2.Chance of wastage – if target is not clarified or useful, it may be a waste to give samples to them3.Need – there may not be a need for the product4.Chance of Failure - With other similar products on the market, consumer loyalty, preference and resistance to try new products may result in product launch failure

Alternative#4 - Manufacturing

● Reflected from the case, the multigrain Sunchip requires a large-scale manufacturing and high involvement in order to sustain in the marketplace.

● Invest and build more production lines to expand manufacturing capacity.

Assumptions

A.Capable process technologies

B.The production line expansion is financially affordable

C.Independent research data is reliable and effective for the national market

Advantages

1.Increase sales volume

2.Seizing market opportunities by building competitive strategy initially(new market segmentation)

Disadvantages

1. Significant capital investment

2. High involvement

3. Resource allocation is necessary

4. Potential product cannibalization may occur

Solution

As a team we have decided Alternative#2 is the best solution. Alternative#2 is to realign the placement/position of the SunChips product. Sunchips should be labeled as health product rather than as a chip and placed in health aisles and health stores.

Although it is post production and testing phase we feel this will help SunChips be successful and kills two problems with one solution.

Assumptions

Key Strength

1.Considerably less competitive health product market - Provides Frito Lay with the possibility to obtain an early entry competitive advantage also reduces costs associated with operating in Highly Competitive market

2.Proven “want” from consumers, specifically the growing population of aging baby boomers for healthy products

Weaknesses

1.Chip labeling - Chips are traditionally viewed as unhealthy, different category labeling is suggested

2.Low advertising - Frito Lay needs to increase its advertising to reach its concentrated market

3.Increased competition - Going healthy is the craze now. Although the health product category brings less competition than the chip category, everyone is headed in this direction so competition is increasing.

Constraints/Limitations

Contingencies

Contingency is defined as:A future circumstance that is possible but cannot be predicted with certainty.

1.A competitor of Frito-Lay takes the market by storm with a better health chip product.

2.Future testing shows that SunChips is not as healthy as originally thought out to be.

3.SunChips does not make a profit as a health product and they place it with the other chips which leads to product cannibalism.