Kelsey French

Frito Lay Brand Case Study

1. How would you characterize the snack chip category and Frito-Lays competitive position in this category? The snack chip industry accounts for 26% of the entire snack food industry and is an extremely competitive category. In addition to being competitive, the new product failure rate is extremely high. Every year over 650 new types of snack chips are introduced to the market. Most of these new products are new flavors of existing snack chips. The snack chip industry is a mature industry with limited growth of only about 5%. Frito-Lay is a leader in the manufacturing and marketing of snack chips and holds close to 50% of all retail sales in the area. Therefore, FritoLay accounts for 13% of the snack-food industry sales. In 1990 Frito-Lay had recorded sales of $3.5 billion. 2. What specific challenges and risks does Frito-Lay face in marketing Sun Chips and what are the implications of each? The snack chip category is highly competitive and the new-product failure rate is high. Very few new products can generate more than $25 million in first-year sales. This leads to companies utilizing competitive pricing to differentiate. However, too much price competition can cause a decrease in profits. Therefore, it is very important to use other tools in order to stimulate sales for the product. Additionally, since SunChips is a multigrain product, it requires a large-scale manufacturing program that requires different processes and technology. This new manufacturing process will require a significant capital investment in a new production line. Another challenge Frito-Lay will face is creating brand awareness. Due to the high competitive nature of the snack chip industry, in order to expand the market developing brand awareness is critical. Therefore, more money should be spent on advertising in order to increase brand awareness. One significant risk Frito-Lay faces is the issue of product cannibalization. While many multi-product companies face this upon developing a new product, the testmarket has shown an expected cannibalization rate of 30%. It is also expected that one-third of the cannibalized volume will come from the Doritos chip, which is another product from Frito-Lay. Another risk that Frito-Lay will face is timing, with so many competitors monitoring Frito-Lays test market, Frito-Lay will need to move quickly and efficiently so they can be the first to market with SunChips. 3. What insights can be drawn from Frito-Lays prior experience with multigrain snacks? The previous multigrain product was called Prontos, and it failed for a multitude of reasons that Frito-Lay learned from in order to make SunChips a greater success. First, it was a difficult name for people to link with the concept of a healthier chip

Kelsey French option. The name SunChips offers a more positive image that people can more easily associate with healthy foods. Second, Prontos were introduced in 1974 when the healthy snack market was not developed. Therefore, by introducing SunChips to the market once it was developed, it will allow the mature market to more willingly accept the product. Third, at the time Prontos was produced manufacturing technology was not advanced enough to produced adequate amounts of product. This particular issue no longer exists. 4. What conclusions can be drawn from research on SunChips consumer acceptance and sales potential prior to the Minneapolis-St. Paul test market? In the pre-test, two flavors were introduced along with three ads and merchandising expenditure levels. During this test, results proved there was strong selling potential that estimated a first-year sales volume of $133 million. During the Pre-test it also suggested that Frito-Lay spend $22 million in Advertising and Merchandising expenditures in order to achieve the first-year sales. In the flavor test, French Onion and Natural flavors led to less cannibalization of other Frito-Lay products. The results of this pre-test were so favorable that it would be beneficial to go to a test market. 5. What is your assessment of the Sunchips test market results? The test market utilized was Minneapolis- St. Paul, Minnesota due to the social and economic profile of the city being very similar to that of the US. The products offered were the Natural and French Onion flavors in a variety of sizes with a packaging design that emphasized the new and different image of the product. The first-year trial rate during the test market was 25% and the repeat rate was 57%. This data clearly shows that the market willingly accepted the product and that the product was ready to be launched nationally. The cannibalization rate of SunChips was only about 30%, which was lower than the pre-market test estimate of 42%. Therefore, furthering the case for launching this product nationally. Additionally, the gross margin of SunChips was higher than for Frito-Lays other snacks therefore, they could afford the cannibalization because Sunchips was such a profitable product. Over 90% of the purchases were made in supermarkets with the French Onion flavor being the most popular. The test market for Minnesota-St.Paul was so successful and revenues at the manufactures prices indicate that Sunchips will exceed the US $100 million mark considerably if launched nationwide. 6. Given your assessment of the test market results, what actions should Dwight Riskey recommend to Frito-Lays top executives? In order to reach the goal of high brand awareness, Frito-Lay should consider investing more money on marketing and advertising. A budget in the range of $30 million should generate enough awareness to obtain trial purchasers and repeat customers. Upon immediate introduction, Sunchips should offer Natural and French Onion flavors in three sizes. After initial flavors and packaging sizes have been

Kelsey French released, the company should consider introducing a Cheddar flavor and other package sizes. Timing and competitive reaction are the key elements of the results. Frito-Lays competition is constantly monitoring SunChips and there is a high probability the competitors have an intention to develop their own version. Therefore, Riskey needs to be concerned with getting the product to market as fast as possible so that they dont lose the first to market advantage, which is critically important in the marketing of new products. Due to the extremely positive results of the test market, there is no need to extend the test market exercise. Additionally, any delay in launching the product would result in a loss of the first mover advantage. Ultimately, there are two options for Frito Lay: to do a nation-wide launch or to do a partial launch in selected states. While a partial launch in states with similar demographics to the test market city would help minimize possible risk of failure, due to the extremely positive test market results, a nationwide launch would be extremely successful No need to extend the test market exercise due to such positive results