I CCFY MADE ON BEHALF OF Frito-Lay, Inc. – Sun ChipsTM Multigrain Snacks I 6 Au3hsf -, – k07 NUS Gusinass School In mid-1990, Dr. Dwight R. Riskey, Vice President of Marketing Research and New Business at Fritu-Lay,Inc. , assembled the product management team responsible for Sun Chipsm Multigrain Snacks. The purpose of the all-day meeting was to prepare a presentation to senior Frito-Lay executives on future action pertaining to the brand. Sun Chipsm Multigrain Snacks is a crispy textured snack chip consisting of a special blend of whole wheat, corn, rice, and oat flours with a lightly salty multigrain taste and a slightly sweet aftertaste.
The product contains less sodium than most snack chips and is made with canola or sunflower oil. The chip is approximately 50 percent lower in saturated fats than chips made with other cooking oils and is choles terol-free. According to a Frito-Lay executive,it is “a thoughtful,upscale classy chip. ” The product had been in test market for 10 months in the Minneapolis-St. Paul, Minnesota, metropolitan area. Even though it appeared consumer response was extremely favorable, Riskey and his associates knew their presentation to senior FritoLay executives would have to be persuasive.
In addition to presenting a thorough assessment of test-market data, Riskey added: We will have to do heavyduty selling [to top executives] because Sun Cbipsm Multigrain Snacks required a new manufacturing process, carried a new brand name, and pioneered a new snack chip category. There is a huge capital investment and a huge marketing investment that could be ? inancially justified only with a product that could be sustainable for an extended time period. Frito-Lay, Inc. is a division of PepsiCo, Inc. , a New York-based diversified consumer goods and services f m . Other PepsiCo, Inc. divisions include Pizza Hut, Inc. Taco Bell Corporation, Pepsi-Cola Company, Kentucky Fried Chicken, and PepsiCo Foods International. PepsiCo, Inc. recorded net income of $1. 077 billion on net sales of $17. 8 billion in 1990. Company Background Frito-Lay, Inc. is a worldwide leader in the manufacturing and marketing of snack chips. Well-known brands include Lay’sB brand and RufflesB brand potato chips, ~ritos@ brand corn chips, ~oritos@’ h d , ~ o s t i t o s @ ‘ brand, and santitasB brand tortilla chips, ~hee. tos@’ brand cheese-flavored snacks, and Rold Gold@ brand pretzels. The cooperation of FriteLay,Inc. in the preparation of this case is gratefully acknowledged.
This case was prepared by Professor Roger A. Kerin, of the Edwin L. Cox School of Business, Southern Methodist University,and Kenneth R. Lukaska, Product Manager, Frito-Lay,h c . , as a basis for class discussion and is not designed to illustrate effective or ineffective handling of an administrative situation. Certain company information is disguised and not useful for research purposes. Copyright O 1995 by RogerA. Kerin. No part of this case may be reproduced without written permission of the copyright holder. FRITO-LAY, INC. 013 EXHIBIT 1 Frito-. Lay, Inc. : Major Brands I n – EstimatedmRgtanSales: w $638 Million
Source: 1990 PepsiCo, Inc. , annual report. The company’s major brands are shown in Exhibit 1 along with estimated worldwide retail sales. Other well-known Frito-Lay products include ~ a k e n – ~ tbrand fried pork s@ skins, ~ u n c h o s @ brand potato crisps, and ~unyuns@ brand onion-flavored snacks. In addition, the company markets a line of dips, nuts, peanut butter crackers, processed beef sticks, smartfood@ brand ready-toeat popcorn, and randm ma’s@ brand cookies. Frito-Lay,Inc. accounts for 13 percent of sales in the United States snack-food industry, which includes candy, cookies, crackers,nuts, snack chips, and assorted other items.
The company is the leading manufacturer of snack chips in the United States, capturing nearly one-half of the retail sales in this category. Eight of Frito-Lay’s snack chips are among the top ten best-selling snack chip items in U. S. supermarkets (see Exhibit 2, page 616). ~ o r i t o brand tortilla chips and ~uffles@ s~ brand potato chips have the distinction of being the only snack chips with $1 billion in retail sales in the world. Frito-Lay’s snack-food business spans every aspect of snack-food production, from agriculture to stacking supermarket shelves. During 1990 in the United States alone, Frito-Lay used 1. billion pounds of potatoes, 600 million pounds of corn, and 55 million pounds of seasonings. The company has 39 manufacturing plants, more than 1,600 distribution facilities, and a 10,000-personroute-sales team that calls on EXHIBIT 2 T o p – S e b g Snack Chip Items in U. S. Supermarkets (Retail Sales in $ Millions) Doritosa Tortilla Chips Ruffles@Potato Chips Potato Chips Fritos@Corn Chips Chee-tos@Cheese Flavored ringlels@ Potato Chips sio@ Crispy Round TortiUa Chips tt s ‘ FriteLay Variety Pack Santitasa Restaurant Style Tortilla Chips Eagle Thins Potato Chips
Source: 1990 PepsiCo,Inc. ,annual report. more than 400,000 retail store customers each week in the United States. Frito-Lay, Inc. , recorded U. S. saIes of $3. 5 billion in 1990. Product-Marketing Strategies Frito-Lay pursues growth opportunities through four product-marketing strategies. 1. G m established Frito-Lay bran& through line extension. Recognizing that consumers seek variety in snack tastes and sizes without compromising quality, Frito-Lay marketing executives use line extensions to satisfy these brand bite-sized wants.
Recent examples of line extension include ~ o s t i t o s ~ tortilla chips and ~hee*tos@ brand Flamin’Hot Cheese Flavored Snacks. 2. Create new products to meet changing consumer preferences and nee&. Continuous marketing research at Frito-Lay is designed to uncover changing snacking needs of customers. A recent result of these effort. is evident in the launch of a low-oil light line of snack chips. 3. Develop products for fast-growing snack-food categories. Recognizing that snack-food categories experience different growth rates, Frito-Lay marketing executives continually monitor consumption patterns to identify new opportunities.
For example, Frito-Lay acquired smartfood@ brand popcorn in 1989. In 1990, this brand became the number one ready-to-eat popcorn brand in the United States. 4. Reproduce Frito-Lay successes in the international market. Initiatives pursued in the United States ofcen produce opportunities in the international arena. Primary emphasis has been placed in large, well-developed snack markets such as Mexico, Canada, Spain, and the United Kingdom. Innovative rnarketing coupled with product development efforts produced $1. 6 billion in international snack-food sales in 1990. THE SNACK CHIP CATEGORY
The United States snack-food industry recorded retail sales of $37 billion in 1990, representing a 5 percent increase over 1989. Dollar retail sales of snack chips consisting of potato, corn, and tortilla chips, pretzels, and ready-toeat popcorn were estimated to be $9. 8 billion-a 5 percent increase over 1989. A major source of growth in the snack chip category results from increased per capita consumption. In 1990, consumers in the United States bought 3. 5 billion pounds of snack chips, or nearly 14 pounds per person; in 1986, snack chip per capita consumption was slightly less than 12 pounds. Competitors
Three types of competitors serve the snack chip category: (1) national brand h s , (2) regional brand h s , and (3) private brand h s . National brand h s , which distribute products nationwide, include Fritehy, Borden (Guys brand potato and corn chips, and Wise brand. potato chips, cheese puffs, and pretzels), Procter and Gamble (pringlesB brand potato chips), RJR Nabisco (several products sold under the Nabisco name as well as Planter’s brand pretzels, cheese puffs, and corn and tortilla chips), Keebler Company (O’Boisies brand potato chips), and Eagle Snacks (a division of Anheuser-Busch Companies, Inc. which sells Eagle brand pretzels and potato and corn chips). A second category of competitors consists of regional brand h s , which distribute products in only certain parts of the United States. Representative firms include Snyder’s, Mike Sells, and Charles Chips. Private brands are produced by regional or local manufacturers on a contractual basis for major supermarket chains (for example, Kroger and Safeway). Competition The snack chip category is very competitive. As many as 650 snack chip products are introduced each year by national and regional brand companies.
Most of the products are new flavors for snack chips. The new-product failure rate for snack chips is high, and industry sources report that fewer than 1 percent of new products generate more than $25 million in frrst-year sales. Snack chip competitors rely heavily on electronic And print media advertising, consumer promotions, and trade allowances to stimulate sales and retain shelf space in supermarkets. Pricing is very competitive, and snack chip manufacturers often rely on price deals to attract customers.
The nature of the technology used to produce snack chips allows snack chip manufacturers to react swiftly to new product (flavor) introductions by competitors. Extensive sales and distribution systems employed by national brand competitors, in particular, allow them to monitor new product and promotion activities and place competing products quickly in supermarkets. DEVELOPMENT OF SUN CHIPSTM MULTIGRAIN SNACKS Sun ChipsTM Multigmin Snacks resulted from Fritehy’s ongoing marketing research and product development program. However, its taste and name heritage can be traced to the early 1970s.
Product Heritage Fritehy product development personnel first explored the possibility of a multigrain product in the early 1970s when corporate marketing research studies indicated consumers were looking for nutritious snacks. A multigrain snack chip called CHAPTER 1 1 COMPREHENSIVE MARKETING PROGRAMS pronto@ was introduced-in 1974 with the following positioning statement:”The different, delicious new snack made from nature’s own corn, oats, and whole grain wheat all rolled into one special recipe, together in asnack for the first time from Frito-Lay. The product was only mildly successful despite advertising and merchandising support. The product was subsequently withdrawn from national distribution in 1978 due to declining sales and manufacturing difficulties. According to Frito-Lay executives, the demise of pronto@ in 1978 was driven by “noncommittaln copy, a confusing name, and a product that generated appeal among too narrow a target market. Reflecting on this experience, Riskey added, “I’m not sure there were dramatic things wrong with the product design so much as ifficulty with the manufacturing process. It may have been invented and introduced before its time. ” The brand name for the product had an equally arduous past. The Sun ChipsTM name was originally assigned to a line of corn chips, potato chips, and puffed corn snacks in the early 1970s. In 1976, the brand name was given to a line of corn chips, but by 1985,this line was also withdrawn from distribution due to poor sales performance. Product Development: The “Harvest” Project
Early 1980s Interest in a multigrain snack was revisited in the early 1980s when Frito-Lay marketing executives began to worry whether the aging baby boomers (people born between 1946 and 1964) would continue to eat salty snacks such as potato, corn, and tortilla chips. According to Riskey: The aging baby boomers were a significant factor [in our thinking]. We were looking for new products that would allow them to snack. But we were looking for “betterfor-you” aspects in products and pushing against that demographic shift.
In 1981,Frito-Lay marketing research and product development personnel instituted the “Harvestnproject with an objective of coming up with a multigrain snack that would have consumer appeal. After several product concept tests and in-home product use tests failed to generate any consumer excitement, it was concluded that the market for wholesome snacks was not yet fully developed to accept such products. Other evidence seemed to support this view. In 1983, FriteLay test marketed O’Grady9s” brand potato chips. The results had been phenomenal.
Projections based on test market performance indicated the brand would produce $100 million in annual sales,which it did in 1984 and 1985. Mid-1980s The “Harvestn project continued in the mid-1980s,albeit at a slower pace due to staff changes and other responsibilities of project team members. At about this time, a change in top management and corporate objectives focused product development efforts on traditional snacks with an emphasis on flavor line extensions for established Frito-Lay brands (for example, Cool Ranch ~oritos@ brand tortilla chips) and low-fat versions of its potato, corn, and tortilla chips.
In addition, attention was placed on costiontainment measures coupled with continuous qualityimprovement initiatives using existing manufacturing facilities and existing product and process snack chip technology. Late 1980s Development efforts on a multigrain product were renewed in early 1988. Over the following 13 months, different product formulations (for example, low oil vs. regular oil; salt content;chip shape), alternative positionings, and branding options (extension of an existing Frito-Lay brand vs. new brand name) were extensively studied using consumer taste tests and product concept tests. The combined results of these tests yielded a multigrain rectangular chip with ridges and an excep tional taste. Further testing of brand names and flavors revealed consumer prefer- FRITO-LAY, INC. 619 EXHIBIT 3 Consumer Expectations and Perceptions of Snack Chips and Multigrain Snacks PRETRIAL PRODUCT EXPECTATIONS HEALTHY PRODUCT Trier Natural 8 Trier . t E E Y A SNACK VR D Y 8 Cool Ranch DoritosB All Dofitos@ Ruffles@ Nacho Cheese DoritosB
Premium 8 Crackers Trier French Onion Mild Cheddar ~ ~ t a l Crackers r Ritz Crackers Fritos@ Corn Chips I * Lay’s@ Potato Chips 8 Total Salty Snacks 1 POSTUSE PERCEPTIONS: TRIER REPEATERS VS. TRIER NONREPEATERS HEALTHY PRODUCT ~ &*. ob. gg-Nga Premium Crackers I ~epeate;Mua- Cheddar ] t 1 Ritz I Crackers 8 Fritos@ Corn Chips >- EVERYDAY SNACK 8 8 Cool Ranch Doritos@ Total Salty Snacks. AU ~oritos@ 8 Nacho Cheese Doritosm Ruffles” Potato Chips I ences for two names (one of which was Sun ChipsTM) and three flavors (original/natural, French onion, and mild cheddar).
Further consumer research revealed that the multigrain product concept and assorted flavors were perceived as a “healthier product. ” This research also indicated that consumer expectations prior to use (that is, before initial trial of the product) were that the product would not be an “everyday snack” item. Consumers who tried the product, however, perceived the multigrain product to be an “everyday snack:’ at least for the natural and French onion flavors. Exhibit 3 shows a plot of pretrial consumer expectations and postuse perceptions of different flavors and representative 20 EXHIBIT 4 Concept Board for the Premarket Test The great tasting snack chip for people who care about what they eat. More and more people care about what they eat because they know that eating habits affect overall heaith and fitness. SUN CHIPST”are a special blend of whole wheat, golden corn and other natural great tasting grains. These wholesome grains combined make a uniquely delicious chip with the golden goodness of corn and the nut-like flavor of wheat. They’re cooked ’till lightly crisp and crunchy.
Then they’re lightly salted to let all that naturally good flavor come through. SUN CHIPS'” are a unique combination of great taste, great crunch, and natural goodness, all rolled into one remarkable chip. So, try new SUN CHIPST”,the chip with the uniquely delicious taste for people who care about what they eat. Available in these two delicious flavors: Natural French Onion snack chip brands and crackers. Concurrent research on brand names indicated a decided preference for the Sun ChipsTM name.
The name evoked positive consumer imagery and attributes of “wholesomeness,great taste, light and distinctive, and fun,” according to a Frito-Lzy executive. Premarket Test Positive consumer response to the product concept and brand name prompted an initial assessment of the commercial potential of Sun ChipsTM Multigrain Snacks. A simulated test market or premarket test (PMT) was commissioned in April 1989 and conducted by an independent marketing research firm.
A PMT involves interviewing consumers about attitudes and usage behavior concerning a product category (for example,snack chips). Consumers would be exposed to a product concept using product descriptions or mock-ups of advertisements,and their responses would be assessed (see Exhibit 4). These consumers would then be given an opportunity to receive the product if interested. After an in-home usage period of several weeks, they would be contacted by telephone and asked about their attitude toward the product, use of the product, and intention to repurchase.
These data would be incorporated into computer models that would include elements of the product’s marketing plan (price, advertising, distribution coverage). The output provided by the PMT would include estimates of household trial rates, repeat rates, ra average number of units purchased on the initial til and subsequent repeats in the first year, product cannibalism,and first-year sales volume. ‘ The product concept tested in the PMT was priced at parity with ~oritos@ brand tortilla chips. Planned distribution coverage was set at levels comparable for FritoLay potato, corn, and tortilla chips.
Twoflavor combinations (natural and French onion and natural and mild cheddar) and three advertising and merchandising expenditure levels ($11 million, $17 million, and $22 million) were t e ~ t e d . ~ Results from the PMT indicated that Sun Chipsm Multigrain Snacks would pro duce a most likely first-year sales volume of $113 million at manufacturer’s prices given the marketing plan set for the product, including a $22 million advertising and merchandising expenditure. The estimated kst-year sales volume exceeded the $100 million FritoLay sales goal for new products.
The n a h d and French onion flavor combination produced the lowest cannibalization (42 percent) of other FritoLay brands. Summary statistics for the simulated test market are shown in Exhibit 5 on page 622. TEST MARKET Positive results from consumer research and the simulated test market led to a recommendation to proceed with Sun Chipsm Multigrain Snacks and implement a test market under Dwight Riskey’s direction, The Minneapolis-St. Paul, Minnesota metro politan area was chosen as the test site because FritoLay executives were confident it had a social and economic profile representative of the United States.
Furthermore, Minneapolis-St. Paul, in general, represented a typical competitive environment in which to test consumer acceptance and competitive behavior. The Minneapolis-St. Paul metropolitan area contained 1. 98 million households that were identified as users of snack chips, or 2. 2 percent of the 90 million snack chip user households in the United States. Discussion among FritoLay marketing, sales, distribution, and manufacturing executives and the company’s advertising agency indicated that the test market could begin October 9, 1989.
Accordingly, a test-market plan and budget were finalized. The test market was scheduled to run for 12 months, with periodic reviews scheduled throughout the test. Snack-food industry analysts became aware of FritoLay’s development efforts on a multigrain snack chip soon after the company began preparation for the test market. According to one industry analyst: Published validation data on premarket test models indicate that75 percent of the time they are plus or minus 10 percent of actual performance when a product was introduced (see, for example, A.
Shocker and W. Hall,”PretestMarket Models: A Critical Evaluation,”Journal of Product Innovation Management 3, (1986): 86- 107. Advertising and merchandising expenditures included electronic and print media advertising,consumer promotions, and trade allowances. * EXHIBIT 5 Simulated Test-Market Results (Selected Statistics) Product and Promotion StrategSP Natural G Mild Cherkiar Combination A M Budget G $1 7 million — Natural G Erench Onion Combination A M Budget & $1 7 million AGM Budget $22 million ACM Budget $22 million
Purchase Dynamics Brand awareness (% of households) Cumulative first-year trial rate (%)b Cumulative first year repeat rate (%)’ Number of purchases in first-year per repeating household Volume Projections ($ millions) Pessimistic Most likeiy Optimistic Incremental annual volume (%) Cannibalized pound volume (%) (from Frito-Lay products) The $11 million advertising and merchandising (A&M) budget for the two flavor combinations produced lower figures than those shown. For example, brand awareness was 35 percent and the cumulative first-year trial rate was 19 percent regardless of flavor combination.
Cumulativeflrst-year h-ial refers to the percentage of households that would try the product. cumulative first-year repeat refers to the percentage of trier households that repurchased the product. a This is a departure from corn or potatoes. Wheat is different. Remember they departed from corn and potatoes a few years ago with ~umbles@, t u f f e r s ~ , ~ and ~ o ~ p e l sand, it was a distasteful business. I’m sure they will take their time and @ really test it. It’s not like they don’t have other products, so there’s no hurry3
Test-Market Plan Product Strategy Frito-Lay executives decided to introduce both the natural and French onion flavors given consumer research and simulated test-market results. Sun ChipsTM MultiSnacks would be packaged in two sizes: a 7-ounce package and an ll-ounce package. These package sizes were identical to ~oritos@ brand tortilla chips. A 2 / -ounce til package would be used as well. l2 ra “New Multigrain Chip Being Readied forTea:AdveWsing Age (June 26,1989): 4. The products referred to were Stuffersmcheese-filled snacks, ~umbles@ granola nuggets, andToppels@ cheese-topped crackers.
These products were introduced in the mid-1980s,failed to meet sales expectations, and were rm subsequently withdrawn f o the market. EXHIBIT 6 Sun ChipsTM Multigrain Snacks Packaging EXHIBIT 6 (continued) Package design was considered to be extremely important. According to a FriteLay executive,”We wanted distinctive, contemporary graphics which would communicate u new, different and f n amidst positive images-sun and a sprig of wheat. “This view rnaterialized in a metalized flex bag with primary colors of black (natural flavor) and green (French onion flavor). Exhibit 6 shows the packages used in the test market. Pricing Strate