Frito-Lay, Inc.: Subchips Multigrains

Performance Analysis.

Frito-Lay has well-known brands such as Lay’sÐ'®, RufflesÐ'® potato chips, FritosÐ'® corn chips, DoritosÐ'®, TostitosÐ'®, SantitasÐ'® tortilla chips, Chee•tosÐ'® cheese-favored snacks, and Rold GoldÐ'® pretzels (see Exhibit 1). Eight of those snacks are in top ten best selling in the U.S. Frito-Lay’s business spans every aspect of snack-food production. It has 39 plants, 1600 distribution facilities and 10,000-person route sales teams serving over 400,000 retail customers each week national wide. In 1990, Frito-Lay has fulfilled over $3.5 billion sales in U.S. market.

The new product line of Sun-Chipsв„Ñž Multigrain snacks will benefit from the excellence of Frito-Lay’s sales performance along with the current trend of “low-carbohydrate” craze. Based on the pre-market test analysis (PMT), national snack chip users are expected to purchase more than 31 million pound of Sun-Chipsв„Ñž (see Exhibit 2). The sales price is $2.7 per pound (see Exhibit 3), the contribution margin is $1.3 per pound, therefore, the total contribution will be over $40 million; exclude the effect of 30 percent of canonization rate, which accounts for $2.3 million loss, (see Exhibit 4), the brand contribution of Sun Chipв„Ñž is over $38 million (see Exhibit 5).

Determinants of Strategic Options

Frito-Lay considers timing and competitive the big strategic issues so that quick decisions, operational efficiency and high capital investment are critical for Sun-Chipsв„Ñž Multigrain snacks to take advantage of first markets. Frito-Lay introduces two package sizes with distinctive package design for each flavor. It does not charge a premium price in order to be consistent with consumer reference prices for snack chips. The primary target of Sun-Chipsв„Ñž is people between the ages of 18 and 34 because they represent the principal purchasers and heavy users of snack chips. The secondary target is people who bracket to 49 years old. Sun-Chipsв„Ñž will be supported by television advertising, in-store displays and freestanding inserts in newspapers, etc. Frito-Lay will also hand the distribution through its store вЂ"door delivery system and sell Sun-Chipsв„Ñž through supermarkets, grocery stores, convenience stores and other retail accounts that already stocked Frito-Lay’s snack product.

Alternative Analysis

Three main alternatives face Frito-Lay, Inc. First, take the conservative way and still put Sun Chipв„Ñž multigrain snacks in test market. Because all the performance analysis is based on projection from the test market; the longer the test, the more accurate the projection is. If put Sun Chipв„Ñž in test market longer enough, the results will help to make the precise budgets. On the other hand, Frito-Lay would have time to test its multigrain snack process technology, which hasn’t be done yet. However, timing is critical and it may lose the benefits of being the first marketer because other competitors may launch similar line of products and sell them in national market before Frito-Lay.

Second, launch Sun Chipв„Ñž nationwide immediately. There is no similar product in the national market yet. Along with its brand recognition, Frito-Lay will benefit from being the starter. The advertising and merchandising (A&M) budget is $22 million on a nationwide basis. To achieve $100 million sales, it needs to sell 37 million pound in the first year. Considering cannibalization effect, the total profits will be over $23 million (see Exhibit 6). However, it is based on current PMT analysis. The projected profits may not be accurate. Besides, since the multigrain snack process technology is still untested, it will cause severe manufacturing difficulties.

Third, launch Sun Chipв„Ñž nationwide and increase the aA&M budget to $30 million. In this scenario, the net profit will be more than $15 million. In the initiating stage, brand awareness is critical although it will involve 34% loss for the first year profit comparing with the $22 million A&M projection. However, if based on the PMT analysis with the same A&M budget but lower sales, the net profit loss will only account for 4% (see Exhibit 6); and, in the long run, it will help stimulate brand recognition.

Recommendation

Launch Sun Chipв„Ñž nationwide immediately and increase A&M budget.

Exhibit 1: Frito-Lay, Inc.: Major Brands and the Market Share in 1990.

Exhibit 2: Projection of National Household Purchase.