Frito Lays

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Introductions Case summary and key facts - Summary + Financial Main issues for decision maker Analysis and class discussion of main issues Our recommendations Class recommendations

1. Grow established Frito-Lay brands through line extension 2. Create new products to meet changing consumer preferences and needs 3. Develop products for fast-growing snack food categories 4. Reproduce Frito-Lay Successes in the international market

Background Information
Frito-Lay Brands include: Lays, Ruffles, Fritos, Doritos, Tostitos, Cheetos, Rold Gold, Funyuns Accounts for 13% of sales in U.S. snack-food industry World leading manufacturer of snack chips Recorded $3.5 billion in sales in 1990 in U.S. Acquired Smartfood brand popcorn in 1989 #1 ready-to-eat popcorn brand in the U.S. Sun Chips Less sodium than most chips 50% lower in saturated fat than other chips No cholesterol

Development of Sun Chips
Frito-Lay first explored possibility of multigrain snack1976 1970 1974 1978Harvest Project 1981 1983 1985 Sun Chips 1988 multigrain1989 snack introduced

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Sun Chips named assigned to a line of corn chips

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O'Grady's potato chips test marketed

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Prontos, a multigrain snack, was introduced Prontos withdrawn from distribution

. . . .

Premarket test shows Sun Chips (corn chips) potential of withdrawn Sun Chips Frito-Lay decides to focus on established brands (Cool Ranch Doritos)

Frito-Lay Considerations
Planning Considerations Timing: first-to-market advantages Capacity: needed assurance adequate manufacturing was in place Strategy Considerations Increased advertising and merchandising spending Larger package size Flavor extension

Pre-Market tests April 1989
$113M 1st year sales volume prediction Natural Flavor & French Onion best options combination with cannibalization rate 42%

Test Market Oct. 9, 1989
Minneapolis St. Paul, Minnesota Metropolitan area test site – social economic profile representative of whole US; 2 million households 12 Month test w/ periodic reviews

Product Strategy
2.25 oz, 7 oz, 11 oz bags identical to Doritos

Pricing Strategy – same as Doritos consistent w/ consumer reference prices and good value

Advertising & Merchandising Strategy
Primary target adults 18-34, Secondary target 34-49 Convey subtle messages of wholeness, fun, & simplicity in TV Ads, in-store displays and freestanding inserts, & coupon supports

Distribution & Sales Strategy
Frito-Lay Store-door where delivery and sales duties combined Sold in supermarkets, conveniences stores, & other retail accounts

Manufacturing – New production line and facilities needed to support 1 Million production LBS/ Yr

PLANNING
Timing & Competitive Reactions 1st to market issues, threat of being upstaged by copycat competitors National Intro & Capacity expansion issues: $20m for full capacity justified only by Sun-Chip sales sustainability & magnitude O’Grady vs. Sun-chips issue: need for more data & selection of one (Sun-Chips most promising, high capital investments already in both)

STRATEGY
Increase Advertising & Merchandising spending = $30M = increase in Brand awareness and trial stimulation Add larger 15 oz package: this could stretch product capacity, considered better to do after Market place established Flavor extension: add Mild Cheddar = increase to 3.5x repeat buying, Cannibal rate up to 35%, & Severe Manufacturing difficulties

$484k, 70% to be spent in 1st 6 months Independent research firm results in: Types of purchases: 90% purchases from Supermarket or conveniences stores After 10 months: 15% from 2.25 oz bags, 47% from 7 oz bags, & 38% from 11 oz bags 55% French Onion, 45% Regular flavor Trial Repeat rates: 1 in 5 households tried it of which 41.8% repurchased at least once Depth of repitition = 2.9 times avg. repurchasing rate Cannibalization rate = 30%

Test Market to actual market conversion    
Minneapolis - St Paul Households Triers Total Repeat triers...
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