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Frito Lay Sun Chips

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FRITO-LAY, INC. SUN CHIPS MULTIGRAIN SNACKS Smarketing Written Case Analysis 17 November 2009 BACKGROUND INFORMATION The Snack Food Industry The snack food industry has been steadily growing over time, increasing 5% in 1990 with corresponding retail sales of about $37 billion as well as a 5% increase in retail dollar sales amounting to $9.8 billion. More specifically, the chip sector has had a great impact on the industry as a whole, generating an overall increase in per capita consumption. Consumption of chips in the United States has reached 3.5 billion pounds, increasing the amount bought by consumers by about two pounds to fourteen pounds since 1986. Frito- Lay, Inc. Frito-Lay, Inc. ("Frito-Lay") is the worldwide leader in the snack chip industry with sales of $3.5 billion in the 1990. Frito-Lay's parent company, PepsiCo, Inc., reported net sales of $17.8 billion in 1990. PepsiCo, Inc. is the leading manufacturer in the snack industry, enabling Frito-Lay to be a leader within the chip industry, especially with regard to the marketing and manufacturing of chips. Under the Frito-Lay brand there are numerous brands, including: Doritos, Tostitos, Rold Gold and Cheetos. Frito-Lay also has brands in several other snack categories including dips, nuts, peanut butter crackers, beef sticks, Smartfood brand popcorn and Grandma's brand cookies. Frito-Lay Inc. has been a powerhouse within the snack industry, and has shown great success over the years. Frito-Lay has been so successful in operating in the chip industry due to their participation in all aspects of the manufacturing of their products, which includes being involved in the production ranging from agriculture to filling supermarket shelves. They have thirty-nine manufacturing plants, over 1,600 distribution centers, and a 10,000 person route-sales team which sells to over 400,000 retail stores per week. With that being said, Frito-Lay has accounted for 13% of sales within the snack food industry and has become the leader in the snack chip category gaining 50% of retail sales within it. ...read more.


47% of purchases were for the 7-ounce package followed by the 11-ounce package with 38% of purchases and the 2 1/4-ounce package accounting for 15% of purchases. More than half (55%) of the purchases were for the French onion flavor; 45% of purchases were for the natural flavor. Test market results also stated that 41.8% of trier households repurchased Sun Chips Multigrain Snacks at least once over the 10-month period. Repeater purchasers purchased the product an average of 2.8 times with an estimated average purchase amount for triers was 6 ounces. The independent research firm also indicated that 30% of Sun Chips Multigrain Snack pound volume resulted from consumers switching from Frito-Lay's potato, tortilla, and corn snack chips. One-third of the cannibalized volume from Frito-Lay's products came from Doritos brand tortilla chips. STATEMENT OF THE PROBLEM Dr. Riskey, Frito-Lay VP of Marketing Research and New Business, must decide how to proceed with the future product launch of Sun Chips. More specifically, the decision revolves around whether to continue product testing or to introduce the Sun Chips nationally. QUALITATIVE ASSUMPTIONS 1. With regard to national introduction, increased manufacturing capacities deal with distribution intensity, not geographical distribution. DISCUSSION OF ALTERNATIVES Alternative 1: Continue Test Market The first alternative addresses the question of whether or not Frito-Lay should continue testing Sun Chips for another six months, either in the same location or in another city. These options have been further broken down into sub-alternatives 1A and 1B: Alternative 1A: Continue Testing in Same Market Extending the test market in the Minneapolis-St. Paul, Minnesota metropolitan area for another six months would provide more accurate information to make better placement decisions and to determine whether or not to introduce the snack nationwide. It also gives the opportunity to extend advertising during the test period which would increase brand awareness. However, extending the test market would provide competitors, who are tracking the company, to get a head start and introduce their competitive products before Frito-Lay, this eliminating the first-mover advantage. ...read more.


Total fixed costs are calculated using the varied manufacturing costs ($5 mm, $10 mm and $20 mm) and marketing expenditures ($22 mm and $30 mm) based on the targeting of different percentages of the market. Comparison Analysis Test Market 15 oz Package Mild Cheddar Both $30 mm advertising budget 25% of market 247.73% 258.21% 281.79% 293.58% 50% of market 73.86% 79.10% 90.89% 96.79% 100% of market -13.07% -10.45% -4.55% -1.60% $22 mm advertising budget 25% of market 313.96% 326.44% 354.51% 368.55% 50% of market 106.98% 113.22% 127.26% 134.27% 100% of market 3.49% 6.61% 13.63% 17.14% This comparison analysis table shows the percent difference between the required breakeven amounts (for each of the market sizes, 25%, 50% and 100%) and the forecasted sales volume for each category. For example, the 15 oz Package forecasted sales represent 258.21% more sales volume than the breakeven sales volume required to serve 25% of the market. RECOMMENDATION Riskey should recommend introducing Sun Chips natural and French onion flavors nationwide at a manufacturing capacity of 50%, using a $30 million advertising budget. Although adding the Mild Cheddar flavor would increase depth of repeat rate, the rate for the original two flavors as determined by the test market is adequate for nationwide introduction. Furthermore, due to its higher cannibalization rate, the addition of another flavor proves to be unnecessary. Based on the forecast volume, using a 50% manufacturing capacity would provide Frito-Lay with a profit, whereas 100% capacity would result in a net loss for the product line. The nationwide distribution of Sun Chips warrants the need for an increased advertising budget to $30 million. This will increase brand awareness and provide more opportunity for product trial through increase promotions. The quantitative analysis of the recommendation is as follows: Forecasted Sales Volume 31,046,985 lbs Weighted Average Price per pound $2.70 Variable Cost $1.30 Total Sales Revenue $83,826,859.50 Total Costs Marketing Expenditure 30,000,000.00 Manufacturing Outlay 10,000,000.00 Variable Cost 40,361,080.50 Gross Profit $3,465,779.00 ?? ?? ?? ?? 14 ...read more.

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