For consumers of snack products the trial rate is low which is why increased focus on marketing is needed. One of the ways products can be most effectively introduced into the market is by going through various market tests.
Market Tests
Three basic types of research tests are used in the marketplace which supplements effective marketing programs. Without research into the consumer preferences, the implementation of a product into the market could result in an unsuccessful product line. As seen in the 1970’s with the failed attempt of Prontos, market research and testing could have altered the marketing approach to adjust for consumer preferences.
Concept testing is a form of research that is not conducted in the field but is rather conceptualized in a controlled environment. This testing allows potential marketing programs to ask a controlled group of consumers what they think either verbally or by involvement with the product by taste testing.
Premarket tests involve a higher level of engagement and realism by exposing the product to selected consumers representing a sample of the population market. Controlled testing allows a trial and error period for determining how the product can be expected to be transfused into the population market. This step involves a higher level of development, creating mock-up advertisements in order to identify attributed perception and purchase behaviors of the sample population theoretically representing the population target.Premarket testing could be misleading if there is a sampling error which could result in a variance between expected and actual results of the population implementation.
Test markets take the approach from the premarket tests and apply them to a target market. With increased exposure, sampling error is reduced providing higher quality results since it captures a large sample size. Since an entire market is being tested, implementation of price, promotion and distribution factors can also be measured.
Each phase of research testing provides more realistic results but also comes at a higher cost. Within the planning phase of product implementation, a balance must be weighed between the costs of the market research verse the benefit that could be provided. If the net benefit is less than zero then the marketing research should not be conducted.
Competitor analysis
Competition in the market is fierce as mentioned in the market analysis. Competition comes from various levels from national brands and regional to private brands. Each brand has a number of sub products that hit various niche markets. With over 650 new brands implemented each year, the competition is overwhelming the market with increased competition. Competition is not only seen across the industry but also occurs within each company.
Within the Sun-Chip analysis, the main competition is itself where it must receive resources from the Frito-Lay brand. Frito-Lay often may develop numerous new products each year but must decide where to allocate resources. Zero-sum applies within Frito-Lay where there are a limited number of resources and providing resources to one new product has to take away from another.
Environmental Analysis
The environment of the snack industry is weighed heavily between the economic influence and cultural influences. As with all consumer food products, there is regulation from the Food and Drug Administration which should be considered as any product that is released into the market that does not meet these standards could have a devastating impact to the brand image.
Pricing is always a large influence on the attractiveness of a product to consumer spending but with the current economic trend, there is increased pressure on efficiency of manufacturing and distribution to drive down prices. SunChips are targeted into an emerging sociocultural market for increased fitness and nutrition. The brand imaging is targeting the consumers’ motivators by lowering saturated fat, adding multigrain and offering a cholesterol-free product line.
Internal Analysis
Performance Analysis
Premarket testing showed that Sun Chips would have first year sales of approximately $113 million if the company spends $22 million in advertising and merchandising for the brand. A 52 week test marketing of Sun Chips predicted a predicted a revenue of $97.12 million in first year sales. This results in a profit of $13.43 million after factoring in $22 million in marketing expense and $11.33 million of cannibalization from other products. A full scale national launch of Sun Chips would require a capital expenditure of $20 million.
Consumers perceive Sun Chips as a healthier product compared to regular snack chips. Also, contrary to initial research, consumers who tried Sun Chips believed it to be an “everyday snack.” The name Sun Chip gave consumers the idea that the chip was wholesome, great tasting, light and distinctive, and fun. Compared to one ounce of Doritos, one ounce of Sun Chips have 10 less calories, 2 grams less fat, and 50 milligrams less sodium. This data is consistent with customers’ expectations of a healthier snack option compared to alternatives. Sun Chips are made with quality ingredients including whole wheat, golden corn, and other natural grains. The primary target market for Sun Chips is adults between the ages of 18 and 34. Studies showed that consumers in this age group were looking for a healthier snack option to the standard potato chip. Sun Chips were branded as “the great tasting snack chip for people who care about what they eat.” The advertising campaign would convey the message that Sun Chips are wholesome, fun, and simple.
Sun Chips will have the same retail price as Doritos. This cost come out to $2.70 per pound which is found with the following formula: . Sun Chips were test marketed in two flavors: original and French onion. Each flavor was available in 2.25, 7, or 11 ounce packages. If these products proved to be successful then the company will explore adding an additional mild cheddar flavor, and an additional 15 ounces package.
Determinants of Strategic Options
Frito-Lay first introduced a multigrain snack chip in 1974 called Prontos. This was done in response to customers’ desires for a nutritious snack chip. Prontos sales were not as great as expected and were discontinued in 1978. Frito-Lays blamed the failure on a confusing name and an overly narrow target market. Basically they believed Prontos were a head of their time. Frito-Lays revisited the multigrain snake chip in 1981, but test markets still suggested that the market was not ready for this chip category. The multigrain category was not explored again until 1988. At this time Frito-Lays spent 13 months testing different product formulations, alternative positioning, and branding options. These tests yielded three flavors of a product name Sun Chips.
A major issue of concern is the competition in the snack chop category. Less than 1% of new products generate more than $25 million in first year sales. Pricing is very competitive and competitors are able to react very quickly to new product introductions. Frito-Lay has an advantage over competitors due to its highly recognizable brands. The company produces eight of the ten bestselling snack chips in the US and is the only company with sales that exceed $1 billion. Frito-Lays had a net income of $1.077 billion and sales of $17.8 billion in 1990.
Alternative Analysis
Alternative 1
Frito-Lay, Inc. has many opportunities, but we will only consider four given alternatives. First, Frito-Lay could consider maintaining its presence in the Minneapolis-St. Paul test marker for an additional 6 months. The additional time and money that could be dedicated to the current test market could yield some results usable for determining predictability and reliability of the market.This could mean that Sun Chips would not be the pioneer in this market. Many benefits of being the pioneer would be sacrificed, due to increased vulnerability of competitors tapping the market first.
Alternative 2
The second option would have Frito-Lay, Inc. launch the Sun Chips product as tested in the Minneapolis-St. Paul market. This would include a 22 million dollar marketing budget, which was the annualized rate of the test market along with the two flavors, Natural and Onion, in the three package sizes. Yielded sales of the products would be around 30 million pounds. From a revenue standpoint, the goal of $100M will not be reached, as the annualized selling dollars would only equate to $82M, slightly offset by a net revenue margin expectation of 7.8M. The average price per pound sold to retailers is converted to $2.70.
Alternative 3
The third option is to follow option 2, but add a 15 oz. bag option. This additional package size is expected to add an increase of half an ounce to the average purchase size of repeat households. This would be an increase from 13 to 13.25. Yielded sales of the products would increase to 31.4 M lbs. From a revenue standpoint, the goal of $100M will still be unreached. The new annualized selling dollars equate to $84.5M, slightly offset by a net revenue margin expectation of $8.8M. The additional product size is assumed to be sold at the same price as the 11 ounce packaged before mentioned. An additional issue with this approach may be that four sizes could create operational issues such as stretching production capacity, increasing inventory, or acquiring adequate shelf space from retailers.
Alternative 4
The fourth and final alternative is to launch nationally and add an additional flavor Mild Cheddar to the current product offerings of Natural and Onion.The additional flavor is expected to increase the depth of repeat of repeaters. Still, however the $100M revenue goal is still unattainable. With an increase in cannibalization and the depth of repeaters being considered, the annualized revenue is expected to be $93M, being offset by a net revenue margin expectation of $9.6M. Many considerations should be taken before taking this alternative. The SKU’s involved will increase, more shelf space will be needed, and an increase in inventory cost will be incurred.
Recommendation
The recommendation is for Frito-Lay to proceed with the launch of the product line nationally. Waiting on more market testing makes the company entirely too vulnerable to missing the pioneering advantage which build brand recognition in the marketplace. Additionally, getting to many product variables can drive the product line from the retailers store due to inventory and spacing issues. Alternative 2 offers the best long term benefit for Frito-Lay in the snack industry.
Appendix 1
Appendix 2
Appendix 3
