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Frito-Lay, Inc – Sun Chips™ Multigrain Snacks

Graduate Diploma in Marketing Management:Strategic Marketing Management

Frito-Lay: SunChips Multigrain Snacks Case Study

Group Members : Chelest LimFadly YahayaPradeep Kelvin Lee

11 September, 2004

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1. Mission

The purpose of this report is to evaluate the feasibility of Frito-Lay Inc launching a new product, Sun Chips™ Multigrain Snacks, into the US market. This report presents many of the findings that were gathering during the premarket test and well as the test market for Sun Chips™ Multigrain Snacks.

Dr Dwight R. Riskey, Vice President of Marketing Research and New Business at Frito-Lay, Inc had to decide if it was feasible to introduce the product, Sun Chips Multigrain Snacks, to the U.S markets. His decision would be based on the results of the test market launch of SunChips in Minneapolis-St Paul, Minnesota.

Sun Chips™ Multigrain Snacks required a new manufacturing process, carried a new brand name, and pioneered a new snack category. There would be a huge capital investment and a huge marketing investment that could be financially justified only if it could be sustained for an extended time period.

The objective of the report will be to answer these salient questions:

(a) How is the snack chip market characterized and how would Frito-Lay’s position in the market be described?

(b) What specific challenges and risks does Frito-lay face in marketing SunChips? What insights can be drawn from Frito-Lay’s prior experience with multi-grain snacks?

(c) What conclusions can be drawn from research on SunChips’s consumer acceptance and sales potential prior to the Minneapolis-St Paul’s test market? What is the assessment of the SunChips test market results?

(d) What future actions should be recommended to Frito-Lay’s top executive? The reasons for recommending this course of action should also be explained.

The next few chapters will describe the very competitive snack chip market, the competition, the team’s analysis of the information given as well as the final recommendations.




2. Frito-Lay – A Short Summary

Frito-Lay, Inc is a division of PepsiCo, Inc, a New-York-based diversified consumer goods and services firm. Besides PepsiCo, Inc. divisions include Pizza Hut, Inc, Taco Bell Corporation, PepsiCola 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.

Frito-Lay, Inc is known as a worldwide leader in the manufacturing and marketing of snack chips, capturing nearly 50% of all retail sales in this area. It houses well-known brands such as Lay’s brand and Ruffles brand potato chips, Fritos brand corn chips, Doritos brand, Tostitos brand and Sanitas brand tortilla chips, Cheetos brand cheese-flavored snacks, and Rold Gold brand pretzels. The snack chips industry accounts for approximately 26% of the snack food industry. Doritos brand tortilla chips and Ruffles brand potato chips have the distinction of being the only snack chips worth $1 billion in retail sales in the world.

Frito-Lay, Inc accounts for 13 per cent of sales in the United States snack-food industry, which is approximately worth 37 billion per annum. Categories in the snack food industry include candy, cookies, crackers, nuts, snack chips, and assorted other items. Frito-Lay, Inc recorded U.S sales of $3.5 billion in 1990.




3. Competition

The snack chip industry contains mainly 3 types of competitors namely, the national brands, regional brands and private brands. National brands are those that distribute products nationwide, include Frito-Lay, Borden, Procter and Gamble, RJR Nabisco and Eagle snacks. Regional competitors consists of regional brand firm which distribute products in certain parties of the United States, Private brands are produced by regional or local manufacturers on a contractual basis for major supermarkets chains.

The competition in the snack food industry is very intense. As many as 650 different types of snack chip products are introduced into the market each year by both national and regional brand companies. Most of the products are new flavors for existing snack chips. It is reported that the new-product failure for snack chips is very high.

Pricing is often very competitive and snack chip manufacturers often resort to price deals to attract customers.




4. An introduction to Sun Chips Multigrain Snacks

Sun Chips Micrograin Snacks is a crispy, textured snack chip consisting of a specific blend of whole wheat, corn, rice and oat flours with a lightly salty multi-grain 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 cholesterol-free. According to a Frito-lay, Inc executive, it is a “thoughtful, upscale classy chip.”

Interestingly, Frito-lay has had previous experience in marketing (i) a multi-grain snack under the ‘Pronto’ brand name and (ii) a separate corn chip snack under the “SunChips” brand name, in the 1970s. Both product lines were not successful and were eventually terminated.




5 Case Analysis (I)

The Snack Chip Market and Frito-Lay’s Market Position

The snack chip industry is clearly a matured industry, showing signs of growth. This is evidenced by the steady growth in both dollar sales as well as volume of snack-chip pounds sold. Our numbers below, back up this conclusion:

(a) The snack chip industry has grown 5% since 1989 to 1990, in terms of retail sales. The snack chips retail market was worth US$9.8billion in 1990.

(b) Since 1986 to 1990, the United States bought 3.5 billion pounds of snack chips, or nearly 14 pounds per person. In 1986, snack chips per capita consumption was slightly less than 12 pounds.

Frito-Lay is a major power-house in the snack chips industry. It accounted for 50% of all snack chips retail sales in 1990. Of the top ten best selling snack chips in the United States, 8 of them are Frito Lay brands and the top 5 selling chips are all Frito-Lay brands. We can consider Frito-Lay to be major player, if not the monopolistic leader in this category.




6 Case Analysis (ii)

The Challenges and Risks Faced by Frito-Lay in Marketing SunChips, and Frito-Lay’s Experience with Multigrain Snacks.

Frito-Lay’s experience with multigrain snacks and the SunChips brand in the 1970s were not successful. The possibility of a multi-grain product was explored in the early 1970s when corporate marketing research studies indicated that consumers were looking for nutritious snacks. Frito-Lay developed a multi-grain snack chip under the brand “Prontos” and it was first introduced in 1974. The snack was sold on the premise that it was “a different, delicious new snack made from nature’s own corn, oats and whole grain wheat all rolled into one special recipe”.

The Prontos brand of multigrain snack chips was not well received and eventually terminated. Our team affirms that Prontos lack of success was due to:

(a) A product type that was ahead of its time. It did not possess product attributes that appealed to a sufficient majority even though it was marketed towards to mainstream of snack chip consumers;

(b) Poor branding – Frito-Lay executives agreed that the product had a confusing name, a poor advertising copy and appealed to too small a market;

(c) Manufacturing problems – Production for multigrain snacks did not run as smoothly as other more established product types. Manufacturing problems contributed to the demise of the product.

The latest SunChips line of multigrain snacks would involve very large risks to Frito-Lay because of a huge capital investment (the product required a new manufacturing process) and an equally huge marketing investment (it was also a new brand) that could be financially justified only with a product that could be sustainable for an extended period.




The challenges, are therefore plain for Frito-Lay to see. With the product development of SunChips, Frito-Lay took the correct decision to undertake proper market testing with a test market exercise in the state of Minnesota-St Paul. This would give Frito-Lay an idea of the product’s potential without extensive risks or costs.

7 Case Analysis (iii)

SunChips’s Consumer Acceptance Levels and its Sales Potential

A premarket test was carried in April 1989 and conducted by an independent marketing research firm. Purpose of the test was to find out about consumers attitudes and usage behavior of Sun Chips. Two flavors were introduced and three advertising and merchandising expenditure levels were tested.

Results from the premarket test were extremely unexpected. It indicated that Sun Chips™ Multigrain Snacks would produce a likely first-year sale 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 first-year sales volume exceeded the $100 million Frito-Lay sales goal for new products. The natural and French flavor combination produced the lowest cannibalization of other Frito-Lay brands.

The Premarket test gave clear indication that there was potential for SunChips that needed further exploration. The next logical step would be a test market, as it would give the product a more rigorous test.

Results of the Minneapolis-St Paul Test Market

Test MarketFrito-Lay executives had chosen Minneapolis-St Paul, Minnesota metropolitan area as the test site because it had a social and economic profile representative of the United States. It also represented a typical competitive environment in which to test consumer acceptance and competitive behavior. 1.98 million out of the 90 households or 2.2% were identified as users of snack chips.




The plan was carried according to 5 different strategies.

Product strategyFrito-Lay executives chose both the natural and French onion flavors. Sizes in terms of 7-ounce and 11 ounce were packaged accordingly. A trial size of 2½ ounce was used as well. Design was heavily emphasized as they wanted it to communicate a new, different and fun image.

Pricing strategySun Chips™ Multigrain Snacks would have the same retail prices as Doritos brand tortilla chips.

Advertising and Merchandising strategyThe primary audience chosen was adults between the ages of 18 and 34 as they are the principal purchasers and heavy users of snack chips. The secondary audience expanded the age bracket to 49 years of age since 34-49 years olds appeared to be more receptive to healthier snacks.

The advertising message was meant to convey subtle messages including wholesomeness, fun and simplicity. TV advertising, in-store display, free-standing inserts in newspapers and coupons were part of the marketing strategy.

Distribution and sales strategySun Chips™ Multigrain Snacks would be sold at supermarkets, grocery stores, convenience stores and other retail accounts that already stocked Frito-Lay’s snack products.

Manufacturing considerationsSince a multi-grain product required different product and process technology than corn or potato products, an investment in one new production line would be necessary.

The test-market budget was set at $22 million on a nationwide distribution basis. Approximately 70 per cent of the budget would be spent during the first six months of the test market.

Test-Market Results

The following results were obtained from the test-market.:

Type of purchase



Frito-Lay, Inc – Sun Chips™ Multigrain SnacksIt was revealed that approximately 90% of purchases were made in supermarkets and convenience stores. The 2½ ounce package accounted for 15 per cent of purchases, the 7 ounce accounted for 47 per cent of purchases, and the 11 ounce package accounted for 38 per cent of purchases. Fifty-five percent of purchases were for the French onion and forty five percent were for the natural flavor.

Trial and repeat rateAlmost one in five households in the test market had tried the product, and 41.8 per cent of these tier households had repurchased the product at least once over the 10 month trial. Repeated purchasers purchased Sun Chips™ Multigrain Snacks an average of 2.9 times.

Product CannibalizationThe incidence of product cannibalization revealed that 30 per cent of Sun Chips™ Multigrain Snack pound volume resulted from consumers switching from Frito-Lay’s potato, tortilla, and corn snack chips. About one third of the cannibalization volume from Frito-Lay’s products came from Doritos brand tortilla chips. From the cannibalization results, Frito-Lay executives noted that the gross profit for Sun Chips™ Multigrain Snacks was higher than that for its other snack chips.

Test Market Results Analysis

In the test market analysis, our team took the initiative to translate the numbers as follows.

(a) Consumption of SunChips was measured in terms of pounds consumed, rather than dollar value purchased.

(b) Looking at the manufacturer’s prices of the 3 different sizes of SunChips (2¼, 7 and 11 ounce packets), we calculated that the average dollar per pound is S$2.65

(c) A nationwide scaling factor of 45.45 was used to predict the response rates of the United States’s market as a whole. This factor was calculated based on Minnesota-St/Paul’s population as factor of the United States population.

Our results indicate that the test market for Minnesota-St.Paul is immensely successful. Revenues at manufacturer’s prices indicate that Sunchips will exceed the US$100million mark considerably if launched nationwide. Please refer to the appendix for the spreadsheet detailing our full analysis of the test market.




8. Planning considerations

After the test-market on Sun Chips™ Multigrain Snacks was conducted, a review of the findings was being presented to the management.

Firstly, timing and competitive reaction were the key elements of the results. Riskey felt that national and regional competitors were monitoring Frito-lay’s test market. There was also a high probability that these competitors were examining the chip with the intention of developing their own version.

Riskey was concerned especially with the timing factor. He felt that if he were to continue testing Sun Chips™ Multigrain Snacks, a competitor might launch a similar product nationally or regionally and upstage Frito-Lay. Thus, the chance to be first-to-market would be lost.

Secondly, if an expanded test-market or a national introduction was considered, a decision would be needed quickly to ensure adequate manufacturing capacity was in place and operating efficiently. Besides, manufacturing capacity expansion would require a significant capital investment.




9. Strategy considerations

Riskey presented a few strategy options for Sun Chips™ Multigrain Snacks to the management of Frito-Lay. An increase in advertising and merchandising expenditure was advocated if the brand was test further or launched nationally. They believed that brand awareness would increase with additional spending and felt that spending the national introduction equivalent of $30 million could stimulate brand trial as well.

A larger package size was also recommended. This would result in additional volume as a larger package size is being purchased. They believed that a forth, larger package could add about one-half ounce to the average annual purchase per repeat purchase occasion. Some felt that another package size would only be more applicable after the brand is established in the market.

The option of building household repeat and dept of repeat business was also recommended. Using a flavor extension, it could increase the repeats per repeater to an average of 3½ times per year given greater variety for consumers.




10. Conclusions/ Our recommendations

The test market for Minnesota-St.Paul was an immense success. There was no need to extend the test market exercise as with such results, it was only a matter of time before competitors would get wind of these test results and proceed to launch a similar product. Any delay in launching the product proper would result in a likely loss of the first mover advantage.

There are 2 possibilities that Frito-Lay has in order to capitalize on the strong test market results:

(a) Move with a nation wide launch, using the tactics and strategies of the Minnesota-St.Paul test market as a template.

(b) Move with a partial launch in selected states, hence minimizing all possible risks of failure.



Frito-Lay, Inc – Sun Chips™ Multigrain SnacksIn the light of these results, the team recommends that Frito-Lay adopt the second option and begin a partial launch of SunChips. We recommend the launch to be held at another 5 states, whose demography is most similar to that of Minnesota-St.Paul. This will give a higher rate of success as well as minimize the costs of failure.


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