Table of Contents Problem Statement3 Situational Analysis3 External Analysis – Market Analysis3 External Analysis – Customer Analysis4 External Analysis – Competitor Analysis4 External Analysis – Environment Analysis4 Internal Analysis – Performance Analysis5 Internal Analysis – Determinants of Strategic Options7 Alternative Analysis8 Recommendation9 Citations10 Problem Statement Frito-Lay, Inc. executives are contemplating the launch of Sun Chips Multigrain Snacks.
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Though there are currently few, if any, other nationally- marketed multigrain snack chips, the snack chip industry is known to be highly competitive and it is likely that competitors will be quick to introduce a competing product. Frito-Lay, Inc. executives are hesitant to move too quickly in introducing Sun Chips because of conflicting data that has come from initial market research. The pre-market testing estimated that first-year sales volume would be $113 million, exceeding the $100 million goal. O’Grady’s chips were the most recent Frito-Lay new product to achieve $100 million in first-year sales.
Test market research revealed that Sun Chip’s estimated trial and repeat rates were lower than the rates of O’Grady’s which may indicate that Sun Chip’s first year sales won’t meet the goal. The reluctance of decision makers to move forward and take the position of pioneer without compelling evidence from market research is justified as most new snack products fail. Executives must decide if they will continue researching in the Minneapolis-St. Paul test market for another six months, launch the product with $22 million in marketing expenditures, or launch the product with $30 million in marketing expenditures.
This decision is critical because a huge capital and marketing investment is required to launch Sun Chips Multigrain Snacks. The brand requires a new manufacturing process, carries a new brand name, and pioneers a new snack chip category. Situational Analysis External Analysis – Market Analysis A total of 3. 5 billion pounds of snack chips were sold in 1990, with a per capita consumption of approximately 14 pounds. Per capita consumption increased from 12 pounds per person in 1986, indicating growth in the snack chip market.
The snack chip market is mature; however, growth opportunity exists in international markets and in areas of unmet customer needs, such as the category of healthier snacks as an extension in the snack chips market. Rivalry is high amongst current competitors and though the potential to move into these new markets is appealing, there are entry barriers. Frito-Lay was able to modify existing production equipment to manufacture the small volume of chips needed for market testing, but a costly new production line would be necessary to manufacture adequate volume for national distribution.
Since multigrain chips require different technology than corn or potato chips, it is likely that competitors would face this entry barrier as well. Even if competitors choose not to introduce a competing multigrain chip, Frito-Lay faces the threat of substitutes because there are other similar healthy snack products such as popcorn on the market. Buyer power will increase if competitors choose to introduce their own multigrain snack chips. Sun Chips are currently in the introductory stage and the road ahead is subject to change if, or when, competitors introduce their own products.
Sales of Frito-Lay, Inc. products make up 13% of all snack food sales in the United States and they are the leading manufacturer of snack chips. Their sales make up nearly half of all sales in this market segment. In 1990, Frito-Lay, Inc. grew 5% from the previous year to have US sales of $3. 5 billion. Total US snack food industry sales for this year were $37 billion and snack chip, pretzel, and popcorn sales made up $9. 8 billion of this total. External Analysis – Customer Analysis Sun Chips are multigrain chips that are made with sunflower or canola oil.
These chips have no cholesterol and are approximately 50% lower in saturated fat than regular potato chips that are made with less healthy cooking oils. Because of their superior nutritional attributes, these chips may be more appealing to “baby boomers” and other health-conscious buyers than traditional snacks. Sun Chips will meet a need that is currently unmet as there are few, if any, other healthy snack chips on the market. Adults ages 18-34 are the main purchasers and users of snack chips and as such are the primary target of advertising for Sun Chips.
A secondary target market is made up of adults ages 34-49 as these individuals are likely to find a healthier snack appealing. Those under age 18 will gain exposure to the product through household usage. External Analysis – Competitor Analysis There is no shortage of competition in the snack chip market. Competition is fierce not only with other national brands like Borden, Proctor & Gamble, RJR Nabisco, and Eagle Snacks but also with regional brands like Snyder’s. Additionally, there are the supermarkets brands to compete using a low-price strategy.
The competitive playing field is not stagnant. The choices available to the consumer consist of chips that have been around for decades like Proctor & Gamble’s original Pringles brand, along with a multitude of new products that saturate the market annually. Consumers in the snack chip market can be quite fickle and may quickly abandon an old favorite for a new taste. Although as many as 650 new products are introduced each year, few of them (less than 1%) reach $25 million in sales in their first year.
The strategies for success in this competitive environment include extensive marketing, competitive pricing, and research and development teams that can crank out new flavors swiftly. With the abundance of new products, Frito-Lay, Inc. competes by gaining recognition of its brand and products through promotions, obtaining optimal shelf space, offering customer discounts, and quickly developing and placing the right snack chip products in the best locations as a pioneer in the healthy snack chip market. External Analysis – Environment Analysis
The snack chip market, with its relatively low price for products, is easily influenced by the latest trends. For instance, interest in healthy eating and maintaining a healthy weight is quickly gaining momentum and influencing the products and the amount of a product that consumers are willing to buy. A great tasting chip that is perceived as healthy can gain the competitive edge. As the baby boomers, people born from 1946 to 1964, age and become more health conscious, the market for nutritious snack chips has increased.
The environment in which a new snack chip is judged on taste and price alone is quickly disappearing. In today’s market, a chip must taste good, be inexpensive, and perceived as healthy. To remain competitive, Frito-Lay, Inc. attempted to market a multigrain product in the 1970s and again in the early 1980s with little success. The challenge in providing a product that satisfies a new and growing trend is to time it just right. The first attempt by Frito-Lay, Inc. was ahead of the curve. However, taking a “wait to see” attitude is risky and can quickly result in lagging behind the competition.
The attitudes and values of the average consumer must be considered when testing a new snack chip. Is this the right time to offer the product? Does it embrace the current trends? Is the consumer willing to buy a larger size to gain cost savings or would the consumer prefer a smaller size to avoid the extra calories? In an attempt to answer these questions in advance of full-scale promotion and production, Frito-Lay, Inc. chose the Minneapolis-St. Paul area as a test market because it tends to align with the cultural trends and economic climate of the US at large. Internal Analysis – Performance Analysis
The premarket test (PMT) indicated that first-year sales volumes of $133 million were possible at manufacturer’s prices given a $22 million marketing plan. This first year sales volume exceeded the $100 million sales goal Frito-Lay, Inc. sets for new products. These positive results led to a recommendation to implement a test market in the Minneapolis-St. Paul with the advertising and marketing budget equivalent to a $22 million expenditure on a nationwide distribution basis. Test market results were compared to O’Grady’s brand potato chips because this brand was the most recent Frito-Lay, Inc. roduct introduction that achieved $100 million in first year sales. Brand awareness studies indicated that Sun Chips achieved greater brand awareness during its test market than O’Grady’s potato chips and a greater depth of repeat, a positive indication of the sustainability of sales over time. The results of this test provides estimates of household trial rates, repeat rates, an average number of units purchased on the initial trial and subsequent repeats in the first year. Product cannibalism and first year sales volume were included as well. The test data from PMT will remain the same. The test market will take place in Minneapolis-St.
Paul, Minnesota, testing the natural and French onion flavors. There are 90 million snack chip user households in the United States, which Minneapolis-St. Paul represents 2. 2%. The trial rate is 19. 9% and the repeat trial rate is 41. 8%. Sun Chip Multigrain Snacks will be packaged in three sizes: 2 1/4, 7, and 11 ounces. (Kerin & Peterson, 2010, p211 & 217) The average amount of trial users purchased 6 ounces, the repeat and repeaters users purchased an average of 13 ounces. The depth of repeat was an average of 2. 9 times, this figure is when a repeat user purchases the product after the initial repeat. Kerin & Peterson, 2010, p217) This information leads to how many pounds will be needed to produce the appropriate amount of packages for the given population. To launch the product with $22 million in marketing expenditures, 30,438,717 pounds will be needed (see Exhibit). [pic] To launch the product with $30 million in marketing expenditures, 34,995,758 pounds need to be produced. Additional research suggests that with $30 million for national Sun Chips advertising and marketing, the trial rate increases from 19. 9% to 22%. The depth of repeat will increase from 2. 9% to 3. 1%.
To launch the product with $33 million in marketing expenditures, 34,995,758 pounds will be needed (see Exhibit 2). [pic] The sales of Sun Chips Multigrain Snacks will depend on several variables such as the price to the retailer and the market share. The sales price for the 2 1/4 -ounce is $0. 385, 7-ounce is $1. 240, and 11-ounce is $1. 732. The market share is 15%, 47%, and 38% respectively. (Kerin & Peterson, 2010, p214 & 217) So therefore the price of the Sun Chips Multigrain Snacks will be $2. 70 per pound (see Exhibit 3). [pic] When computing the sales, cannibalization has to be taken into account.
The research firm indicated that 30% of Sun Chips Multigrain Snack pound volume resulted from users switching from Frito-Lays potato, tortilla, and corn snack chips. (Kerin & Peterson, 2010, p217) A multigrain snack can have a gross profit of $1. 30. The cannibalized products in Frito-Lays line have a gross profit of $1. 05. This leaves Sun Chips with a profit of $. 25 additional on each cannibalized product. The incremental and cannibalization pounds must be separated. When finding the revenue with $22 million in marketing expenditures, the incremental pounds should be 70% of 30,438, 717(see Exhibit 1).
The cannibalization pounds would make up the remainder 30%. The incremental and cannibalization pounds will then be multiplied by their profits giving the Sun Chip revenue of $29,982,136 (see Exhibit 4). [pic] When finding the revenue with $30 million in marketing expenditures, the incremental pounds should be 70% of 34,995,758 (see Exhibit 2). The cannibalization pounds would make up the remainder 30%. The incremental and cannibalization pounds will then be multiplied by their profits giving the Sun Chip revenue of $34, 470,821 (see Exhibit 5). [pic] After considering the selling price of $2. 0 and the unit variable cost of $1. 40 in Exhibits 4 and 5, the net profits can be calculated. The net profit with the $22 million marketing expenditure will be $7,982,136 and $4, 470,821 with the $30 million marketing expenditure (see Exhibits 6 and 7). [pic] [pic] Internal Analysis – Determinants of Strategic Options Dr. Dwight Riskey, vice-president of marketing research and new business at Frito-Lay, Inc. , and the product management team responsible for Sun Chips Multigrain Snacks are preparing to present their recommendations to senior Frito-Lay, Inc. xecutives regarding further action to the brand. Sun Chips Multigrain Snacks have been tested in the Minneapolis-St. Paul market for the past 10 months and although consumer response has been extremely favorable, the snack chip market is very competitive and the new-product failure rate for snack chips is high. The development of Sun Chips Multigrain snacks is a result of the “Harvest” project launched in 1981. Development efforts in 1988 determined that consumers preferred a multigrain rectangular chip with ridges and exceptional taste.
Further testing of brand names and flavors revealed that consumers preferred the name Sun Chips in flavors of original/natural, French onion, and mild cheddar. Although the consumer response has been extremely positive for Sun Chips, the “Harvest” project has also experienced past failures that must be considered. After the “Harvest” project launch in 1981, several product concept tests failed to generate any consumer excitement and Frito-Lay’s marketing research and product development staff determined that the market for wholesome snacks was not yet fully developed.
This assessment followed a failure of Prontos brand multigrain snack chip in 1978 due to declining sales and manufacturing difficulties. These past failures highlight the risk faced by Dr. Riskey, the project management team, and senior executives. A full-scale national introduction would require a capital expenditure of $20 million in addition to either $22 million or $30 million in marketing expenditures. Further market testing could minimize the risk of introducing Sun Chips. Currently, Frito-Lay, Inc. pursues growth opportunities through four product-marketing strategies.
The first marketing strategy is to grow established Frito-Lay brands through line extensions. The second strategy is to create new products to meet changing consumer preferences and needs. The third strategy is to develop products for fast-growing snack-food categories. The last strategy is to reproduce Frito-Lay successes in the international market. Implementing these new marketing strategies will help launching Sun Chips Multigrain Snacks a success. Alternative Analysis The advertising and merchandising budget for the Minneapolis-St. Paul test market was equivalent to a $22 million expenditure on a nationwide distribution basis.
If Frito-Lay continues with the PMT they run the risk of competitor’s launching a similar product nationally or regionally. The opportunity to be the pioneer would be lost. If Frito-Lay, Inc. decides to move forward and launch Sun Chips Multigrain Snack on a national basis and not continue testing, what level of spending for advertising and merchandising is appropriate? Many product management team members believed that increasing the advertising and merchandising spending to $30 million would increase brand awareness and stimulate brand trials.
The performance analysis indicates that with a $30 million marketing expenditure, the net profit would be $4, 470,821 versus $7,982,136 with the $22 million marketing expenditure. The result of increasing the advertising expenditure to $30 million is an increase in repeat users and an increase in the depth of repeat, but not an increase in profit. Product testing in the Minneapolis – St. Paul market identified that 30% of Sun Chips pound volume was a result of consumers switching from other Frito-Lay’s products.
A 30% cannibalization rate is not uncommon for the industry in new product introductions but this must be considered when projecting Sun Chip’s contribution to Frito-Lay. What happens if the cannibalization rate is 42% versus the 30%? If there is an increase in the cannibalization rate, the net profit would be $4,146,858 with $22 million marketing expenditure and $61,356 with $30 million marketing expenditure (see Exhibit 8 and 9). If the cannibalization rate is higher this would significantly decrease the profits and Frito-Lay, Inc. would need to re-evaluate how they should move forward. [pic] [pic] Recommendation
Dr. Riskey and the project management team responsible for Sun Chips Multigrain Snacks will recommend a national product launch with $22 million in advertising expenses to senior Frito-Lay, Inc. executives. The decision to launch the product nationally, as opposed to continued testing in the Minneapolis – St. Paul market, is due to the positive results in the test market and a belief that national and regional competitors were monitoring the Frito-Lay’s test market with the intention of launching a similar product. Frito-Lay, Inc. executives want Sun Chips to be the first-to-market in the multigrain snack market.
The decision to launch with a $22 million advertising expense is due to higher net profits in the first year. A $30 million advertising expense would increase brand awareness, repeat users, and volume sales but the added expense does not result in an increase in net profits. Citations Kerin, R. A. , & Peterson, R. A. (2010). Strategic Marketing Problems. Upper Saddle River: Prentice Hall. Orville C. Walker, J. , & Mullins, J. W. (2011). Marketing Strategy, A Decision-Focused Approach. New York: McGraw-Hill. ———————– October 28, 2011 Frito-Lay, Inc. Sun Chips Case Analysis