Frito-lay/Sunchips Case Study Analysis Introducing a New Term Paper

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Frito-Lay/SunChips Case Study Analysis

Introducing a new product of any kind is risky at best. However, introducing a new snack product to a finicky public could be considered crazy. Frito-Lay, a leader in the snacking industry, was not afraid of that risk. In late October 1989, a team lead by Dr. Dwight R. Riskey, VP of Marketing Research and New Business at Frito-Lay, introduced SunChips to a test market in Minneapolis-St. Paul, Minnesota for ten months. Following is an analysis of the case study describing SunChips performance and potential actions that team could take in moving forward with the product.

Characterizing the snack chip category and Frito-Lay's competitive position

The snack industry recorded sales of $37 billion in 1990 which was a five percent increase over the previous year. Of those sales, $9.8 billion are attributed to snack chips which also show a five percent increase. The industry is obviously growing significantly. This growth creates a demanding competitive environment since every snack chip manufacturer wants a share of those sales.

The good news for Frito-Lay is that they are considered to be a leader in the industry with 13% of the total snack food industry sales in the U.S. In fact, they have half of the total retail sales in the snack-chip category with eight of their snack items in the top ten best selling chips. Chart One shows Frito-Lay's top selling brands that grossed in the millions (there wasn't any specific numbers available for Frito-Lays variety pack which is among the eight top selling products). Chart Two shows Frito-Lay's top selling brands that grossed in the billions.

Frito-Lay's competitors consist of national, regional and private companies. Their national competitors are primarily Borden, Procter and Gamble, RLR Nabisco, Keebler and Eagle Snacks. Regional brands are manufactured only in specific areas. Private companies manufacture products for major supermarket chains. National and regional companies introduce over 650 snack chip products every year. Even though most of these are new flavors for existing products, there is still a high failure rate. Industry reports show that less than one percent of these new products generate over $25 million in sales their first year.

To get the word out on new products, Frito-Lay and their competitors create extensive advertising campaigns using electronic and print advertising methods. To know what kinds of products to introduce, national competitors monitor the success of new and existing products closely. Shelf pace in a grocery or convenience store is similar to owning real estate and making sure those shelves are selling product is important.

Frito-Lay sits in a very attractive position as an industry leader with significant sales. However, maintaining that position requires hard work. Part of that work includes monitoring consumer snacking trends. That is exactly what led to the introduction of the SunChip line.

Challenges associated with marketing SunChips

Long before 1989, the idea of a multigrain chip began to form at Frito-Lay. Consumers in the 1970s were looking for nutritious snack choices which lead to Frito-Lay introducing Prontos. After four years in the market, it was withdrawn due to poor sales and manufacturing problems. In order to make sure that SunChips would be much more successful, they would have to make sure that they could overcome the problems Prontos experienced. Following is a break down of those problems and the implications of each.

Confusing name- A confusing name can lead to poor name recognition among consumers. To avoid this, the new product had to have a name that consumers would associate with the product.

Narrow target market- In the 1970s the target market was too narrow. However, in today's world, many different age groups are concerned with eating "healthier" products. As a result, the opportunity to market a larger group exists with an opportunity for larger sales. Without this opportunity, a new product could have the same problem that Prontos had.

Poor advertising copy- Advertising would need to have a message that would capture consumer attention and make them want to buy the product. It would also have to include promotions to get them to taste the product and offer savings opportunities to become repeat buyers. Without repeat buyers, the life of the product becomes very short.

Difficulty with the manufacturing process- One of the benefits in the snack-chip industry is that the chips are created similarly so it is easy to switch to a new flavor. However, multigrain chips require a different manufacturing process. Therefore, it is not easy to start a new multigrain chip profitably. Frito-Lay would have to overcome this to manufacture a multigrain chip on a large scale.

Assessment of pre and post testing results

After previous failures with "healthier" snack chip products, it was important that testing showed the value of moving forward with a new multigrain product. Testing began with finding a multigrain solution that appealed to a large market. That testing resulted in a rectangular chip with ridges that had a slightly sweet aftertaste. It also showed a preference for the SunChips name and three flavors (original, French onion and mild cheddar). In addition, after tasting, the chip was considered as "healthier" and as something that would become an everyday snack chip. With this information in hand, it was time to move towards a premarket test.

In the premarket test, SunChips were priced comparable to Doritos with distribution similar to Frito-Lay's other snack chips. Two different flavor combinations were used (natural with French onion and natural with mild cheddar) with three different advertising levels (11, 17 and 22 million). The results were very promising. For natural with mild cheddar, brand awareness was very close to 50% at the 22 million budget with a culmative first year repeat rate of 61%. For natural with French onion, brand awareness was also close to 50% at the 22 million budget with a culmative first year repeat rate at 57%. Volume projections for both flavor combinations were very encouraging at approximately 95 million at the 17 million budget and 113 million at the 22 million budget. Before these tests, Frito-Lay's goal was $100 million for the first year. When pretesting showed that the product could possibly exceed expectations, it was apparent that the product should proceed to the test market.

The test market selected was in Minneapolis/St. Paul, Minnesota because it was felt that this city had a general representation of American households. Rather than going with both flavor combinations, the natural and French onion combination was selected and packaged in 7 and 11-ounce packages. A 2 1/4 ounce trial package was also manufactured. The packaging was contemporary and included a sun and spring of wheat to compliment the product name. The pricing and packaging size was the same as Doritos. Advertising (22 million budget) carried a strong message that the consumer is smart to choose SunChips over another chip. The target market was 34- to 49-year-olds first and 34- to 49-year-olds second. Manufacturing on a small scale for the test market would be fine but if the product moved to the national market, it would require investing in a new production line. It seemed as if Frito-Lay successfully addressed all the issues critical to making the product successful.

The test ran for ten months with excellent results. 47% of the purchases were for the seven-ounce package, 38% were for the 11-ounce package and 15% was for the 2 1/4 package. The winner in the flavors was French onion with 55% of sales. Although these figures are good, the team and executives needed to know how repeat sales added up. Fortunately, those numbers looked promising too. By the end of the ten-month trial, 41.8% of households were repeat buyers. However, approximately one-third of the Doritos buyers were buying the SunChips. Since this is expected with new products, neither the executives nor the team was concerned.

With the test results in, it was time to decide how Frito-Lay should move forward with the product. This will require evaluating all the options and how the competition will respond to the new product.

Action Plan

Based on the information of the snack chip market and the test market results, following is an action plan that Dr. Riskey could present. This plan addresses timing, manufacturing, advertising and packaging size and flavors.

The action plan addresses timing first. Riskey felt that competitors in national and regional markets were tracking the product. If they felt the product was successful, it was highly probable that the competitors would launch a similar product. Therefore, the product should be released on a wider scale first and then move to a complete national release. This timing will give manufacturing time to keep up. Frito Lay's O'Grady's chips were the last new chip released that could compare in sales to SunChips. SunChip's test numbers were higher than O'Grady's. Therefore, it warrants a large-scale release.

Second is manufacturing. Manufacturing on a large scale would require up to a $20 million dollar investment. However, once again the numbers support the decision to move forward. In addition, consumers…[continue]

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