Frito-Lays Dips Essay, Research Paper
Frito-Lay Inc. has a very profitable dip product line. This is not only a great deal now, but also has shown tremendous sales growth over the past few years. In 1981 their sales reached 30 million dollars, with the sales figures almost tripling by 1985, reaching 87 million dollars. However, this success brings the corporation into a very unique situation as well as bringing up a very good question of ?how to develop this further?? Their options boil down to two different viewpoints. The first is the ?chip dip? category or secondly, the newer and edgier ?vegetable dip? category. The company in 1986 has also introduced sour cream-based French onion dip, which has an annual sales forecast of 10 million dollars and it is a bridge between the chip and the vegetable dip markets.
Nationally, 80 percent ($620 million) of the total dip sales, which is about 775 million dollars, are accounted for in supermarket sales. About 55% of the total sales by supermarkets require refrigeration, and their retail prices were typically in the $0.07 to $0.15/oz. range. In this market the major competitors are Kraft, Borden, regional dairies and store brands. The other 45% of the sales by supermarkets is considered to be shelf stable goods and these are typically sold for an average price of $0.09 to $0.20/oz. The major producers of these products are Frito-Lay and also some regional chip manufacturers.
Sour cream-based dips are the most popular flavor, and it accounts for about half of all total dip sales in the US. But the wholesale price of these products is only $0.09/oz. The second most popular segment of the market, the cheese-based dips, are taking up about 25 percent of the total market. While cream cheese-based dips are the third most popular and they take up about 15 percent of the total sales. Dips are most frequently used with salty snacks, in fact, 67 percent of all dip sales are linked to salty snack usage. On the other hand, only 33 percent of total dip sales are linked to vegetable usage. The growth in the popularity of Mexican foods in recent years has created a huge increase in the size of the dip market.
As big as the market is for dips, there is an increase in market dip substitutes. About 20 percent of the dips used in the US are homemade; nearly as many consumers use refrigerated salad dressings for dips. It is estimated that about 35 percent of refrigerated salads sold in the states is used as dips. It is also estimated that annual sales of the vegetable dip market are about 67 million dollars and the market is growing about 18 percent annually (this trend has been consistent since 1978).
Competition in the dip market is increasing very aggressively, especially in 1984-85. Not only the existing competitors releasing new products, but also many well financed companies, such as Campbell Soup, introduced their dip lines. This data indicated increasing competitors and that leads to increasing advertising expenses, in 1985 the market?s total advertising expense was 58 million dollars which was up 25 percent from the year before.
Frito-Lay, Inc. is a division of PepsiCo Inc. a New York based diversified consumer goods and services firm with annual sales over 8 billion dollars in 1985. Divisions of the parent company also include Pizza Hut, Taco Bell, Pepsi Cola Bottling, Kentucky Fried Chicken, PepsiCo Foods International. Frito-Lay is a nationally recognized leader in the manufacturing and marketing of salty snack foods and their net sales approached 3 billion dollars in 1985.
Frito-Lay?s introduced its’ first two dips in the 1950?s and they had only three types of dips until 1983. However, during 1983 and ‘84 many other types of dips were added to their product line, due to the increasing popularity of dips. Prior to 1983 dips line was viewed as a non-promoted profit producer, but that quickly changed with the introduction of cheese dips and other very popular products.Dollar Sales of Frito-Lay?s? Dip (in Millions of Dollars)
YearMexican Dips($)Cheese Dips($)Sour Cream Dip ($)Total Dips($)
1986(forecast)41481099
19853948_87
19844055_95
1983385_43
198235__35
198130__30
Frito-Lay distributes its products through 350,000 outlets nationwide. In 1985 34,000 outlets were supermarkets, where majority of the dips were sold. 47,000 other outlets were convenience stores, and 20,000 were nonfood outlets and the remainder 249,000 outlets were small grocery, liquor stores and service stations.
SWOT AnalysisFrito-Lay is a manufacturer and marketer of salty snack foods, which is nationally recognized. The net sales of Frito-Lay in 1985 approached $3 billion. The dip business is part of the Frito-Lay Company. There were three dips sold by the company until 1983. During 1983 and 1984, there were a number of cheese-based dips introduced by the company. All the dips were displayed in the salty snack section of supermarkets, where 80 percent of dip sales are made.
There are many internal factors of the company, which affect their strengths and weaknesses. The company does have a well-experienced marketing department but they have a weak leader. A well developed line of salty snack foods are offered by the company, which can help the sales of the dips. The dips are displayed besides the salty snack food section. Whenever a person buys some chips they will also be heavily inclined to buy a dip to go with it. This can helps to increase sales of the dip. The company does try to offer more choice of dips but is still not enough. People need different taste and more choice. People are loyal but still want to try new tastes sometimes. Frito-Lay recognizes the up and coming health consciousness of Americans and is considering the expansion into the vegetable dip niche.
The Frito-Lay Company has national awareness and has distribution center across the U.S. The company has 350,000 outlets that distribute the products nationally. They have many kinds of distributors throughout the states but the majority of Frito-Lay dips are sold through supermarkets. There are four geographical zones that organize the distribution system and cover the entire United States. Thirty-three percent of salty snack food tonnage sold in the United States was captured by Frito-Lay. This will also help a brand recognizing by the customers. Cheese dip was introduced and it has a good initial penetration of the market. This can also shows that a different kind of dip will catch people?s eye and get interest in buying it. The Cheese dip sales have tapered off because the novelty of shelf-stable cheese dips has passed.
The company is organized around four geographical zones and each zone contains distribution centers to provide inventory for the sales force. During an average day, the sales force makes 400,000 sales and delivery calls. Each salesperson has their own route for selling the company products. Frito-Lay uses a ?front-door store? delivery system that is suited the 270,000 non-chain outlets. The supermarkets, which are chain-store accounts, were not favored by the front-door store delivery system. A Frito-Lay region or division manager always required participating. This is necessary because the chain-store buyers responsible for the outlets in the chain also approve in-store merchandising plans as well.
Frito-Lay has the opportunity to capitalize on their present commanding position in the dip market by expanding their product line to include vegetable dips that will complement their successful cheese and picante (Mexican) dip lines. With the correct launch and positioning, Frito-Lay, Inc. could penetrate and stake a claim to a large and undefined, yet extremely viable, vegetable dip market. This is a market which does not have a major competitor in a strong competitive position, there isn’t a shelf-stable sour cream-based dip offered by anyone (Frito-Lay has one ready to be released), and consumers are becoming more concerned over the content of the food they eat and buying enough “substitute dip” (salad dressing) to support growth in this market at an astonishing 18% compounded rate per annum. This growth rate has been sustained since 1978. The vegetable dip market is estimated at $23 million in sales per year Further, sour cream dips are the most popular flavor, accounting for about 50% of dip sales in the salty snack dip segment of the market. Combining this prior information with the additional fact that after cost analysis, the gross margin on the sour cream dip will be a healthy 45% and you have all the makings of a cash cow product line. Now if Frito-Lay can muster the resources and intestinal fortitude, they could really start working on the next billion in sales for the company in ‘87.
Naturally, in a free market, there are always risks that are associated with any undertaking. The company faces several threats from the market that must be objectively weighed when conducting the planning for expansion into a new market segment. Principally, as the new sour cream dip will be positioned in a different part of the supermarket, away from the rest of the Frito-Lay salty snack food products, the normal front-door delivery system will need to be changed.
New contacts with the produce managers in each store will have to be developed so as to get proper positioning and exposure for this new dip. The company sales force will need additional training and marketing expenditure at the supermarket level to capture interest and assist in the placing of the new product. If the stores can’t or won’t make space in their produce sections, then this venture faces the possibility of a very limited lifespan. Perhaps the marketing department could develop new display racks that would attach to the top of produce bins and offer supermarkets additional marketing space without sacrificing floor space.
Additionally, as the company is proposing to launch a new product line, with only one selection so far and it will be positioned in the supermarket far away from the rest of our products, the risk that the product won’t be noticed and/or accepted by the consumer is higher than normal for a new introduction. Perhaps if another dip selection was developed and offered along with this line, then consumers would be exposed to more shelf space of Frito-Lay’s? product and be more inclined to trust the brand name and try it. It is recommended that the French onion dip line be placed with the sour cream line to address the demand and growth trends of the market.
Concurrently, as mentioned, this product will be in a different section of the supermarket and thus new advertising must be developed and broadcast to the consuming public to inform them where to look in their neighborhood market to find this wonderful new dip to use with their healthy vegetable snacks.Plan of Action
In late 1986, Frito Lay, Inc wants to complete their planning review for the line of dips sold. There are two different viewpoints expressed, a ?chip dip? category and a ?vegetable dip? category. In plan of action, we will analyze these two categories in detail.
For analyzing two viewpoints, we will go back to early 1986 and assume that Frito Lay, Inc. only did one marketing action. What would have happened if Frito Lay, Inc. increased its advertising and promotion expenses to increase cheese dip sales (whose trend of sales is going down) without marketing sour cream dips? What would happen if it markets sour cream dips, which will increase its selling expenses, without increasing advertising and promotion expenses for cheese dips? What level of sales does Frito Lay, Inc. have to achieve to maintain its $ 99,000,000 total sales goal? With this information, we will know what product category Frito Lay, Inc. must emphasize in its’ 1987 sales planning because, in 1986, the company has already increased its advertising and promotion expenses and also marketed its new shelf-stable sour cream dip.
We also need to make an assumption about retail price, trend of sales, gross margin and trend of expenses. We assume that retail price of shelf stable dip is $ 0.16 per ounce for every kind. This assumption is based on the average retail price for shelf stable dip, which ranges from $ 0.13 – $ 0.20 per ounce.
The amount of general administrative overhead expense, selling expense and freight expense stays the same in 1985 and 1986. The amount of consumer advertising expenses and consumer and trade promotion expenses will vary. It depends on what strategy is applied. We also assume that COGS is the only variable cost. The company maintains its gross margin at the same rate in 1985 and 1986, which about 49% for Mexican dip, 45% for Cheese dip and 45% for Sour cream dip. The last assumption is that the sales trend of chip dip is declining.
Based on the amount of sales in 1984, which was $ 55 million and in 1985, which was $ 48 million, the trend of sales of chip dip declined about 12.72%. The company increases advertising expenses ($ 1,023,000) and promotion expenses ($ 594,110) due to increasing sales. The increasing amount of expenses ($ 1,617,110) will be divided proportionally between Cheese dips and Mexican dips. We will try to calculate if the company increases those expenses and doesn?t market new product (sour cream dip) in 1986. In 1986, the company plans to achieve $ 99 million in total sales. Enclosure 1 will show the calculation of this assumption.
The company launches its’ new product, shelf-stable sour cream dip, that will increase selling expenses to 25% of total sales. The amount of other fixed cost is staying the same, but without increasing of advertising and promotion expenses for cheese dips, trend of cheese dips sales is decreasing 12.72% from its prior year sales. Enclosure 2 will show the calculation of the assumption that Frito Lay, Inc. markets the sour cream dip and doesn?t increase advertising and promotion expenses for cheese dips.Outcomes
Enclosure 1 shows that the company has to increase sales $ 16,146,763.64 to reach its $ 99 million in total sales. It is very hard for it to do because the company is facing a fully saturated market for cheese dips. Gross margin from this action is about 46%, which is good for the company, but advertising and promotion expenses are almost reached the budget line. This will prohibit the company from increasing its’ advertising and promotion effort in 1987, whereas in fact, the company must to do this to increase its sales in the full market.
In enclosure 2, the company only has to increase sales $ 15,900,000 to reach its
$ 99 million total sales and $ 12,603,111 to reach its break-even point. This is much easier because the company only has to get a 5.73% market share to reach BEP. The market for this product (shelf-stable sour cream dip) is not near being full yet and there are no competitors that have marketed self-stable sour cream dips, which means that a golden opportunity exists for the company. Though its unit gross margin is little bit lower than cheese dips and its’ total gross margin is almost the same, it is the overall potential of the vegetable dip market that makes this option an outstanding one.
Based on the analysis of SWOT, enclosure 1 and enclosure 2, we conclude that in 1987 sales planning, Frito Lay, Inc. should elect to extend its sales effort into the sour cream vegetable dip market.