Problem Statement

1. Sun Chips Case Problem Statement • Frito Lay has had Sun Chips in a 10 month long test market in Minneapolis St. Paul. The product appears to be successful. The national company must now decide what product launching path it will take.

2. Market Analysis • Frito-Lay, Inc. is a leading snack manufacturer and accounts for 13 percent of sales in the United States snack-food industry. • Frito-Lay, Inc. recorded U.S. sales of $3.5 billion in 1990 • US recorded $37 billion in 1990. • 5% increase from 1989 • Fewer than 1 percent of new 650 products produced per year generate more than $25 million in first year sales. • PMT was setup to take place in Minneapolis-St. Paul. Executives felt that it had a social and economic profile representative of the US. • Minneapolis-St. Paul Test Market contains= • 1.98 million households that were identified as users of snack chips • 2.2% of the 90 million snack chip user households in the US

3. Porter’s Five Forces Model • Barriers to Entry: The national chains like Frito Lay have established a distribution network, retail outlet agreements and an established sales force. This network allows them some protection of their territory from new entrants. • Potential Entrants: With 650 new snack products launched yearly, there are many potential entrants regionally and nationally. Private brands effectively block Frito Lay from sales at a very local level with price differentiation. • Threats of Substitutes: Many of the snack industry products have readily available substitutes. The technology is flexible and new products can be made quickly. • Bargaining Power of Suppliers: ???? • Bargaining Power of Customers: Customers hold a lot of power due to price pressure.

4. Customer Analysis • Primary audience considered was 18-34 years old. Secondary audience expanded the age to 49 since people aged 34-49 appeared to be receptive of a healthier snack. •  The Baby boomers were considered in snack development. This demographic was viewed as an aging population with disposable income that were going to be more interested in eating healthy and maximizing their overall health. • Americans like to snack and many of the snack varieties available prior to Sun Chips were not viewed by the buyers as healthy.

5. Competitor Analysis • 3 types of competitors are in the snack chip category: national brands, regional and private brands. • National brands will have established networks for distribution and a strong advertizing presence. • National brands: Guys products (Borden owned), Wise (Borden owned), Pringles (Procter & Gamble owned), Planter’s (RJR Nabisco owned), O’Boisies chips (Keebler owned), and Eagle Snacks (Anheuser-Busch). • The far reach of National Brands allow them to monitor and react quickly to changes in the market. • Regional brands have smaller distribution networks and only supply regions of the US. • Regional brands: Snyders, Mike Sells, and Charles Chips. • Private brands include the contract chip producers for grocery store chains. • Kroger and Safeway are examples of stores that contract these type of chips. • Competitor Dynamics: • The regional and national markets are highly competitive. There are 650 snack products introduced each year with only 1% producing significant returns, $25 million or more. • This industry has a historic reliance on electronic, print media, promotions, and trade allowances. The industry feels pressure to continue these practices to retain shelf space. • Technology used in this industry is flexible and allows competitors to react quickly to one brand’s success.

6. Environmental Analysis • Environmental challenges occur due to constant pressure the industry faces to keep prices competitive and the high flexibility of its competitors to quickly imitate their products. The invested cost in developing and marketing a new product should be recovered quickly to decrease the overall risk of product failure to the company. • This high flexibility of the competitors is an outcome to the improvements in manufacturing technology. • Baby Boomers were originally targeted for the development of a healthy snack product. This case occurred in 1990. The 90s witnessed a trend in many food products to greater selection of healthy options. This shift was not limited to just baby boomers. Many efforts were made to education consumers about healthier choices through magazines and news pieces. • A larger demographic demands healthier options. (The success of Subway Chain Stores over McDonalds is an example of this new interest).

7. Performance Analysis • Results from PMT (Premarket Test) • Sun Chips would produce a most likely first year sales volume of $113 million. • The marketing plan for this would cost $22 million. • The natural and French onion flavor combo had the lowest cannibalization rate (42%)

8. Determinants of Strategic Options • Prontos in 1974 was a multigrain snack product that failed due to a narrow target market, confusing name, and “non-committal” copy. • In 1983 O’Grady’s was introduced which produced $100 million in sales for two years, 1984-85. • Mid 1980s, flavor line extensions were pursued along with continuous quality improvements using technology. • 1988 had 13 months of different product formulations. Consumer tastes and product concepts were studied. • Strategy and pricing was modeled after the company’s Doritos product. A 7 and 11 ounce bag was released along with a 2.25 ounce trial bag. • The advertizing messages would be fun, wholesome and simple. • Distribution was through Frito Lay’s “store-door delivery system.” The sales/delivery person introduces and stocks these products in stores. • Have to buy a new production line to make the 1 million pounds of multi grain product needed to produce the three bags.

9. Alternative Analysis • Continue testing in the Minneapolis St. Paul market for 6 months. • Timing was a concern, if test marketing continued. Test marketing gives a competitor time to manufacture a similar product and launch it nationally, removing Frito Lay’s first to the market benefits. • Launch nationally with a $22 million marketing campaign. • A quick decision was needed if there was a desire to go national. Capacity in the plants had to be arranged and secured for this type of launch. This capacity requires a significant capital investment. • Launch nationally with a $30 million marketing campaign. • Product management team members recommended that the expenses on advertising and merchandising be increased in a national launch. This was thought to increase brand trial members.

11. Recommendation • The product should be Nationally launched. • Remaining in the Test Market for the next 6 months puts the initial product launch too much at risk. • Current Test Market results are very favorable. • A Marketing Investment of 22 million is preferred. • 1st year projections show better Net Sales after cannibalization and Marketing Expenses are subtracted. • This is true regardless of the 19.9 vs. 22% trail rate and the 30 vs. 42% cannibalization rate.