Sunchips
...ans to introduce a multigrain product. By the late 1980’s, new consumer tests revealed a new multigrain rectangular chip with ridges would be successful in the snack food market. Further consumer tests helped Frito-Lay develop the idea of Sun Chips, a product that departs from the normal corn or potato based snack food. Industry analysts commented that there have already been similar departure from the norm products like Rumbles, Stuffers, and Toppels introduced in the past and they were failures. Because of these past failures and Frito-Lay’s extensive list of other already successful brands, analysts predicted a long testing period before any nationwide introduction of the new snack chip. Because of the highly competitive nature of the snack food industry, barriers of entry must be carefully considered in determining the attractiveness of new entries into this market. Since Sun Chips are a new type of snack food, rivalry among present competitors would be low. The competition simply does not offer a multigrain snack food at the present time. Threat of substitutes would also be low because, while there are many snack foods currently on the market to choose from, Sun Chips would be the only multi-grain healthy snack food available. The threat of new entrants, however, is quite high. Many national and regional competitors are monitoring the Sun Chips test market and may already be planning their own healthy versions to enter into the market. Careful timing is imperative when properly evaluating the potential success of Sun Chips and quickly getting this snack chip to market before the competition. Sun Chips will be distributed through supermarkets, grocery stores, convenience stores, and existing retail accounts. Distribution channels would be through Frito-Lay’s existing store-door delivery system. One person fulfills the responsibilities of both a delivery person and a salesperson by soliciting orders, stocking shelves, and handling in-store merchandising and marketing plans. Packaging for Sun Chips would consist of two sizes: a 7-ounce package and an 11-ounce package. A 2.25-ounce trial size will also be introduced. The trial size will be sold by Frito-Lay to the retailer at $0.385 with a suggested retail price of $0.69. The 7-ounce package will be sold to the retailer at $1.24 with a suggested retail price of $1.69. The 11-ounce package will be sold to the retailer at $1.732 with a suggested retail price of $2.39. Environmental Analysis. The public, in general and particularly the Baby Boomers, are knowledgeable about good health habits and staying well. The U.S. population has become more watchful with their health and is amenable to healthy food snacks. The market is receptive to new products that are enjoyable, as well as healthy. Sun Chips are made with canola or sunflower oil and contain less sodium than most snack chips. The chip is approximately 50% lower in saturated fats than chips made with other oils and is cholesterol-free. As one ages, he/she usually embraces the idea of improved health. INTERNAL ANALYSIS Performance Analysis. In the early 1980’s, Frito-Lay began to question whether people would continue to eat salty snacks, such as, potato, corn, and tortilla chips. Consumer research discovered that multigrain products, with its assorted flavors, were associated with a healthier food image. Further research on brand names indicated a market preference for Sun Chips, which is associated with the imagery and attributes of wholesomeness, great taste, light and distinctive, and fun. Determinants of Strategic Options. Frito-Lay recognizes consumers’ need for variety when choosing snack tastes and sizes. They create new products to meet changing consumer preferences and needs. In response, Frito-Lay establishes brands, such as Sun Chips, through line extension without compromising the quality. The development of Sun Chips gives consumers the ability to snack on chips without the fat since Sun Chips is about 50% lower in saturated fats than regular chips. Sun Chips is a multi-grain snack that is packaged in two sizes: a 7-ounce package and an 11-ounce package. Research shows that this meets consumers’ needs for a healthy chip in a desirable size package. The pricing strategy for Sun Chips is one that mirrors that of Doritos brand tortilla chips. Prices are as follows: $1.69 for 7-ounce package and $2.39 for 11-ounce package. These prices are consistent with consumer reference prices for snack chips with value. Currently, the distribution and sales of Sun Chips is handled through Frito-Lay’s store-door delivery system. The duties of a delivery person and a salesperson are combined, which keeps expenses low. These employees take orders, stock shelves, and introduce merchandising programs to retail stores. Sun Chips is sold in supermarkets, grocery stores, convenience stores, and other retailers that currently stock Frito-Lay products. Sun Chips business strengths include the fact that Frito-Lay is the worldwide leader in the manufacturing and marketing of snack chips. In the United States, Frito-Lay captures almost one-half of the retail sales in the snack chip industry. With Frito-Lay being the leader, it is easier for them to introduce new products. They do not have to create brand awareness or build the quality of their brand since it is already well known. People are more likely to try Sun Chips, because they are already enjoying Frito-Lay’s other chips. ALTERNATIVES When considering package size, flavors, and marketing spending, many alternatives could be considered in this case. We will explore four of these alternatives. The first alternative is to continue market testing for an additional six months in the Minneapolis-St. Paul metropolitan area to further evaluate the acceptance and profitability of Sun Chips. Although this alternative would give Frito-Lay more information upon which to make a decision, more money will be spent on marketing a product that is already proving to be popular. Brand-awareness studies have been prepared to compare Sun Chips test data to a successful potato chip brand already launched, O’Grady’s. When Frito-Lay launched O’Grady’s potato chips, the product reached over $100 million in sales the first year. The studies showed that O’Grady’s only had a 28 percent brand awareness compared to 33 percent that Sun Chips has already achieved. Considering Sun Chips percentage is higher than O’Grady’s, may indicate that Sun Chips should be a sustainable product and maybe even more popular with higher sales than estimated over O’Grady’s. In addition, this alternative opens the field to competitors to produce and distribute similar multigrain chips during this period. Frito-Lay could loose the opportunities of being first to the market, which include establishing the brand name, controlling a large market share, and increased revenues from a lack of competition. However, if another company beats Frito-Lay to the market, as a result of the additional six months of testing, there are still advantages of being a follower. Frito-Lay would be in a position to take advantage of the pioneer’s positioning, product, and marketing mistakes. If the pioneer misjudges the preferences of the snack chip market, the follower (Frito-Lay) will be in a position to introduce a more precisely positioned product. A follower can also benefit from product enhancements that become evident as the product of the pioneer is judged by the market. Our second alternative is to take the pioneer approach and launch production and distribution nationally with the Natural and Onion flavors in three package sizes, 2.25, 7, and 11-ounces. The results are shown below in Appendix 1. The national campaign requires a $22 million annual marketing budget. From the market research, we know that there are 90 million consumer households that purchase snack items. Research also shows that 19.90% of those households will be triers of Sun Chips for a total of 17,910,000 triers. The average trial size of Sun Chips is 6-ounces. Of the triers, approximately 41.80% show to be repeat buyers. The number of repeaters is 7,486,380. The same repeat households go on to repeat this purchase 2.9 times. The repeat purchases of Sun Chips averages 13 ounces, or 30,438,717 pounds of Sun Chips annually. The sales price of Sun Chips is $2.70 per pound, which projects revenue of $82,184.535. The projected revenue falls slightly short of the $100 million benchmark. However, these are only estimates, and we believe that brand awareness studies show that Sun Chips maybe more popular than the existing brand, O’Grady’s, which were able to reach over $100 million in sales their first year. Research also suggests that Frito-Lay may lose 30% in sales of its current snack chips due to cannibalization. The unit contribution of Sun Chips is $1.30 per pound. The unit contribution of the current snack chips of Frito-Lay is $1.05 per pound. Therefore, Frito-Lay will gain $0.25 for each cannibalized pound. Incremental sales of Sun Chips (70% of total pounds) will produce $27,699,232 in contribution dollars and cannibalized sales will contribute $2,282,904, for a total contribution of $29,982,136. With total revenues being $82,184,535, the gross margin being $29,982,136 and the marketing expenses being $22,000,000, the estimated net profit under the second alternative is $7,982,136 with 30,438,717 pounds produced. The pioneer strategy of Alternative 2 will give Frito-Lay first choice of market segments and position and allow Frito-Lay to establish product quality, price, distribution, and promotional appeals. Our third alternative is again a pioneer strategy that will launch production and distribution nationally with the Natural and Onion flavors, but will include a 15-ounce package as an additional size. Test data shows that adding the 15-ounce package will increase the average purchase repeat ounces from 13 to 13.5-ounces. Again, the national campaign would require a $22 million marketing budget. The net profit under this scenario is $8,...