Frito-Lay has long dominated the snack-food business by relentlessly focusing on the middle swath of America that eats chips, pretzels and party mix without apparent regard to the effect on the waistline.
Now, though, Frito-Lay, a unit of PepsiCo Inc., is building a “company within a company” to pursue what might be called a 1 percent-99 percent strategy: creating high-end snacks as well as those that appeal to what it diplomatically calls “value” customers.
The effort is all about what Tom Greco, the president of Frito-Lay North America, has called the “bifurcation” of American snackaholics.
By that, he meant that “the rich are getting richer and the poor are getting poorer,” said Ann Mukherjee, chief marketing officer at Frito-Lay North America.
“Demographics, the aging population and changing ethnic mix, and bifurcating income are the trends reshaping the way people are eating,” Mukherjee said. “We’re snacking more often during the day, and we’re looking for snacks that are more satisfying physically and healthier.”
Frito-Lay is a “perennial rock” in PepsiCo’s portfolio, as described by Judy Hong, a stock analyst at Goldman Sachs. That has helped cushion the company as its cola business struggles.
One major investor, Donald Yacktman of Yacktman Funds, has suggested that PepsiCo rename itself Frito-Lay to reflect the growing importance of that business, and others like Nelson Peltz and Relational Investors have agitated for it to uncouple the snacks business from the drag of its beverage operations.
But Frito-Lay’s traditional business - Doritos, Tostitos, Lay’s, Rold Gold and other middle-market brands - has slowed as consumer tastes migrate to nuts, dried fruits and snacks made from whole grains.
While the overall $22 billion salty-snacks market is losing sales, its $2 billion premium end has grown on average about 7 percent during the past two years, according to Goldman Sachs. The investment bank expects sales of snacks in the bottom end of the market to grow about 4 percent a year for the next few years. The vast middle, however, is forecast to grow at just half that rate.
“The challenge for them is how to continue to grow their core business when some of their mainstream brands are losing share to some of the smaller premium and value brands as well as to other snack categories,” Hong said. “Pretzels and snack bars and energy bars, trail mixes and nuts are also growing at a faster pace.”
Those other snacks are where Frito-Lay’s large competitors like General Mills, Kellogg and Kraft are increasing their activities, which makes the two extremes of the salty snacks market even more attractive.
Frito-Lay has until now largely left the premium end of the market to niche competitors like Pop Chips, Pretzel Crisps and Pirate’s Booty and ceded the bottom to grocery store brands.
“These traditionally have been niche markets dominated by small players and regional brands,” said Harry Balzer, the chief food-industry analyst at the NPD Group, a research firm. “That leaves a lot of room for a mass player like Frito-Lay to come in and gain market share.”
The company has begun introducing items like Olive Coast, kettle-cooked chips with a Mediterranean twist, and Taqueros, a low-pricedtortilla chip to be sold in places like dollar stores.
Existing brands that appeal to more upscale customers are getting new emphasis as well, like Stacy’s Pita Chips and Sabra, a line of refrigerated dips that are often packaged with crackers and pretzels that is a joint venture with the Strauss Group. And Cracker Jack is being recast as a brand aimed primarily at Frito-Lay’s value shoppers.
“Whether you look at it in terms of price points or customers, there’s just morehappening on the edges of the market than in the middle right now,” said Daniel Naor, senior vice president for growth ventures at Frito-Lay North America.
Naor’s unit operates as a distinct business within Frito-Lay. Started 18 months ago, it already generates roughly $400 million of Frito-Lay’s $13.2 billion in North American sales and has expectations of adding another $100 million in revenue this year.
Naor compared it to Toyota’s Lexus brand.
“In the background, there are some common elements - the same factories make both products - but the materials used may be different and they are sold in different outlets,” Naor said.
Not only is the unit coming up with new brands, but it also is introducing Frito-Lay’s first resealable bags and using a different distribution system.
Mukherjee said, “What makes this proprietary is the way we’ve operationalized it to be a business strategy and not just about marketing.”
In the past, Frito-Lay might have pushed new products by using its “direct store distribution” system, which relies on Frito-Lay truck drivers to deliver products directly to stores. Naor’s unit is instead cultivating grocery store delicatessen managers and brokers who sell niche snacks and using warehouses to supply them.
Business, Pages 60 on 06/24/2012