CRACKER JACK
An analysis of potential brand acquisition by Diversified Products Corporation
John Bry
Sonja Gessling
Phil Mark
Sara Meinke
Jordan Schulz
Som Thamma
Cindy Tsai
Cohort C ‐ Team 4

CURRENT SITUATION ANALYSIS:
Cracker Jack (CJ) is a classic American caramel-coated popcorn and peanut snack that was acquired by Frito-Lay (FL) in 1997.1,2 Sales peaked in 1998 to $100M but soon sank back to $30M per year and has remained at that level since.3 Several factors are attributed to this sales slump. FL incorporated CJ into its existing distribution model that utilizes Direct Store Delivery and packaged
CJ in Mylar bags (as opposed to the classic boxes).They also shelved CJ with other Frito-Lay salty snack products such as Lays Potato Chips, despite 98% of consumers rating CJ as a sweet snack and not a salty one. 4 Although priced lower than the leading caramel corn brands, CJ still appears expensive when merchandised next to inexpensive potato chips. Consequently CJ has numerous misalignments and a comparatively low profit margin (8.2% compared to snack average of
20.5%).5,6

The low price point combined with rising commodity prices has forced FL to

substantially cut the quality of the prizes found inside each box to control costs, angering long time consumers.7 CJ, having stagnant sales for the past ten years, has not received the support required for brand revitalization, instead relying on steady baseball stadium sales to survive.8 Overall CJ has become a neglected brand and is ripe for acquisition.
MARKETING RECOMMENDATIONS:
First, DPC will merchandise CJ with other caramel popcorns, which will permit a price increase of
$0.29 (19.5%). This will temporarily decrease sales by 6% but provide an increase in operating income by $3.96M. We will also repackage CJ in the classic cardboard box at a price of 2.3 cents per box. The new boxes will permit a price increase of $0.10 (operating income increase of $0.74M) with no direct impact on sales volume. We will include higher quality prizes in each box of CJ at 3 cents per box, permitting a $0.09 price increase with no impact on sales volume. The cumulative price increase will be $0.45 (average retail price from $1.49 to $1.94) for a total impact on operating income of $1.5M.
We will develop our website to establish an online presence to listen, respond, and communicate
1

PepsiCo 1998 Annual Report
“Cracker Jack”, Wikipedia Foundation, Inc. 8, October 2010
3
PepsiCo 1999 Annual Report
4
Consumer Survey 12/2010
2

6

PepsiCo 2009 Annual Report http://www.planetfeedback.com/frito+lay/price/value/cracker+jac ks+not+all+theyre+cracked+up+to+be/290600
8
Interview with Don Helm, Cracker Jack Brand Manager,
11/17/2010
7

i

with our customers with a one-time cost of $200,000. Additionally we will donate a portion of sales to Little League Baseball (capped at $50,000 in the first year) in an effort to secure a positive public relations image. We anticipate this will increase sales by 0.5% through increase purchases from parents who will have an emotional connection to youth sport causes.
CJ’s brand awareness is 90%, however only 33% of people report purchasing CJ in the last two years.9 Because of this fact, an aggressive advertising campaign will focus on increasing purchase intentions by communicating the new toys and emphasizing an association between CJ and family events. Using 50% of manufacturer revenues after COGS and SGA we calculated our marketing budget to be $3.9M. This will reduce operating income by $3.75M after the expected 5% sales increase. We will utilize a mix of approximately 65% advertising and 35% sales promotions, which will give us an expected ROI of 31%.10
ORGANIZATIONAL RECOMMENDATIONS:
Internally we will seek alignment by emphasizing family on the corporate level. We will host family events and foster a close-knit, entrepreneurial work place while emphasizing collaborative management. Externally we will capitalize on CJ strengths of American history and nostalgia by focusing on family values. We will not bring staff from Frito Lay, however we will consult Don
Helm, a former CJ brand manager, as needed. We will use a combination of new and existing DPC staff to support CJ.
FINANCIAL IMPACT:
Our initial offer for CJ will be $17.9M based on the baseline projections of CJ as it currently stands.
We project a NPV of $62.37M after all recommendations are implemented and a maximum offer price of $48.8M from the expected cash flows and the internal rate of return required to make the acquisition of CJ worthwhile. Based on the Monte Carlo simulation, our expected NPV range is from $37.3M to $172.5M, and there is an 81% probability that the actual NPV of CJ will be above the maximum acquisition price. We expect that the return on assets and return on equity will be higher after implementation, but will continue to see a downward trend. This is consistent with CJ’s market position as a cash cow (high market share but very low growth).

9

Consumer Survey 12/2010 findarticles.com/p/articles/mi_m3065/is_n7_v18/ai_7381940/ 10

ii

Table of Contents
Target Acquisition: Cracker Jack...................................................................................................... 1
The Snack Food Industry ................................................................................................................... 2
Frito Lay and Cracker Jack................................................................................................................ 3
Misalignments .................................................................................................................................... 4
Supply Chain & Dsitribution ................................................................................................. 5
Pricing and Profitibility.......................................................................................................... 6
Promotions ............................................................................................................................. 7
The Cracker Jack Consumer ............................................................................................................. 8
Baseline Financials and Initial Offer Price ................................................................................... 10
Cracker Jack SWOT Analysis .......................................................................................................... 11
A New Cracker Jack Generation..................................................................................................... 13
New Organizational Structure and Culture ...................................................................... 14
Bringing Back the Boxes ..................................................................................................... 17
Cracker Jack Prizes ............................................................................................................. 19
New Marketing Campaign .................................................................................................. 21
Advertising ................................................................................................................ 23
Non-Traditional Marketing ..................................................................................... 25
New Distribution Channels .................................................................................... 26
Marketing Budget.................................................................................................... 29
Cracker Jack Financial Analysis ................................................................................................. 31
WACC .................................................................................................................................... 32
Financials and Sensitivity Analysis ............................................................................................ 33
References ................................................................................................................................... 38

iii

Target Acquisition : Cracker Jack
Cracker Jack under Frito Lay

Cracker Jack is a renowned caramel popcorn market leader owned and operated by Frito Lay North
America with a rich brand history and deep consumer connection, and DPC recognizes that this brand is an attractive target for acquisition:







Current market leader in caramel popcorn market1
2009 Cracker Jack sales have been steady for 5 years and estimated at $32.6M for 20091
Strong baseball stadium revenue estimated at $9M
Cracker Jack has highest brand awareness in caramel popcorn market (81%) 2
Currently sold in 3oz & 7oz Mylar bags and recently started offering 1oz box 3‐packs
Frito Lay distributes Cracker Jack using both direct store and warehouse delivery3

Steady monthly sales since 20051
$32.6M
Annual Revenue

4
Monthly Revenue M$

High brand awareness amongst caramel corn consumers2

Other brands
19%

3

Cracker
Jack
81%

2
1
0
2005

1AC Nielsen
2Consumer Survey
3PepsiCo 1999 Annual
Report

2006

2007

2008

2009

2010

DPC believes that Frito Lay has made a number of negative changes to Cracker Jack since its acquisition which have ultimately affected Cracker Jack’s brand equities and limited its growth potential. By implementing structural and marketing changes to Cracker Jack and striving to grow at minimum by the current pace of the snack food market, we believe this beloved snack food can reconnect with consumers and realize a significant increase in profits.
1

Snack food industry shows steady growth over the past several years, yet
Cracker Jack has been unable to capitalize
Snack food market breakdown1

Caramel Popcorn market leaders: 2009 sales2
 The caramel corn market has shown growth of 0.1% over the past 5‐years, essentially holding steady with annual retail sales of roughly $100 million
 Cracker Jack is the caramel popcorn leader with 24% of the market
 30% of Cracker Jack’s revenue is from baseball stadium sales which have been steady over many years and is a relatively uncontested channel
 Cracker Jack shows moderate sales increases during the baseball season, increasing 12.3% compared to non‐ baseball months
 Poppycock sales peak significantly during the holidays with nearly 25% of annual sales coming in
November/December
 There are growth opportunities in the convenience and food channels, particularly to gain market share in light of the recent decline in sales of private label caramel corn brands
1IBISworld Snack food manufacturing
2AC Nielsen

$35
$30
$25
B$

 Revenue in the snack food industry is approximately
$25.8B with expected annual growth of 2.1%
 In 2009 the snack food industry as a whole realized profits of $5B
 Salty snack foods in particular were able to thrive during the economic downturn because consumers want foods that are cheap and satisfying
 Increased on‐the‐go snacking
 The healthy snack market between 2010 to 2013 is forecasted to increase sales by 9%

Overall snack food manufacturing market growth1

$20
$15
$10
$5
$0
2002

2003

2004

2005

2006

2007

2008

2009

2010

Caramel Popcorn market leaders 2009 sales2

Crunch N
Munch
($28.4M)
21%

Cracker
Jack
($32.6M)
24%

Poppycock
($21.3M)
16%

Smartfood
($4.1M)
3%
Other
($48.6M)
36%

Frito Lay has not given Cracker Jack the opportunity to grow at the same rate as the overall snack food market, allowing Cracker Jack competitors to steal market share.
2

Despite steady sales and high brand awareness, Cracker jack has glaring misalignments due to Frito Lay ownership that has hurt brand perception, sales, and growth
Frito Lay North America1

Brand misalignments due to Frito Lay ownership

Frito Lay North America is the US leader in salty convenience snack foods. They have a strong brand portfolio and product mix with over 35 different brands.
 Subsidiary of PepsiCo
 2009 Profit margin of 25%
 48,000 employees
 All products manufactured and packaged in Plano, TX
 Top down corporate structure

Frito Lay dominates snack food industry2
Kraft ‐
ConAgra
$2.1B
$2.3B

Other
$11.7B

General
Mills ‐ $2B
Frito‐Lay
$18.9B

DPC recognizes that concerns over Cracker Jack’s brand perception and current misalignments are currently neglected by Frito Lay. We believe that reestablishing the connection with target Cracker Jack consumers is paramount to the growth of the brand. On the following slides we go into further detail regarding the following misalignments:
 Distribution misalignment
 Competitive misalignments
 Pricing misalignments
 Promotional inconsistencies
 Loss of consumer confidence due to changes of
Cracker Jack’s primary differentiators:
 Packaging: Boxes to Bags
 Prizes: Actual toys to pieces of paper

Highest selling Frito Lay brands $B3
$1.6
Total retail sales ($B)

Frito Lay purchased Cracker Jack in 1997 from Borden Foods,
Inc. There is currently no Cracker Jack brand manager; instead the brand is managed by a group of assistant brand mangers. Frito Lay began manufacturing Cracker Jack in 3oz and 7oz
Mylar bags in order to fit their distribution system. They lowered the budget for the “prize inside” each box, diminishing the prize quality and lessoning the value add for the Cracker Jack consumer. These changes to Cracker Jack’s key differentiators have created a consumer uproar about the quality about the product. Cracker Jack’s history and connection with consumers has been weakened by the top down corporate structure and salty snack focus of Frito Lay.

$1.4
$1.2
$1.0
$0.8
$0.6
$0.4
$0.2
$0.0
Lay's Potato
Chips

Doritos

Cheetos

Tostitos

Fritos

3

1PepsiCo

2IBIS Snack Food Production
3AC Nielsen

CRACKER JACK MISALIGNMENTS

4

Frito Lay’s distribution channels: competitive misalignment for
Cracker Jack

+

Drug
Stores

Frito Lay Distribution Channels1

+
Vending
Distribution

Sports &
Entertainment
Venue
Distributors

Baseball
Stadiums

+
Mass
Merchants

Warehouse
Distribution

Wholesale
Distributors

+

Cracker jack has been priced to compete with other Frito Lay salty snacks whose COGS are much less than Cracker Jack’s

Frito Lay
Salty Snacks
• Doritos
• Fritos
• Cheetos
• Smartfood





Hot Dogs
Cotton Candy
Peanuts

Caramel
Popped Corn
• Crunch n’
Munch
• Poppycock
• Private
Labels

Pricing misalignments due to competition

FL
Route
Service
Reps

Competition Misalignment in different channels

Direct
Store
Deliveries

Convenience
Stores

Traditionally sports venues charge much higher prices for Cracker Jack.

Cracker Jack is the lowest priced caramel popcorn in the food and mass merchant channels, but sales are not increasing. There is a lot of room for price increases which we will see on the next slide. Grocery
Stores

5
1PepsiCo 1999 Annual Report

Cracker Jack has not raised MSP to account for rising commodity prices or to compete with caramel corn competitors
CJ price in food channels vs caramel corns1

CJ price in DSD channels vs FL snacks1
Lays

Smartfood

*Price scale highlights the difference in FL snacks vs caramel corn brands

Fritos
Doritos

Poppycock
Crunch n’ Munch

Cheetos

Cracker Jack

Cracker Jack
$0

$1

$2

$3

Operating profits2

Snack Foods

$0

$4

$2

$3

$4

Caramel Corn MSP compared to materials costs1

COGS
51.0%

Other
Expenses
28.5%

Operating
Profit
20.5%

$4.00
$3.50
$3.00

Cracker Jack

$1

72.6%

19.1% 8.3%

Cracker Jack
Caramel Corn Competitors

$2.50
$2.00
$1.50

All Industries

70.0%

22.6% 7.4%

$1.00
2004 2005 2006 2007 2008 2009 2010

The main drivers of profits in the snack food industry is the cost of commodities for manufacturing the snack foods

Cracker Jack has not been increasing retail prices to match the rise in commodity prices to compete with all other channels

Cracker Jack and other caramel corns have much more expensive materials (corn, peanuts, and sugar) than most snack foods which typically only have one main commodity (such as potatoes or corn). By not increasing prices, Cracker Jack is leaving a significant amount of profit on the table.
Maintaining the low price point has had a negative effect on promotional allowances as well.
1AC Nielsen
2IBIS Snack Food Production

6

Cracker Jack promotional misalignments hurt the bottom line across all retail channels
Promotional ACV1

Promotional misalignments hurt profits



30
25
20
15



Feature
Display

10
5
0
Crunch N Munch

Poppycock

Cracker Jack

Percent of sales coming from promotions1
60%
50%
40%


Warehouse
DSD

30%
20%
10%
0%
Crunch N Munch

Poppycock

Cracker Jack

Avg % price cut during promotion w/ results1
30
25
20
15
10
5
0


% Price Cut
Promotional Efficiency

Crunch N Munch

1AC Nielsen

Poppycock

Cracker Jack

Cracker Jack’s promotional mix of features and displays is misaligned compared to the major competitors
Cracker Jack generates a higher proportion of its sales from promotions than the two main caramel corn competitors  Relative volume between Warehouse and DSD is fairly consistent between all three caramel corns, with DSD channels generating 65% higher sales from promotion than Warehouse channels on average1
In order to achieve higher sales from promotions and to achieve the mix of volume within each channel,
Cracker Jack has been offering much higher price reductions on average during promotions
 This results in a much lower promotional efficiency because Cracker Jack has to discount more than its competitors to generate similar sales volumes
 The higher price reductions result in less revenue for Cracker Jack
Bringing Cracker Jack into alignment with competition would mean that discounts could be reduced while maintaining sales volume which will generate more revenue There is promotional misalignment across all channels and this is an area that needs considerable attention moving forward. Next we will examine the target consumers and how to best reach them.

7

Cracker Jack consumers are typically lower income families who enjoyed the snack as children
Target consumers are 35‐44 y/o1
800

572

600

423

303

291

55‐64

400
200

The primary buyers of Cracker Jack:
 Women (6x more likely than men to purchase)
 Aged 35‐44
 Parents of children ages 6‐17
 White
 Less educated
 Living in the southern region (48%)
 Living in smaller cities, populations