1. How would you characterize the snack chip category and Frito-Lay’s competitive position in this category? The snack chip industry is clearly a matured industry, showing significant signs of growth. This is evidenced by the steady growth in both dollar sales as well as volume of snack-chip pounds sold. The snack chip industry has grown 5% since 1989 to 1990 in terms of retail sales. The snack chips retail market was worth $9.8 billion in 1990. Since 1986 to 1990, the US bought 3.5 billion pounds of snack chips which is nearly 14 pounds per person. In 1986, snack chips per capita consumption was slightly less than 12 pounds. The snack chip industry contains mainly three types of competitors: national brands, regional brands, and private brands. National brands are those that distribute products nationwide, include Frito-Lay, Borden, Procter and Gamble, RJR Nabisco and Eagle Snacks. Regional competitors consist of regional brand firm which distribute products in certain parties of the United States. Private brands are produced by regional or local manufacturers on a contractual basis for major supermarket chains. The competition in the snack food industry is very intense. As many as 650 different types of snack chip products are introduced into the market each year by both national and regional brand companies. Most of the products are new flavors for existing snack chips. It is reported that the new product failure for snack chips is very high. Pricing is also very competitive and snack chip manufacturers often resort to price deals to attract customers. Frito-Lay is a major powerhouse in the snack chips industry. It accounted for 50% of all snack chips retail sales in 1990. Of the top ten best selling snack chips in the US, 8 of them are Frito-Lay brands and the top 5 selling chips are all Frito-Lay brands. Frito-Lay is considered the monopolistic leader in this category. 2. What specific challenges and risks does Frito-Lay face in marketing SunChips and what are the implications of each? Frito-Lay’s experience with multigrain snacks and the SunChips brand in the 1970s were not successful. The snack was sold on premise that it was a “different, delicious new snack made from nature’s own corn, oats and whole grain wheat all rolled into one special recipe”. The Prontos brand was not well received and eventually terminated. The latest SunChips line of multigrain snacks would involve large risks to Frito-Lay because of a huge capital investment (new manufacturing process) and an equally huge marketing investment (new brand) that could be financially justified only with a product that could be sustainable for an extended period. The challenges are evident for Frito-Lay to see. With the product development of SunChips, Frito-Lay took the correct decision to undertake proper market testing with a test market exercise in the state of Minnesota-St. Paul. This would give Frito-Lay an idea of the product’s potential without extensive risks or costs. 3. What insights can be drawn from Frito-Lay’s prior experience with multigrain snacks? Frito-Lay’s experience with multigrain snacks and the SunChips brand in the 1970s were not successful. The possibility of a multigrain product was explored in the early 1970s when corporate marketing research studies indicated that consumers were looking for nutritious snacks. Frito-Lay developed a multigrain snack chip under the brand Prontos and it was first introduced in 1974. The snack was sold on premise that it was a “different, delicious new snack made from nature’s own corn, oats and whole grain wheat all rolled into one special recipe”. The Prontos brand was not well received and eventually terminated. Insights that can be drawn from the lack of Prontos’ success are the following: poor branding – Frito-Lay executives agreed that the product had a confusing name, a poor advertising copy, and appealed to too small of a crowd, a product type that was ahead of its time – it did not possess product attributes that appealed to a sufficient majority even though it was marketed towards to mainstream of snack chip consumers, manufacturing problems – production for multigrain snacks did not run as smoothly as other more established product types. Manufacturing problems contributed to the demise of the product.

4. What conclusions can be drawn from research on SunChips’ consumer acceptance and sales potential prior to the Minneapolis-St. Paul test market? A premarket test was carried in April 1989 and conducted by an independent marketing research firm. The purpose of the test was to find out about consumers attitudes and usage behavior of SunChips. Two flavors were introduced three advertising and merchandising expenditures were tested. The results from the premarket test were greatly unexpected. It indicated that SunChips Multigrain snacks would produce a likely first year sale of $113 million at manufacturer’s prices given the marketing plan set for the product, including $22 million advertising and merchandising expenditure. The estimate first year sales volume exceeded the $100 million Frito-Lay sales goal for new products. The natural and French flavor combination produced the lowest cannibalization of other Frito-Lay brands. The premarket testing gave clear indication that there was great potential for SunChips that needed further exploring. The next logical step would be a test market because it would give the product a more thorough test.

5. What is your assessment of the SunChips’ test market results? I found that the SunChips test market was adequately and sufficiently operated by Frito-Lay. The following results were obtained from the test market. Type of purchase: it was revealed that approximately 90% of purchases were made in supermarkets and convenience stores. The two and half ounce package accounted for 15% of purchases, the seven ounce accounted for 47% of purchases, and the eleven ounce package accounted for 38% of purchases. 55% of purchases were for the French onion and 45% were for the natural flavor. Trial and repeat rate: almost one in five households in the test market had tried the product, and 41.8% of these tier households had repurchased the product at least once over the 10 month trial period. Repeated purchasers purchased SunChips Multigrain Snacks an average of 2.9 times. Product Cannibalization: the incidence of product cannibalization revealed that 30% of SunChips Multigrain Snacks pound volume resulted from consumers switching from Frito-Lay’s potatoe, tortilla, and corn snack chips. About one third of the cannibalization volume from Frito-Lays products came from Doritos brand tortilla chips. From the cannibalization results, Frito-Lay executives noted that the gross profit for SunChips Multigrain Snacks was higher than that for its other snack chips. From the above results, I have translated the test results into the following analysis. Consumption of SunChips was measured in terms of pounds consumed rather than dollar value purchased. Looking at the manufacturer’s prices of the three different sizes of SunChips, the average dollar per pound is $2.65. Lastly, a nationwide scaling factor was used to predict the response rates of the US’s market in its entirety. This factor was calculated based on Minnesota-St.Paul’s population as factor of the US population. The results indicate that the test market for Minnesota-St.Paul was extremely successful. Revenues at manufacturer prices indicate that SunChips will exceed the $100 million mark considerably if launched nationwide.
6. Given your assessment of the test market results, what actions should Dwight Riskey recommend to Frito-Lay’s top executives? After the test market on SunChips multigrain Snacks was conducted a reviewing of the findings were presented to management. The following are planning considerations that the case expressed. Timing and competitive reaction were the key elements of the results. Riskey felt that the national and regional competitors were monitoring Frito-Lay’s test market. Riskey was concerned especially with the timing factor. He felt that if he were to continue testing SunChips, a competitor might launch a similar product nationally or regionally and upstage Frito-Lay. If an expanded test market was considered, a decision would be needed quickly to ensure adequate manufacturing capacity was in place and operating efficiently.

Strategy considerations that were also introduced within the case and that Riskey had presented as options for SunChips to the management of Frito-Lay. Riskey advocated for an increase in advertising and merchandising expenditure. It was believed that brand awareness would increase the additionally spending and felt that spending the national equivalent of $30 million could stimulate brand trial as well. Riskey also recommended a larger package size. This would result in additional volume as a larger package size is purchased. A fourth, larger package option for customers to choose from could add about one half ounce to the average annual purchase per repeat purchase.

Based upon the above considerations and the test market results, I would recommend that there is no need for there to be an extension of the test market because it was such a success. Time is of the essence for Frito-Lay and it’s only a matter of time before competitors would hear about the positive test results and proceed to launch a similar and possibly better product. I would recommend that Frito-Lay move with a partial launch of SunChips in particular (well selected) states. The states that should be selected are those with similar demographics to the Minnesota-St.Paul area. Selecting the appropriate states in this manner will eliminate and minimize as much as possible the risks of failure. After a decided time frame and given that the partial launch is a success, I would then recommend that Frito-Lay moves to a full nationwide launch using all the strategies that the test market utilized as a template.