Frito-Lay Company

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Frito-Lay Company

7701 Legacy Drive
Piano, Texas 75024-4099
U.S.A.
Telephone: (972) 334-7000
Fax: (972) 334-2019
Web site: http://www.fritolay.com

Division of PepsiCo, Inc.
Incorporated: 1961 as Frito-Lay, Inc.
Employees: 92,000
Sales: $10.98 billion (1998)
NAIC: 311919 Other Snack Food Manufacturing; 311821 Cookie and Cracker Manufacturing

Frito-Lay Company is the world leader in the salty snack category, controlling more than 35 percent of the world market in snack chips and 60 percent in the United States. Among the company’s well-known brands are five that generate annual sales of $1 billion each: Lay’s, Ruffles, Doritos, Tostitos, and Chee-tos. In addition to its dominance of the potato chip, tortilla chip, and corn chip sectors (the last of these led by the Fritos brand), Frito-Lay has major brands in other categories, such as Rold Gold pretzels, Cracker Jack candy-coated popcorn, and Grandma’s cookies. About $4 billion of the company’s overall net sales are generated outside the United States, with sales in 42 countries. Lay’s, Ruffles, and Chee-tos are among Frito-Lay’s major international brands, along with such local favorites as Walker’s in the United Kingdom and Sabritas in Mexico. Frito-Lay Company is the snack food division of PepsiCo, Inc., generating about half of the parent company’s revenues and two-thirds of its profits.

Early Years of the Frito Company

Frito-Lay traces its origins to the early 1930s. In the midst of the Great Depression, the lack of job prospects spurred a number of young people to turn to entrepreneurship in order to get ahead. Among these were the founders of the two companies that would merge in 1961 to form Frito-Lay. Elmer Doolin’s entrance into the snack food industry was one of happenstance. In 1932 the Texas native was running an ice cream business which was struggling because of a price war. Doolin began seeking a new venture and happened to buy a five-cent, plain package of corn chips while eating at a San Antonio café. At the time, corn chips or “fritos” (the word frito means fried in Spanish) were a common fried corn meal snack in the Southwest. Typically, cooks would cut flattened corn dough into ribbons, then season and fry them.

Impressed with his five-cent snack, Doolin discovered that the manufacturer wished to return to Mexico and would sell his business for $100. Doolin borrowed the money from his mother, purchasing the recipe, 19 retail accounts, and production equipment consisting of an old, handheld potato ricer. Initially setting up production in his mother’s kitchen, Doolin spent his nights cooking Frito brand corn chips and sold them during the day from his Model T Ford. Early production capacity was ten pounds per day, with profits of about $2 per day on sales ranging from $8 to $10 per day.

Doolin soon expanded to the family garage, and increased production by developing a press that operated more efficiently than the potato ricer. Within a year of his purchase of the business, Doolin moved the headquarters for the Frito Company from San Antonio to Dallas, the latter having distribution advantages. Sales began expanding geographically after Doolin hired a sales force to make regular deliveries to stores. The Frito Company also began selling the products of potato chip manufacturers through license agreements. The company soon had plants operating in Houston, Tulsa, and Dallas.

In early 1941 Doolin expanded to the West Coast by opening a small manufacturing facility in Los Angeles. Only the onset of World War II and rationing slowed Frito’s growth. But sales quickly picked up again following the war’s end, and by 1947 revenues exceeded $27 million. Doolin moved his company toward national status through licensing agreements. The first came in 1945, when Frito granted H.W. Lay & Company an exclusive franchise to manufacture and distribute Fritos in the Southeast. This marked the beginning of a close relationship between the two companies, and would eventually lead to their 1961 merger. In 1946 another franchise was launched in Bethesda, Maryland, followed by a Hawaii-based franchise in 1947. The following year, Frito introduced Chee-tos brand Cheese Flavored Snacks, which gained immediate popularity. Meantime, the Fritos brand went national in 1949 when Doolin purchased color advertisements in several magazines, including Ladies’ Home Journal, Better Homes and Gardens, and Life.

By 1954 the Frito Company business included 11 plants and 12 franchise operations. In 1953 the Frito Kid made his debut as a company spokesman; the character continued to be used in Fritos advertising until 1967. In 1956 the Frito Kid made an appearance on the “Today” show with host Dave Garroway, marking the Frito Company’s first use of television advertising. Fritos gained a new advertising theme in 1958 with the debut of “Munch a Bunch of Fritos.” That year, the Frito Company acquired the rights to Ruffles brand potato chips. The following year, Doolin died, having led his company to its status as a major snack food maker, with revenues exceeding $51 million. The Frito Company continued to operate 11 plants, but its franchise operations had been reduced to six after the company bought out several franchisees. John D. Williamson took over as president of the company. Within two years of Doolin’s death, the Frito Company would merge with H.W. Lay.

Early Years of H.W. Lay & Company

H.W. Lay & Company, Inc. was founded by another entrepreneur, Herman W. Lay. Born in humble circumstances in 1909 in Charlotte, North Carolina, Lay had worked a variety of jobs and run a few small businesses from the age of ten, including an ice cream stand, before taking a position as a route salesman at the Barrett Food Products Company, an Atlanta-based potato chip manufacturer, in 1932. Later that year, Lay borrowed $100 to take over Barrett’s small warehouse in Nashville on a distributorship basis. This was coincidentally the same year that Doolin had established the Frito Company.

Lay started out selling Barrett’s Gardner brand products from his 1928 Model A Ford, initially pocketing about $23 a month. Growth came rapidly, however. In 1933 Lay hired his first salesman, and by the following year his company had six sales routes. By 1936 Lay employed a workforce of 25 and had moved his company from its original warehouse to another Nashville building. From this location, Lay began manufacturing products himself, including peanut butter cracker sandwiches and french fried popcorn. In 1938 the latter became the first item marketed under the Lay’s name, specifically Lay’s Tennessee Valley Popcorn. By that year Lay was distributing snack foods throughout central Tennessee and southern Kentucky, and had opened a new warehouse in Chattanooga. The most significant development of 1938, however, came as a result of financial difficulties encountered by Barrett Food Products. After securing $60,000 in financing through business associates and friends, Lay bought Barrett, its plants in Memphis and Atlanta, and the Gardner’s brand name. He changed the name of the company to H.W. Lay & Company, Inc., with headquarters in Atlanta.

During the early 1940s H.W. Lay added manufacturing plants in Jacksonville, Florida; Jackson, Mississippi; Louisville, Kentucky; and Greensboro, North Carolina. Lay also built a new plant in Atlanta featuring a continuous potato chip production line, one of the first in the world. In 1944 the company began marketing potato chips under the Lay’s name, with the Gardner’s brand becoming a historical footnote. That same year, H.W. Lay became one of the first snack food concerns to advertise on television, with a campaign featuring the debut of Oscar, the Happy Potato, the company’s first spokesperson. The following year, H.W. Lay gained from the Frito Company an exclusive franchise to manufacture and distribute Fritos corn chips in the Southeast.

After establishing a research laboratory to develop new products in 1949, H.W. Lay expanded its product line during the 1950s to include barbecued potato chips, corn cheese snacks, fried pork skins, and a variety of nuts. The company also expanded outside the Southeast and acquired a number of weaker competitors. In 1956 H.W. Lay went public as a company with a workforce exceeding 1,000, manufacturing facilities in eight cities, and branches or warehouses in 13 cities. Revenues in 1957 stood at $16 million, making Herman Lay’s company the largest maker of potato chips and snack foods in the United States. H.W. Lay had also gained fame for carefully developing and utilizing its sales routes. Company salespeople were among the first to go beyond simply delivering their merchandise to store owners, as they also stocked the merchandise for the owners, set up point-of-purchase displays, and helped to assure product quality by pulling stale bags off the shelves and displays before they could be sold. This “store-door” delivery system helped to increase revenues as the salespeople were able to “work” a particular sales territory more intensely. By the spring of 1961, H.W. Lay had operations in 30 states, following the purchase of Rold Gold Foods, makers of Rold Gold Pretzels, from American Cone and Pretzel.

Frito-Lay, Inc.: 1961–65

In September 1961 H.W. Lay and the Frito Company merged to form Frito-Lay, Inc., a snack food giant headquartered in Dallas with revenues exceeding $127 million. The new company began with four main brands—Fritos, Lay’s, Ruffles, and Chee-tos—and a national distribution system. Williamson served as the first chairman and CEO of Frito-Lay, with Lay taking the position of president. In 1962 Lay took over as CEO, with Fladger F. Tannery becoming president; two years later, Lay added the chairmanship to his duties.

In 1963 Frito-Lay began using the slogan “Betcha Can’t Eat Just One” in its advertising for Lay’s potato chips. Two years later comedian Bert Lahr began appearing in ads in which he attempted—always unsuccessfully—to eat just one Lay’s chip. Annual revenues for Frito-Lay exceeded $180 million by 1965, when the company had more than 8,000 employees and 46 manufacturing plants.

Company Perspectives:

Our Mission Statement: To be the world’s favorite snack and always within arm’s reach.

June 1965: Frito-Lay + Pepsi-Cola = PepsiCo

In June 1965 Frito-Lay merged with Pepsi-Cola Company to form PepsiCo, Inc., with Frito-Lay becoming an independently operated division of the new company. Pepsi’s CEO and president became CEO and president of PepsiCo, while Herman Lay was named chairman, a position he held until 1971. Lay then served as chairman of the executive committee until 1980, when he retired. He died in December 1982.

There were a number of forces that drove the two companies together. The 1960s was an era of consolidation, with a number of food and beverage firms being gobbled up by larger entities. Pepsi-Cola was considered a takeover target not only because it ran a distant second in the soft drink sector to industry giant Coca-Cola Company, but also because little of the company’s stock was in the hands of management. Following the creation of PepsiCo, however, the new company’s directors held a much larger proportion of shares, with Lay holding a 2.5 percent stake himself. A second force behind the merger was Frito-Lay’s desire to more aggressively pursue overseas markets. The company’s sales had largely been restricted to the United States and Canada, but it could now take advantage of Pepsi’s strong international operations, through which Pepsi products were sold in 108 countries.

A third force was the perceived synergy between salty snacks and soft drinks. As Kendall succinctly related to Forbes in 1968, “Potato chips make you thirsty; Pepsi satisfies thirst.” The plan was to jointly market PepsiCo’s snacks and soft drinks, thereby giving Pepsi a potential advantage in its ongoing battle with Coke. Unfortunately, these plans were eventually scuttled by the resolution of a Federal Trade Commission antitrust suit brought against Frito-Lay in 1963. The FTC ruled in late 1968 that PepsiCo could not create tie-ins between Frito-Lay and Pepsi-Cola products in most of its advertising. PepsiCo was also barred from acquiring any snack or soft drink maker for a period of ten years.

New Products, the Frito Bandito, and Increased Competition: 1965–79

Frito-Lay began its PepsiCo era with the same lineup of brands it had when Frito-Lay was created in 1961: Fritos, Lay’s, Ruffles, Chee-tos, and Rold Gold. Shortly after the creation of PepsiCo, Lay’s became the first potato chip brand to be sold nationally. Of even greater importance was increased new product development activity. In 1966 Frito-Lay began test-marketing a new triangular tortilla chip under the brand name Doritos. Compared to regular tortilla chips, Doritos were more flavorful and crunchier. Launched nationally in 1967, Doritos proved successful, but additional market research revealed that many consumers outside the Southwest and West considered the chip to be too bland—not spicy enough for what was perceived as a Mexican snack. Frito-Lay therefore developed taco-flavored Doritos, which were introduced nationally in 1968 and were a tremendous success. Four years later, national distribution began of nacho cheese-flavored Doritos, which were also a hit. Ironically, with increasing popularity, Doritos became less and less identified as a “Mexican snack,” a development that echoed the earlier brand history of Fritos. During the 1970s Doritos became Frito-Lay’s number two brand in terms of sales, trailing only Lay’s. This spectacular growth was fueled by heavy advertising expenditures—as much as half of the company’s overall $23 million ad budget in the mid-1970s. The “Crunch” campaign began in the early 1970s, and gained added impetus in 1976 when Avery Schrieber began crunching Doritos on national television. Frito-Lay also found lesser success in this period with other new products, including Funyuns onion-flavored rings, which debuted in 1969, and the Munchos potato crisps that were launched in 1971.

In 1968 Frito-Lay began a new Fritos advertising campaign featuring the Frito Bandito, a Mexican bandit complete with a long mustache, sombrero, and six-gun who spoke in a heavy accent. Ads showed the cartoon character robbing and scheming to get his beloved Fritos corn chips. The campaign quickly drew heavy criticism from Mexican American groups who alleged that it showed a prejudice against Mexican Americans and perpetuated a stereotype. Responding to the protests, radio and television stations in California began pulling Frito Bandito spots off the air. Frito-Lay finally ended the campaign in 1970.

Key Dates:

1932:: Elmer Doolin founds the Frito Company in San Antonio, Texas, and begins making Fritos corn chips.
1938:: Herman W. Lay buys Atlanta potato chip maker, changes name to H.W. Lay & Company, Inc., the following year.
1944:: H.W. Lay begins marketing potato chips under the Lay’s name.
1948:: Frito Company introduces Chee-tos snacks.
1958:: Frito Company acquires the rights to Ruffles brand potato chips.
1961:: The Frito Company and H.W. Lay & Company are merged to form Frito-Lay, Inc.
1965:: Frito-Lay, Inc. and the Pepsi-Cola Company merge to form PepsiCo, Inc., with Frito-Lay becoming a division of the new company.
1967:: Doritos tortilla chips make their national debut.
1970:: Frito Bandito advertising campaign is abandoned following complaints from Mexican American organizations.
1981:: Company introduces Tostitos tortilla chips.
1991:: Sunchips multigrain snacks are introduced.
1997:: Company acquires the Cracker Jack brand.
1998:: Wow! line of low-fat/no-fat chips debuts.

During the 1970s Frito-Lay began feeling the effects of increased competition. The Lay’s brand was challenged not only by more aggressive regional brands but also by such newfangled chips as Pringles and Chipos. These chips were made from mashed or dehydrated potatoes molded into a uniform shape, which enabled them to be stacked into a can or packaged in a box. In either case, they had several advantages over regular potato chips: they were less fragile, their packaging was less bulky, and they had a longer shelf life. Most importantly, they could be made in one location and shipped nationally, rather than having to be made in a nationwide system of regional plants. Pringles and Chipos were also backed by the national advertising prowess of two consumer product giants—Procter & Gamble Company and General Mills, Inc., respectively. Additional competition in the 1970s came from Nabisco Inc., maker of Mister Salty pretzels and such extruded snacks as Flings and Corkers, and Standard Brands Inc., which was expanding its Planters brand beyond nuts into corn and potato chips, cheese curls, and pretzels. Despite its formidable foes, Frito-Lay remained the clear leader in the U.S. snack industry, with sales by the late 1970s exceeding the $1 billion mark, more than double that of the nearest competitor, Standard Brands. Moreover, Frito-Lay was far from resting on its laurels. It increased its overall production capacity by one-third by 1979 through the opening of a new plant in Charlotte, North Carolina, and the culmination of expansion programs at ten existing plants. Keeping Frito-Lay ahead of the competition during this period was D. Wayne Calloway, who became president and chief operating officer in early 1976.

New Product Ups and Downs in the 1980s

The 1980s started out promisingly, with Frito-Lay acquiring the Grandma’s regional brand of cookies in 1980 for $25 million, in a venture outside of its salty snack stronghold. In 1983 the company made a national launch of the Grandma’s brand, and soon was selling five varieties. Among these was a homemade-style cookie that was soft on the inside but crispy on the outside. In 1984 Procter & Gamble sued Frito-Lay and two other cookie makers for infringing on its patent for Duncan Hines crispy-chewy cookies. The parties reached a settlement in 1989, whereby Frito-Lay agreed to pay about $19 million to Procter & Gamble, while the bulk of the $125 million settlement was shared equally by the two other defendants, Nabisco and Keebler Co.

In addition to the acquisition of Grandma’s, the early 1980s also saw Frito-Lay introduce Tostitos tortilla chips. Debuting in 1981, Tostitos was the most successful new product introduction yet in Frito-Lay history, garnering sales of $140 million in the first year of national distribution. The development of Tostitos came out of market research on Doritos indicating that some consumers felt the latter chips were too heavy, too thick, and too crunchy; at this time, there was a general trend toward consumer preference for “lighter-tasting” foods, as well as an increased interest in Mexican food. Frito-Lay thus created the thinner, crispier Tostitos, which could be eaten alone, made into nachos, or dipped into increasingly popular salsas. By 1985 Tostitos was Frito-Lay’s number five brand, with sales of about $200 million, trailing only Doritos ($500 million), Lay’s ($400 million), Fritos ($325 million), and Ruffles ($250 million). Also in 1985 Frito-Lay expanded its tortilla chip line with the introduction of Santitas white and yellow corn round chips.

In 1983 Calloway shifted to the PepsiCo headquarters in Purchase, New York, to become the parent company’s CFO (and eventually its chairman and CEO). Taking over as president of Frito-Lay was Michael Jordan, who held the position for two years before also heading to Purchase and eventually becoming PepsiCo president. Willard Korn served as president of Frito-Lay during the mid-1980s, a period coinciding with the company’s relocation of its headquarters from Dallas to Piano, Texas, but more importantly with a spate of failed product introductions. In 1986 Frito-Lay rolled out a slew of new products, several in the nonsalty snack sector, including Toppels cheese-topped crackers, Rumbles crispy nuggets, and Stuffers dip-filled shells. The company also attempted to penetrate the growing market for kettle-cooked chips, a variety harder and crunchier than regular potato chips, with a brand called Kincaid. The barrage of new products was too much for Frito-Lay’s 10,000-strong sales force to handle; products were lost on store shelves and all of the new brands were quickly killed. Korn resigned from his post in November 1986, with Jordan returning to Texas to head Frito-Lay once again.

Under Jordan’s leadership in the late 1980s, Frito-Lay focused on revitalizing its existing brands rather than developing new brands. Among the successful line extensions introduced in this period were Cool Ranch flavor Doritos and a low-fat version of Ruffles. In 1989 Frito-Lay acquired the Smartfood brand of cheddar-cheese popcorn, a regional brand it hoped to roll out nationwide. The company was also finding success in the international market, where profits were increasing 20 percent per year, revenues exceeded $500 million by the end of the decade, and Frito-Lay products were being sold in 20 countries. Overall sales stood at about $3.5 billion.

Rising Fortunes in the 1990s

Entering the 1990s, Frito-Lay faced continuing challenges from both regional and national players, including the upstart Eagle Snacks brand, owned by beer powerhouse Anheuser-Busch Cos. Eagle Snacks gained market share in the 1980s with premium products that sold for low prices, some of which were 20 percent lower than those of Frito-Lay. In addition to the increased competition, Frito-Lay also suffered in the late 1980s through 1990 from self-inflicted wounds, such as increasing prices faster than inflation, letting the corporate payroll become bloated, and allowing product quality to decline. As a result, profits were on the decline in the early 1990s.

In early 1991, Roger A. Enrico was named to the top spot at Frito-Lay, after most recently serving as president of PepsiCo Worldwide Beverages. Enrico, a former Frito-Lay marketing vice-president, immediately set out to turn around the stumbling but still formidable snack giant. During 1991 the company eliminated 1,800—or about 60 percent—of its administrative and managerial jobs, creating a much more streamlined structure. Four of the company’s 40 plants were closed or sold off, and more than 100 package sizes and brand varieties were dropped from what had become an unwieldy product portfolio. These moves resulted in annual savings of approximately $100 million. On the selling side, Frito-Lay created 22 sales/marketing offices to bring decision-making closer to retailers and consumers. The company also slashed its prices. In its first big new product success since Tostitos, Frito-Lay launched SunChips in 1991, garnering $115 million in sales during the first year; the multigrain, low-sodium, no-cholesterol chip/cracker found a ready market among adults seeking a more healthful snack. In moves designed to revitalize its longstanding brands, Frito-Lay redesigned the packaging for several products, including Fritos and Rold Gold pretzels, and reformulated both Lay’s and Ruffles potato chips—the first time the Lay’s formula had ever been changed. To enhance the flavor of both chips, the company developed a new frying process and switched from soybean oil to cottonseed oil. With consumers preferring less salty snacks, the sodium content of the chips was also reduced. The new Lay’s chips were introduced in 1992 through an ad campaign featuring the tag line, “Too Good to Eat Just One!,” a variation on the old “Betcha Can’t Eat Just One” slogan. In 1993 Rold Gold pretzels were the subject of the product’s first network television campaign, with ads featuring “Seinfeld” star Jason Alexander as “Pretzel Boy.” The following year the formula for Doritos was reformulated to make the chips 20 percent larger, 15 percent thinner, and stronger tasting—changes that were based on careful market research. Frito-Lay also continued to roll out new products, including Wavy Lay’s potato chips and Baked Tostitos (1993), Cooler Ranch flavor Doritos (1994), and Baked Lay’s (1996).

By the mid-1990s, as the snack food sector entered a slower growth period marked by heavy price competition, it became increasingly clear that Frito-Lay would remain the industry front-runner by a wide margin. The company increased its share of the salty snack market in the United States from 38 percent in the late 1980s to 55 percent by 1996. Competitive pressure from Frito-Lay led two of its fiercest rivals to wave the white flag. Borden sold most of its snack businesses in the mid-1990s as part of a massive restructuring. In early 1996 Anheuser-Busch shut down its Eagle Snack unit after failing to find a buyer for the unit; it sold four of Eagle’s plants to Frito-Lay, which converted them to production of its main brands.

In 1996 PepsiCo merged its domestic and international snack food operations into a single entity called Frito-Lay Company, consisting of two main operating units, Frito-Lay North America and Frito-Lay International. The following year Frito-Lay bought the Cracker Jack brand from Borden, marking the company’s reentrance into the nonsalty snack food sector. Also in 1997 Frito-Lay reentered the sandwich cracker market with the national introduction of seven varieties. Frito-Lay expanded internationally in 1998 through the acquisition of several salty snack assets in Europe and Smith’s Snackfood Company in Australia from United Biscuit Holdings plc for US$440 million. In late 1998 Frito-Lay announced that it had formed a broad Latin American joint venture with Savoy Brands International, part of a Venezuelan conglomerate, Empresas Polar SA. Covering Venezuela, Chile, Colombia, Ecuador, Guatemala, Honduras, Panama, Peru, and El Salvador, the joint venture was designed to enable Frito-Lay to better penetrate the $3 billion salty snack sector in Latin America. Also in 1998 Frito-Lay began selling its Wow! line of low-fat and no-fat versions of Doritos, Ruffles, Lay’s, and Tostitos. Made with a fake fat called olestra developed by Procter & Gamble (ironically the maker of rival chip Pringles), the Wow! products were controversial because of reports and studies that indicated that the chips could cause gastric distress. All olestra products carried warning labels stating that they “may cause abdominal cramping and loose stools.” Despite waves of negative publicity, the Wow! line was the best-selling new consumer product of 1998, garnering a whopping $350 million in sales.

By the end of the 1990s, Frito-Lay’s aggressive new product development, advertising, and marketing efforts had further increased the company’s share of the U.S. salty snack market to 60 percent. With the domestic market so firmly in its control, Frito-Lay was sure to look increasingly overseas for growth opportunities, particularly because there was no other global competitor in the industry. In the early 21st century, the company was likely to continue its expansion of its main brands—especially Lay’s, Ruffles, Chee-tos, and Doritos—into new markets and to seek additional acquisitions and joint ventures in order to add more brands to its non-U.S. portfolio, which featured Walker’s in the United Kingdom and Sabritas in Mexico.

Principal Divisions

Frito-Lay North America; Frito-Lay International.

Principal Competitors

Borden, Inc.; Campbell Soup Company; ConAgra, Inc.; General Mills, Inc.; Golden Enterprises, Inc.; International Home Foods, Inc.; Keebler Foods Company; Lance, Inc.; Nabisco Holdings Corp.; Poore Brothers, Inc.; The Procter & Gamble Company.