Frito-Lay North America

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Frito-Lay North America

7701 Legacy Drive
Plano, Texas 75024-4099
U.S.A.
Telephone: (972) 334-7000
Toll Free: (800) 352-4477
Fax: (972) 334-2019
Web site: http://www.fritolay.com

Division of PepsiCo, Inc.
Incorporated: 1961 as Frito-Lay, Inc.
Employees: 44,000
Sales: $10.98 billion (2004)
NAIC: 311919 Other Snack Food Manufacturing; 311340 Nonchocolate Confectionery Manufacturing; 311421 Fruit and Vegetable Canning; 311821 Cookie and Cracker Manufacturing; 311911 Roasted Nuts and Peanut Butter Manufacturing

Frito-Lay North America is the dominant player in the salty snack category in the United States, with a 65 percent share of the market. Led by such blockbuster brands as Lay's, with annual sales of $2.8 billion, and Tostitos, a $1.6 billion brand, Frito-Lay boasts no fewer than 15 brands whose sales each year exceed $100 million. In the United States, Frito-Lay is the leader in several snack categories: potato chips (Lay's, Ruffles), extruded snacks (Cheetos), corn chips (Fritos), tortilla chips (Tostitos, Doritos), multigrain chips (Sun Chips), and pretzels (Rold Gold). Other major brands include Cracker Jack candy-coated popcorn, Grandma's cookies, Quaker Chewy granola bars, and Munchies snack mix. Operating only in the United States and Canada, Frito-Lay North America runs about 50 food manufacturing and processing plants and approximately 1,700 warehouses, distribution centers, and offices. Of PepsiCo, Inc.'s four operating divisions, Frito-Lay North America is the most profitable, generating 39 percent of the parent company's operating profit, and it is also responsible for one-third of PepsiCo's overall revenues.

The original Frito-Lay, Inc. company, whose predecessor firms date back to the 1930s, merged with Pepsi-Cola Company in 1965 to form PepsiCo, Inc., with Frito-Lay becoming a division of the new company. The operations of Frito-Lay were later divided into two units, Frito-Lay North America and Frito-Lay International. While the former continues to operate as a division of PepsiCo—and can be considered the successor to the original Frito-Lay company—the latter in 2003 was subsumed within another PepsiCo division, PepsiCo International. This division comprises the parent company's beverages, snacks, and foods businesses outside the United States and Canada. It includes the non-North American manufacturing and distribution of such global brands as Lay's and Doritos as well as regional snack brands, including Walkers in the United Kingdom, Gamesa and Sabritas in Mexico, and Smith's in Australia.

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 that 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" were a common fried cornmeal snack in the Southwest (the word frito meaning "fried" in Spanish). 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 converted for the job. 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 daily, with profits of about $2 on sales ranging from $8 to $10 daily.

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, when the firm made its initial offering of public stock, 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.

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.

Company Perspectives:

In 1932, two young entrepreneurs independently started two separate companies that were thousands of miles apart. Both men had the same objective in mind, and both shared the same basic business philosophy: "Provide the customer with a product of the highest quality and value; sell it for a fair profit; and make service a fundamental part of doing business."

Elmer Doolin of San Antonio, Texas started his company by purchasing the rights to a then unknown corn chip product that he would make famous.

Herman W. Lay of Nashville, Tennessee developed his business by selling a product that was familiar to people in his region, but later would become America's favorite potato chip.

These two savvy businessmen, who transformed a small, fragmented portion of the food business into the large, flourishing world of snack foods, created an industry based on unrivaled customer service and superior products.

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 "storedoor" 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, 46 manufacturing plants, and more than 150 distribution centers throughout the United States.

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 Donald M. Kendall, the head of Pepsi-Cola, 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. These plans, however, 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.

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.
2001:: Following PepsiCo's acquisition of the Quaker Oats Company, Frito-Lay gains the Quaker snack business, which includes granola bars and rice cakes.
2003:: As part of a restructuring, the international operations of Frito-Lay are subsumed within the PepsiCo International division, while Frito-Lay North America (FLNA) carries on the Frito-Lay legacy in the United States and Canada; FLNA enters the natural and organic snacks category with the launch of the Natural line.

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 (meaning, when literally translated into Spanish, "little bits of gold"). 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 Schreiber, a bushymustached character comedian, began crunching Doritos on national television. Frito-Lay also found lesser success in this period with other new products, including Funyuns onionflavored 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.

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 $1 billion, 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 homemadestyle 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 crispychewy 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 Plano, 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 were exceeding $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 frontrunner 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; 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. That same year, after Enrico had moved up to become CEO of PepsiCo, Steven Reinemund took over as CEO of Frito-Lay. He had been head of the company's North American operations since 1992. Frito-Lay in 1997 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. Other developments heightened Frito-Lay's importance to its parent company. In 1997 PepsiCo spun off its restaurant operations, and despite PepsiCo's 1998 acquisition of juice maker Tropicana Products, Inc., Frito-Lay generated half of the parent company's revenues and two-thirds of its profits in the late 1990s.

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 $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 nofat 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 1999 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. That year, the company changed its corporate logo for the first time since 1980, and it signed an agreement with Oberto Sausage Company to be the exclusive distributor of Oh Boy! Oberto brand meat snacks, such as beef jerky. Frito-Lay also launched an efficiency drive involving the closure of four of its oldest U.S. plants and the expansion of five others that were among its most efficient. The workforce was reduced by a net 450 people as a result of the restructuring. A second effort also launched in 1999, involving changes to Frito-Lay's much lauded distribution system, aimed at saving as much as $340 million a year by the time of its full implementation. The three-year distribution overhaul was designed to enable its battery of 15,000 salespeople to spend more time merchandising and selling snack products in retail stores as opposed to loading and sorting the products in their trucks. In September 1999 Reinemund moved up to become president and COO of PepsiCo (he would succeed Enrico as chairman and CEO of the parent company in May 2001). Al Bru, a 23-year PepsiCo veteran, took over leadership of Frito-Lay.

Also during the late 1990s, Enrico was placing increased emphasis on building sales of Pepsi in its core supermarket channel. To this end, he launched an initiative called "Power of One" that aimed to take advantage of the synergies between Frito-Lay's salty snacks and Pepsi beverages. This strategy involved persuading grocery retailers to move soft drinks next to snacks, the pitch being that such a placement would increase supermarket sales. In the process, PepsiCo would gain sales of both snacks and beverages while arch-rival Coca-Cola could benefit only in the latter area. Power of One harkened back to one of the original rationales for the merger of Frito-Lay and Pepsi-Cola. At the time, the head of Pepsi, Donald Kendall, had told Herman Lay: "You make them thirsty, and I'll give them something to drink." The promise of this seemingly ideal marriage had never really been achieved, however, until the Power of One campaign, which in 1999 helped increase Frito-Lay's market share by two percentage points and boosted Pepsi's volume by 0.6 percent.

Early 2000s: Adding Quaker Brands, Pushing More Natural and Healthful Products

Late in 2000 PepsiCo reached an agreement to acquire the Quaker Oats Company in a deal valued at $14 billion when completed the following August. Although clearly coveted for its blockbuster Gatorade sports drink, Quaker Oats also brought to PepsiCo brands that meshed well with Frito-Lay. Quaker's snack brands, which included Quaker Chewy granola bars, Quaker Fruit and Oatmeal bars, and Quaker Quakes rice cakes, became part of a new convenience-food unit within Frito-Lay North America. The addition of these brands helped Frito-Lay in its efforts to diversify outside the salty snack sector, and particularly into "on the go" light meals and nutritious snacks. In turn, the Quaker brands were expected to benefit from being placed into Frito-Lay's massive and recently overhauled distribution system.

On the new product front, Frito-Lay attempted to tap into the booming growth in the U.S. Hispanic population by launching a line of products aimed specifically at that market. The line included a mix of new products, such as Doritos Rancheros, several spicy snacks already sold in the United States, and four items that were big sellers for its sister company in Mexico, Sabritas S.A.: Crujitos, Churrumais, El Isleno Plantains, and Abobadas.

Other new product developments during this period centered around Americans' growing concerns about the healthfulness of the foods they were consuming. Sales of the Wow! line had turned disappointing following its stellar launch, perhaps because of the controversies surrounding olestra, but Frito-Lay pushed ahead with non-olestra-based products deemed to be more healthful, such as Lay's Reduced Fat and Cheetos Reduced Fat snacks, both of which debuted in 2002 with significantly less total fat and saturated fat than the original versions. The nonfried Baked line expanded as well that year with the introduction of Baked Doritos. Frito-Lay announced that it would begin eliminating artery-clogging trans fats from its products. Whereas Lay's, Fritos, and Ruffles had never contained trans fats, Doritos, Tostitos, and Cheetos had, and by 2004 Frito-Lay had eliminated trans fats from all of its products.

Pushing further in this same direction, Frito-Lay in 2003 branched into the natural and organic snacks category for the first time. Under the overall umbrella name "Natural," the company launched a slew of new products made with certified organic ingredients. Among the initial offerings were Natural Reduced Fat Ruffles, Organic Blue Corn Tostitos, Tostitos Organic Salsa, Natural Lay's Potato Chips with Sea Salt, and Natural Cheetos White Cheddar Puffs. Another new product launched in 2003 was Lay's Stax potato crisps, which were packaged in a cardboard can and designed to compete directly with Procter & Gamble's Pringles brand. The fast-growing Baked line, meanwhile, began sporting "Smart Spot" symbols as a further way of alerting consumers to their status as a more healthful choice, and as part of a wider PepsiCo project. To include the symbol, a Frito-Lay product had to contain: 150 calories or less, less than 35 percent of calories from fat, zero grams of trans fats, and 240 milligrams or less of sodium per 1-ounce serving. Sales of these "sensible snacks" totaled more than $1 billion in 2003, out of total Frito-Lay revenues of $9.09 billion.

Another significant development of 2003 was the separation of PepsiCo's two snack businesses, Frito-Lay North America and Frito-Lay International. The former—concentrating solely on the United States and Canada—continued to be one of the main divisions of the parent company, but the latter was subsumed within a newly enlarged international food and beverage division called PepsiCo International. Frito-Lay North America now generated about one-third of the parent company's net revenue—as did PepsiCo International—but Frito-Lay contributed nearly 40 percent of the operating profit, making it the most profitable of PepsiCo's four divisions.

By 2003 the Wow! line was garnering annual sales of just $100 million, despite the U.S. Food and Drug Administration's ruling in August 2003 that the warning label on olestra-laden snacks was "no longer warranted." In September of the following year, Frito-Lay attempted to reposition its olestra line. It was rebranded with a new name, Light, the packaging was revamped, and the marketing began focusing on reduced calories rather than lower fat. In the interim, the American food scene had been roiled by the low-carb craze. Frito-Lay responded quickly with a new line called Edge, which debuted in January 2004 with new versions of Doritos and Tostitos with 60 percent fewer carbohydrates than the originals.

Late in 2003 Frito-Lay North America announced plans to close its Louisville manufacturing plant and shut down older manufacturing lines in two other plants. The restructuring involved 330 employees losing their jobs. In September 2004 Irene Rosenfeld came onboard as chairman and CEO of Frito-Lay, replacing Bru, who became vice-chairman of PepsiCo before retiring in February 2005. Rosenfeld had spent 22 years at Kraft Foods Inc., leaving in July 2003 as president of Kraft's North American businesses, which consisted of five operating units with annual sales of $21 billion. Rosenfeld took over at a time when concerns were mounting that increasingly healthconscious consumers were beginning to buy fewer salty snacks. The new leader responded in February 2005 by announcing that Frito-Lay would begin repositioning itself and its brands to compete within the broader "macrosnacks" category, which included cookies, crackers, yogurt, and candy in addition to Frito-Lay's forte, salty snacks. In this larger category—in which annual U.S. sales totaled about $75 billion—Frito-Lay held the leading share of 15 percent. Initial plans included increasing the advertising budget by 50 percent, bumping up ad and marketing expenditures aimed at minorities, pumping more money into smaller products with high-growth potential such as Sun Chips multigrain snacks, and introducing new products, such as multigrain Tostitos tortilla chips, aimed at meeting consumer demand for more natural and healthful snacks. While North American diet trends seemed to indicate a potentially more troubled future for Frito-Lay, the company had proved adept at changing itself and its products with the times.

Principal Competitors

The Procter & Gamble Company; Kraft Foods Inc.; Kellogg Company; General Mills, Inc.; Campbell Soup Company; Snyder's of Hanover; The Hain Celestial Group, Inc.