Frito-Lay, Inc.

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Frito-Lay, Inc.

founded: 1932

Contact Information:

headquarters: 7701 legacy dr. plano, tx 75024 phone: (972)334-7000 fax: (972)334-2019 url: http://www.fritolay.com

OVERVIEW

As the maker of Lay's, the leading potato chip brand (which in 1996 accounted for almost 21 percent of the potato chip market) and of 5 of the 6 leading tortilla chip brands—Doritos, Tostitos, Baked Tostitos, Santitas, and Doritos Thins (which together accounted for over 76 percent of the tortilla chip market 1996)—Frito-Lay is indeed king of the U.S. snack food industry. According to U.S. News & World Report in 1996, 94 percent of all households in the United States contain a product made by Frito-Lay. The company's 40 manufacturing plants together produce about 30,000 snack packages every minute and about 40 million bags of potato chips weekly. Frito-Lay's sales account for about 50 percent of parent PepsiCo's total sales annually.

COMPANY FINANCES

In the early 1990s Frito-Lay was losing market share. By 1991, Frito-Lay's profit was only $617 million and the company's share of the market had slid to 38 percent. But when Roger Enrico (now chairman and CEO of Frito-Lay's parent PepsiCo) was put in charge of Frito-Lay in 1991, he turned the company around. By 1995, Frito-Lay's net sales totalled $8.6 billion and the company had an operating profit of $1.43 billion. From the mid- to late 1990s, Frito-Lay continued to grow steadily—net sales reached $9.75 billion in 1996 and in 1997 about $10.37 billion. By 1997 Frito-Lay's net sales accounted for about half of PepsiCo's total net sales of about $20.92 billion. During that time, operating profit continued to increase as well, growing to about $1.61 billion in 1996 and almost $1.70 billion in 1997.

At the end of 1997, PepsiCo's price/earnings (P/E) ratio was 32.1 with estimated earnings per share of $1.15, up from $0.93 in 1996. In the first quarter of 1998, PepsiCo's profit rose 19 percent on increased Frito-Lay sales, but flagging beverage sales and a rise in potato prices lowered the company's share price at the end of April to $39.63 from $43.06. The higher potato price was expected to cut Frito-Lay's profit growth. Still, PepsiCo hoped Frito-Lay would carry the company's beverage division while PepsiCo focussed on updating its soft drinks so as to better compete with rival Coca-Cola Co. Frito-Lay seems to have the might to carry the beverage division; by the end of the 1990s, four of Frito-Lay's prod-ucts—Lay's, Doritos, Ruffles, and Chee-tos—were each selling over $1 billion retail annually.

ANALYSTS' OPINIONS

Because Frito-Lay is so dominant in the salty-snack foods industry, with primarily only small, regionally-based competitors, like Chicago manufacturer Jay's and Granny Goose Foods, Inc. in California, some allege that Frito-Lay is guilty of anti-trust violations. Peter Sprecker, president of Kentucky-based food manufacturer Louisa's, says that Frito-Lay "is a company that makes Microsoft really look like a pussycat." Others allege that without competition, Frito-Lay will be able to raise prices with impunity. The company is already able to outbid competitors for shelf space (buying shelf space is a widely accepted practice in grocery retailing) and to undercut prices in regions where real competition exists. William Leach, who follows the food industry for investment firm Donaldson, Lufkin Jenrette, claims that Frito-Lay appears to be doing nothing unethical. "They've driven all their competitors out of business by being too successful," Leach says. "They're just better at product development, marketing and execution. But there is no law against doing well."

HISTORY

In 1932, in separate parts of the southern United States, Elmer Doolin and Herman W. Lay each started a snack food business with a loan of about $100. Doolin, who was living in San Antonio, Texas, was inspired by a lunch he had in a small cafe. After ordering a sandwich, Doolin happened to notice a $.05 package of corn chips on the counter and he ordered it. The chips were made from a corn dough that had been developed and used for centuries by Mexicans in the Southwest. Doolin was so impressed with the chips that he sought out the inventor and for $100, bought the recipe, a healthy number of retail accounts, and a hand-cranking potato ricer converted to make the product. Soon, Doolin set up production in his mother's kitchen, making about 10 pounds of Fritos (Spanish for "fried") Corn Chips per hour. He sold between $8 to $10 of product daily, with profits sometimes reaching as much as $2 per day. In 1933, Doolin moved the Frito Company to Dallas in order to take advantage of better distribution possibilities. There the business continued to grow, gaining new accounts, but Doolin was not yet able to pay himself a salary.

FAST FACTS: About Frito-Lay, Inc.

Ownership: Frito-Lay, Inc. is a subsidiary of PepsiCo, Inc., a publicly owned company traded on the New York Stock Exchange. PepsiCo, Inc. is also listed on the Amsterdam, Chicago, Swiss, and Tokyo Stock Exchanges.

Ticker symbol: PEP

Officers: Steven S. Reinemund, Chmn. & CEO, 49, $1,768,774; Brock H. Leach, Pres. & CEO Frito-Lay North America, 39; James H. O'Neal, Pres. & CEO Frito-Lay International, 60; William R. McLaughlin, Pres. Frito-Lay Europe, Middle East, & Africa Region, 49

Employees: 30,000 (1997)

Principal Subsidiary Companies: Frito-Lay's parent company is beverage and snack-food giant, PepsiCo. Frito-Lay operates approximately 40 manufacturing plants in 26 states and counts among its subsidiaries: Frito-Lay Inc. Council Bluffs; Frito-Lay Inc. North Div.; Frito-Lay of Hawaii Inc.; and Smartfoods Inc.

Chief Competitors: One of the largest snack food companies in the world, Frito-Lay produces potato chips, tortilla chips, pretzels, cookies, and Cracker Jack. The company's competitors include: Nabisco Biscuit; The Proctor & Gamble Company; The Cape Cod Potato Chip Company; Snyder's of Hanover, Inc.; Jay's Foods LLC; and Granny Goose Foods, Inc.

Meanwhile, in Nashville, Tennessee, in 1932, Herman Lay had begun distributing potato chips for manufacturers, hauling product in his Model A. By 1934, Lay had six routes and was becoming a primary distributor for an Atlanta potato chip manufacturer. Four years later, in 1938, this manufacturer began having difficulties. Lay collected funds from friends and business associates and was able to purchase the failing company, which he renamed H.W. Lay & Company. That year, he introduced Lay's Potato Chips.

Through the late 1930s and the early 1940s both the Frito Company and H.W. Lay & Company grew, and by World War II H.W. Lay & Company, with its Lay's brand of potato chips, had become one of the largest snack food companies in the Southeast. Similarly, the Frito Company, with its Fritos Corn Chips, had grown into one of the largest Southwestern snack food companies. World War II slowed expansion for both companies until about 1945. It was then that the Frito Company granted H.W. Lay & Company one of the first franchises to make and distribute Fritos Corn Chips in the Southeast. By the 1950s, the Frito Company had become a leader in the snack food industry and Frito's Corn Chips were one of the most popular snack foods in the country. Elmer Doolin died in 1959; two years later, the Frito Company and H.W. Lay & Company merged to form Frito-Lay, Inc. That same year, the company acquired Rold Gold Pretzels, firmly establishing itself as a major force in the burgeoning snack food industry.

In 1965 soft drink giant Pepsi-Cola Company and Frito-Lay, Inc. merged to form beverage and snack food giant PepsiCo, Inc. The following year, Frito-Lay introduced Doritos brand tortilla chips and for the next decade and a half, Frito-Lay was the indisputable and largely un-opposed leader of the salty-snack food market.

In 1982, in a direct challenge to Frito-Lay's stronghold on salty snack foods, Anheuser- Busch began manufacturing Eagle Snacks and so started a battle, which in the snack foods industry became known as "the Great Potato Chip War." By 1996, the war was over. Never having captured more than 10 percent of the market in almost 15 years, Anheuser-Busch admitted defeat and closed down its Eagle Snacks division. Frito-Lay had won. The following year, Frito-Lay introduced Baked Lays, which enjoyed an immediate success bringing the company an additional $250 million in sales. In late 1997, Frito-Lay announced its further expansion in the area of sweet snack foods with its acquisition from Borden Foods of the then 104-year old snack brand Cracker Jack. At the end of the 1990s, Frito-Lay still ruled the salty-snack foods market.

STRATEGY

In 1991 sales in almost every Frito-Lay category were falling, but because Frito-Lay kept hiking the prices of its products, the company's profits were stable. As John Greenwald rightly noted in his June 10, 1996 article in Time magazine, "Raising prices while losing share is a recipe for disaster in an era in which value is a driving force in consumer behavior." In the meantime, in the early 1990s, Anheuser-Busch's Eagle Snacks had begun to claim market share. More, results from Frito-Lay focus group surveys showed that people preferred Eagle Snack chips to Lay's, which they found "too greasy, too bland, and too boring."

CHRONOLOGY: Key Dates for Frito-Lay, Inc.

1932:: Elmer Doolin and Herman Lay founded separate companies that would later become Frito-Lay
1933:: Doolin moves the Frito Company to Dallas
1938:: Lay buys a failing potato chip manufacturer and renames it H.W. Lay & Company; introduces Lay's Potato Chips
1945:: Frito Company grants Lay the right to produce and distribute Fritos
1948:: Introduces Cheetos
1959:: Elmer Doolin dies
1960:: Frito Company and H.W. Lay & Company merge to form Frito-Lay, Inc.; acquires Rold Gold pretzels
1965:: Merges with Pepsi-Cola Company to form PepsiCo, Inc.
1966:: Introduces Doritos
1982:: Anheuser-Busch begins manufacturing Eagle Snacks to compete with Frito-Lay
1989:: Frito-Lay restructures into four regional business divisions—North, South, Central, and West
1991:: Richard Enrico is assigned to Frito-Lay
1996:: Anheuser Busch sells Eagle Snacks name to Proctor & Gamble and its factories to Frito-Lay
1997:: Introduces Baked Lays; acquires Borden Foods, which owns Cracker Jack

In 1991 Roger Enrico, chairman and CEO of Frito-Lay's parent PepsiCo, was assigned to head Frito-Lay and he began a major restructuring, quickly cutting about half a billion dollars from operating expenses by laying off more than 1,000 workers. Then, with Enrico at the helm, Frito-Lay invested about $90 million in researching, redesigning, and repositioning its products, going so far as to assign geneticists the task of creating "the perfect potato," one that would be flavorful but low in sugar. Soon, Frito-Lay introduced new snacks, including a line of baked snacks, began improving existing products, and initiated a serious cost-cutting campaign.

Apparently, the strategy worked. By 1993, Frito-Lay had sales of $4.4 billion; by 1995, sales topped $8.0 billion. Frito-Lay increased its market share from 38 percent in the late 1980s to 55 percent by the mid-1990s. By 1996, Frito-Lay's main competitor Eagle Snacks was defunct and Anheuser-Busch then sold the Eagle Snacks name to Proctor & Gamble and 4 of the snack division's 5 factories to Frito-Lay. Before the end of 1996 Frito-Lay employed about 13,000 delivery workers equipped with hand-held computers capable of following buying trends daily.

INFLUENCES

By the mid-1990s, Frito-Lay so completely dominated the salty snack foods market that virtually all other competitors had dropped out—either by stopping manufacture of salty snack foods, like the Keebler Foods Company, or by closing down altogether. While monitoring Frito-Lay's purchase of Anheuser-Busch's Eagle Snacks factories in the mid-1990s, the U.S. Justice Department became interested in Frito-Lay and in the salty-snack food industry. Soon, the Justice Department began an investigation of anti-trust activity in the industry, focussing on Frito-Lay and on the practice of buying shelf space in supermarkets. This buying of shelf space, a common practice in grocery retailing, can be very lucrative for the retailer: manufacturers sometimes pay up to $100,000 for a foot of desirable shelf space. The Justice Department's investigation was also attempting to determine whether, in order to shut out competitors, Frito-Lay had been buying up more space than it needs. Toward the end of the 1990s, the investigation was still underway.

CURRENT TRENDS

In the 1990s, Frito-Lay's research revealed tremendous growth opportunities in the area of low-fat snacks: almost half of consumers taking part in the research (47 percent) admitted that they felt they should limit their fat intake, but felt they couldn't; another 53 percent claimed that they limited their salty-snack intake because of concerns about good nutrition. In response to these trends, Frito-Lay began introducing low-fat versions of its products, the most successful of which has been a line of lowfat potato crisps called Baked Lays, which are made from dried potato flakes instead of fresh potatoes.

While initial controversy surrounded the early use of Proctor & Gamble's fat-substitute olestra in food products (much was made about reports of gastric distress allegedly caused by the "fake fat") later studies, like one sponsored by Proctor & Gamble published in 1998 in the

Journal of the American Medical Association, concluded that consumers suffered no greater gastric distress after consuming potato chips made with olestra than they endured after eating traditional potato chips. But the study also found that consumers did not like the taste of chips made with olestra as much as that of "regular" potato chips. The chips used in the study were Frito-Lay's new WOW brand; as a result of the study, Frito-Lay decided to change its recipe.

PRODUCTS

Frito-Lay has more than 100 product lines. Some of its more well-known salty-snack food brands include: Chee-tos, Doritos, Fritos, Funyuns onion rings, Lays, Baked Lays, Ruffles, Smartfood popcorn, Sun Chips, Tostitos, and Baked Tostitos. Frito-Lay also makes GrandMa's cookies and Cracker Jack candy-coated popcorn. The company caused a big stir with its 1998 introduction of its WOW brand potato chips, made with Proctor & Gamble's controversial "fake fat" product, olestra, trademarked "Olean." Frito-Lay has also been developing a "three-dimensional tortilla chip," Doritos 3Ds.

BREAKING THE FRITOS CODE

If you have a good eye for detail, you might have noticed that certain Frito-Lay products have either a "K" inside a triangle or a "U" inside a circle somewhere on the package. Just what does this secret code mean? It's pretty simple. The "K" designation is used to identify products that are Kosher; that is, permissible for consumption under Jewish Dietary Laws. Rabbis Ralbag and Genack from New York certify Kosher products for Frito-Lay. "U" is a code assigned to products by the Union of Orthodox Jewish Congregations of America. Check for it on your next bag of Fritos.

GLOBAL PRESENCE

Worldwide, principal salty snack food markets include Brazil, Mexico, the Netherlands, South Africa, Spain, and the United Kingdom. While there is much room for Frito-Lay to expand in the international arena, the challenge for the company is to match flavor with culture. In Asia, where most consumers prefer steak- and cuttlefish-flavored snacks, Chee-tos are sold without cheese. And though potato chips are popular around the world, in Latin America, they don't sell well unless they are flavored with lime and chili. In 1997, Frito-Lay changed its snack food packaging worldwide to create a more uniform, and uniformly recognizable, look. That year, the company also acquired snack food operations in Argentina, Australia, Europe, and the United States.

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