Frito Lays Dips Case

October 10, 2016/ Uncategorized/ 0 comments

Frito-Lay’s Dips

•How would you characterize the dip category in general?

Dips are a complementary product; they are served along with chips, crackers, or raw vegetables. The market for dips is highly fragmented and difficult to measure. More than 80% of all dips are accounted for by supermarkets, with a total dip retail dollar sales volume of $620 million (in 1985).

The dip category became more popular in late 1983 and early 1984, an explanation for this increase is the growing popularity of Mexican food, including nachos, which stimulated the trial and acceptance of Mexican-style dips. Even though the market for dips is large, it is estimated that about 20% of all dip volume consumed by households in the U.S. is homemade. Also many consumers use refrigerated salad dressings for dips, especially for vegetables, which can be considered the main dip substitute.

•How might the dip category be segmented?

The main segments in the dip market are the “chip dip” category and the “vegetable dip” category. The total dip market is divided in two product types, segmented on its usage; prepared dips (2/3 of total) and dip mixes for at-home preparation (1/3 of total). More than half of the prepared dips sold in supermarkets require refrigeration, and the remaining 45% are “shelf-stable”, which means that they are packaged in metal cans, don’t require refrigeration and can be placed anywhere in the supermarket. Dips are segmented in four different flavor categories: sour cream-based dips (50%); cheese-based dips (25%); bean and picante dips (10%); and cream cheese-based dips (15%).

•What is Frito-Lay’s competitive position within the segments it pursues?

Frito-Lay is the major competitor in shelf-stable dips; with a total market share of 21.77%. They carry a highly profitable product line and had phenomenal sales growth between 1981($30M) and 1985 ($87M). In the last two
years (1984 and 1985) however, competitive activity accelerated; well-financed companies began to pursue the dip market (e.g. Campbell Soup and Lipton), numerous new products were introduced and advertising expenditures increased by nearly 600% (1984-1986).

The major competitors in the prepared dips category are Kraft (mainly cheese dips), Borden, a large number of regional dairies, and numerous store brands. It is estimated that 35% of refrigerated salad dressing volume is used for dips; the competition in this area includes brands such as Marie’s, Bob’s Big Boy, Marzetti’s, Walden Farms, and a few local brands in different areas of the country.

Frito-Lay established their competitive advantage in the dip market because of that they are the nationally recognized leader in the manufacture of salty snack foods. Since dips are most frequently used with salty snacks, such as potato ships and corn chips, Frito-Lay’s distinctive competency is the distribution and location near the salty snacks.

•What sales volume and market share(s) will be required of the dip line to preserve its profit contribution given budgeted promotion expenses?

Sales in 1985
Profit contribution in 1985
Total fixed costs in 1986
Advertising and merchandising
General and administrative overhead costs= $
= $
= $
= $87,336,000
10.3 %
1986 sales requirement = = $ 109,713,757.30; increase 1985 – 1986 = =
25.62 %

•What are the pros/cons of focusing attention on the “chip dip” segment?

+Frito-Lay already has a strong competitive position in the chip dip market, and the dips complement their existing product-lines (salty snacks). +There’s a major opportunity in the chip dip segment to build penetration: research indicated that only 20% of chips were currently eaten with dips, and that only 45% of the all U.S. households used dips (1985) whereas 97% used salty snacks. +The chip dip is the larger segment (67%).

+The frequency of shelf-stable dips purchases can be increased through promotion. +Increased competitive activity; a lot of new styles of dips had been introduced since 1983. +Frito-Lay didn’t aggressively promote their dips yet.

+Frito-Lay could spin off other products from its sour cream-based dip.

-Increased competitive activity; Kraft will be introducing additional products that will compete with Frito-Lays dips. For this reason it will be difficult enough to hold their current position in the market. -It requires a lot of effort and expenses to increase penetration and/or increase purchasing frequency. -Frito-Lay’s recent sales growth in dips was due to new products, it is not clear that further product line extension could produce continued growth. -Significant potential for cannibalization of existing cheese dips in this segment. -The new sour cream dip doesn’t fit in the existing Mexican-style dips; it is more suitable for vegetable dipping. -Research indicated that consumers are becoming concerned about the nutritional value and salt content of prepared foods; most likely consumers will prefer vegetables over chips in the future.

•What are the pros/cons of focusing attention on the “vegetable dip” segment?

+Frito-Lay will have a ‘bridge’ to this segment, because of their sour cream-based French union dip. +Research showed that 33% of dip sales were
linked to vegetables. +Only ¼ of vegetable dipping is accounted for by refrigerated salad dressings. The remainder was accounted for by dip mixes and refrigerated dips, and no major competitors have a strong competitive position in the market. +Trend data indicated that consumers are becoming concerned about the nutritional value and salt content of prepared foods; this will affect their preference for vegetables and salty snacks and, as a result, dips. +Frito-Lay didn’t start promoting their sour cream-based dip for vegetable dipping yet. +No competitor introduced a shelf-stable dip for vegetables yet; Frito-Lay can take the opportunity to pioneer in this segment. +A cost analysis indicated that the gross margins would be largely unaffected.

-Lately well-financed companies began to aggressively pursue the vegetable dip market and introduced new products and product lines in this segment. -Research showed that supermarkets prefer that the dips are handled by their produce warehouse; this doesn’t favor Frito-Lay’s front-door delivery system and might require a new sales approach. -Estimated selling expenses will increase to 25% of sales (current is 22.7%). -Frito-Lay’s dip will lose some economies in advertising and merchandising. -New product-lines (added flavors) will be necessary to compete in this segment, this results in higher R&D expenses and promotional support. -Vegetable dip consumers may not like the shelf-stable dip.

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