Executive Summary Frito-Lay is a brand known by almost every consumer in North America. With products being exported to 79 countries around the globe and accounting for almost 62% of the salty snack industry in North America, it is certainly a powerful brand. Yet there are still many issues the company faces, both internally and externally. Some external problems the company faces are the threats of new entrants, threats of substitutes, and intense rivalry among competitors.
Some internal problems the company faces are the rigid capital structure, falling profits, and increasing pressure from consumers to reduce their adverse environmental impacts. Eco-Innovations Consulting Firm has come up with a sustainable strategy for the company to put forward in the future. Focusing on pollution prevention, we recommend for the company focus on four main areas: * Reducing energy consumption; * Reduce water consumption; * Reducing waste generation from products, as well as at the production plants; and * Educating workers and the community.
This strategy will help differentiate Frito-Lay from its competitors and bring about a positive reputation as an environmental steward. With customers becoming increasingly more concerned with the environmental footprint they are leaving on the world, switching to a pollution prevention strategy is not only a smart, but also necessary step for Frito-Lay as it moves toward dominating the salty snack industry. i 1. 0 External Analysis The external analysis of the client company Frito-Lay includes three parts: Value chain analysis, Industry analysis, and Competitor Analysis. . 1 Structure and Value Chain As Frito-Lay’s core business, Potato chip production will be assessed as the key-point.
Thus, here Frito-Lay’s supplier network mainly will be mainly defined as farmers. It has no more than 100 individual suppliers (Admin, 2008). These farmers are identified as core suppliers because they focus on cultivating a limited number of potato varieties. Then, Frito-Lay provides them with long-term contracts, which improves the business into a more efficient and profitable status in other parts of the value chain. The company annually purchases 2. billion pounds of potatoes from these suppliers. Furthermore, Frito-Lay follows the logistical movement of products throughout the supply chain, from obtaining raw materials to final product disposal with its 848 tractors, 2,251 trailers, and a fleet of local computer-equipped delivery trucks (Admin, 2008). On next step, Frito-Lay delivers the raw materials such as potatoes and corn as well as packaging materials to any of the 41production factories all over the Country. These factories produce 1,800,000 packages of products per hour.
The huge quantity of production demonstrates the high efficiency and low cost. Afterwards, thousands of trucks are operated to convey products from these factories to 1,900 warehouses and 200 distribution centers (Admin, 2008). Finally, 400,000 stores across the country will receive Frito-Lay’s snack food products on time for retail sale with the guidance by Frito-Lay how technological systems, reallocating shelf space, for example, can produce larger profits. Overall, the analysis, computation, track and operation as a systematic value chain demonstrate the maximized supply with minimized costs.
In addition, Frito-Lay is firmly convinced that the value in their services for retail store, supermarket and other distribution centers is derived from the company’s ability to utilize innovative information technologies to efficiently and effectively transport their products to the appropriate target markets. 1. 2 Industry Analysis The status of Frito-Lay in the industry will be assessed with the Porter’s five forces framework. The following forces that will be discussed boost pressure on the company because if they are not properly managed, it is hard or the company to stay in the leader position in the market. 1. 2. 1 Bargaining Power of Supplier Usually raw materials provided to Frito-Lay mainly consist of potatoes, barley, spices and other ingredients.
Empirically, among these primary materials, potatoes are in the dominating position. Potatoes and even barley are extremely ordinary crops. Frito-Lay has great control power on them. * Again, as one of the common farm crops, potatoes are more likely to be provided by farmers. For Frito-Lay, there are more than enough potato growers to select from, thus the number of potential input suppliers can be huge. At the same time, as a leader in the industry, the company can be absolutely well informed about these farmers’ products (potato and barley) and market. * Due to the scale and power of influence in North America, Potato suppliers, to a large extent, rely on the cooperative business with Frito-Lay. Sometimes this is the one and only regular customer for some farmers, which means business with Frito-Lay, occupies a relatively large portion of their business. * The unique taste, formulation and production process of chips are definitely commercial secrets.
In addition, the barrier to the technology and the restricted capital for machinery also eliminate the possibility for suppliers to directly sell chips to customers of the company. Therefore, suppliers cannot enjoy a high bargaining power in comparison with the company. Frito-Lay has strong power to lower cost or improve product features by purchasing a fixed amount of potatoes/barleys at a set of price. 1. 2. 2 Bargaining Power of Buyers The company instantly provides goods when it is needed by stores.
Frito-Lay takes two delivery programs called “Promotional Direct Delivery (PDD)” and Total Direct Delivery (TDD) to ensure prompt supply (FritoLay, 2011). In order to adjust to the product short shelf life and delivery timeliness, buyers could have a relatively high bargaining power; however Frito-Lay is one of the industry leaders in North America, which makes it maintain some control over price. * Currently, the two largest buyers of Frito-Lay constitute the convenience store such as “seven eleven” and supermarkets such as “Wal-Mart”.
As one of the market leaders, the company has a large amount of customers, thus it is not that detrimental to lose one of them. The less dependency on particular customers restrict the buyers’ bargaining power * Chips, the main product of Frito-Lay, can be classified as snacks, which definitely accounts for a very small part of the daily expense for customers, thus it is unlikely for customer to bargain for the price for this small expense goods. * Customers often have no idea about the chip production process as a large corporation. The complex market is totally out of customers’ control.
They would not bargain hard if they cannot fully understand the background of the business. * However, chips are such ordinary products that customers can obtain some power to lower the price from the potential purchase from competitors as the convenient access to these normal snacks. * Another adverse factor for Frito-Lay lies in the easy switch from the product of Frito-Lay to that from competitor. Therefore, the bargaining power is pretty much balancing between Frito-Lay and its buyers. 1. 2. 3 Threat of New Entrants The current salty snacks industry in North America is sharing a relatively saturated market.
The evidence is in the last five years, market share of major companies in this industry kept constant; however, there were a lot of potential entrants such as “Curtice Burns” and “Eagle”, which could not fully survive because of decreased market share. Finally, most of the companies succumbed to the competition and quit from the market. Frito-Lay would not face much of the threat from new players with its market leader position and established customer base in North America. * Customers can be loyal to the products. The current customers usually feel the snacks tasty or find the flavours more to their taste. The high start-up investment, including cost of machinery, factory workshop and labour power, sets the barrier for new players to enter the market.
* The necessary assets for running the business such as the unique formula and existing customer base are not easy to imitate. * The new competitor will be hard to acquire needed input. The existing distribution channel including suppliers and customers will establish greater barrier. * New competitors will be fairly difficult to compete with Frito-Lay in customer acquisition. * The districted resources might be another reason for new players to compete efficiently with Frito-Lay.
Customers can be quite loyal to previous brand such as Frito-Lay because of the brand effect. 1. 2. 4 Threat of Substitutes As an extremely large industry, salty snacks are always linked to various tastes, flavours, preferences, and lifestyle. All these factors change with the times. One of the powerful substitutes can be snacks that are labeled with “healthy” or “organic”. * Compared to healthy food such as fruit cookies, Frito-Lay’s chips can be obviously unfavorably because healthy food can offer more benefits or features to customer. * Also, it will not be too expensive for customers to switch to another product in snack industry.
Snack expenses or even food expenses will not account for a large portion of the family month spending in comparison with the income range in North America. * Customers can be loyal to the brand but it is not necessary for customer to stick to a brand which does not provide new popular snacks. For example, customers may be loyal to Pepsi or Coke; however, they can also purchase organic beverage from Phoenix Organic because Pepsi does not produce such kind of products. The increasing awareness of food safety and organic lifestyle with the growth in quality of life put a pressure on the salty snacks provided by Frito-Lay.
The trend of healthy life can be a huge and unstoppable. Frito-Lay has to be careful about the change and try to diversify their product orientation if they want to maintain the leader status. 1. 2. 5 Rivalry among Competitors Frito-Lay has very limited number of competitors well matched in strength. The leadership in North America is definite and the rivalry is fierce. Frito-Lay is almost dominant in the salty snacks industry and it keeps product innovation in order to maintain the leading status. The strategy of its competitor is to imitate Frito-Lay and grab a small portion of market share in very limited product lines. The number of powerful competitors is small. The rivalry is less intense to Frito-Lay. * There is a clear leader in the industry. Frito-Lay is this leader.
* The market is stagnant and even declining. Competitors have to struggle for a smaller market. The rivalry is intense. * The fixed cost is relatively low for Frito-Lay. * The storage and shelf life factor is medium for chips. Frito-Lay does not have to sell the products in a short time. * The competitors in North America are not aggressive at all. They are usually taking the strategy of milking profit. It is easy for competitors to exit the industry because the low exit costs. The fact is that many companies have already quit in the last five years. Frito-Lay enjoys less rivalry in the market due to the above factors; however, the company should still be clear that some competitors might implement strategies gaining both operational effectiveness and competitive edge.
1. 3 Competitor Analysis Though Frito-Lay has almost dominates the salty snacks, in a larger scale, the company still face strong competitors in the packaged food industry. The largest two competitors of would be ConAgra Foods, Inc. nd Kraft Foods Inc. ConAgra Foods is one of the top US food producers, providing name-brand packaged and frozen foods. ConAgra’s brands are a cornucopia of popular foods, including Jiffy, Banquet, Chef Boyardee, Egg Beaters, Marie Callender, Orville Redenbacher’s, PAM, Slim Jim, and Van Camp’s. It is one of the most powerful foodservice and food producing suppliers, providing convenience foods and ingredients. The company has sold off its agricultural, meat, and commodity products operations, as well as a number of noncore brands to focus on branded and value-added packaged foods (Hoovers, 2011).
The strength of the ConAgra Foods mainly constitute * Diversified business direction * Huge customer base and steady supplier chain due to the strong brand effect * Increased focus on Research & Development as well as sustainability strategy. The weakness also exists. The poor initiatives in product recall and limitation in scale might restrict the further expansion in the market. The scandals such as climate change issues, labour issues and health violation will be the negative examples which lost the trust from customers. 2. 0 Analysis of Frito-Lay
Goal: Frito-Lay aims to seek financial rewards to their investors while maintaining honesty, fairness and integrity and providing opportunities for employees and business partners to grow. 2. 1 Strategy Variables 2. 1. 1International Expansion * Created 50 million new jobs and committed a $50 million investment to improve the Lynchburg manufacturing facility * $53 million expansion of Topeka plant * Signed seven year long-term contracts to provide Frito-Lay snacks to American franchisees * Now has operating facilities in United States of America, Canada and Indonesia * Sells in 200 countries 2. 1. 2 Differentiation
Frito-Lay has 34 different brands with multiple different flavors of each brand. However, they have not only relied on a diverse selection of snacks. They have also added health and environment aspects to their products to differentiate their products from their competitors. * Health * Removed trans fats in some products like partially hydrogenated oils and saturated fats * Products for “special dietary needs. ” For example, gluten free snacks * Uses all natural corn and potatoes * Reduced salt content in products * Environmental Sustainable Products and Processes * Conserving energy * Saving water * Minimizing waste Reducing emissions * Zero landfill initiative- $0. 02 goes to a school or non-profit organization for each bag a customer sends back to Frito-Lay * 155 electric delivery trucks 2. 1. 3Enter New Market Segments Frito-Lay has made acquisitions and joint ventures with other snack food companies in order to capture more of the market.
* Joint venture with Sabra to enter dip mix market * Developed “Special Dietary Needs” products to enter new markets * Strategic acquisition of Stacy’s Pita Chip which was the leader in the pita chip industry * Currently looking to expand the dried fruit, cracker and nut segments of Frito-Lay 2. Internal Resource/Competency Variables 2. 2. 1 Capital Structure * Owned by PepsiCo. Organized by 4 business units. For a diagram of this structure please see appendix 4. 0. * Joint venture with Strauss Group which makes, markets, sells and distributes Sabra * Approximately 1,750 warehouses, distribution centers and offices * 55 plants and production processing facilities * Owns and leases 40 food manufacturing and process plants
2. 2. 2 Culture The culture at Frito-Lay has been said to be “hardworking, yet very friendly. ” Essentially, the employees are happy to work hard because they are treated with respect from upper management. Stock options * Tuition reimbursements * Childcare assistance * Legal assistance * Long hours * Open gate vs. top down management- “got a new idea for Frito-Lay” box * This program saved $500,000 in cost saving ideas 2. 3 Performance Variables 2. 3. 1Financial Performance Despite Frito-Lays lack luster annual results, they are still an overwhelming leader in the snack food industry as well as, the greatest portion of PepsiCo’s total revenue.
* 40% market share in the world, 56% in North America * Frito-Lay represents 29% of PepsiCo’s total revenue 2. 3. Falling Profits, Flat Sales Frito-Lay increased revenue marginally which means that they have flat sales from a saturated market where big brands are being purchased less. Also, Frito-Lay only had an increase in operating profit from 2010-2009 because of lower commodity cost. Frito-Lay has no control over these costs and if commodity costs increased then they would have to pass the expense onto their customers through the price of products. * Net Revenue grew 1% compared to 6% in 2009 * Operating profits grew 9% compared to 10% in 2009 * Reflecting lower commodity costs Pound volume decreased which means Frito-Lay is producing less
* Double digit revenue decline for Sunchips * Tostitos had a mid single digit revenue decline * Highest growth has been with variety packages and Ruffles products 3. 0. Problem Definition 3. 1 Environmental Issues Frito-Lay is an industry leader not only in terms of market share but also in terms of environmental sustainability. They have continued to improve their environmental impacts with energy, water usage, waste and emissions. Some awards that Frito-Lay has been recognized with are: * EPA- Green Power Leadership award Transport Canada- Green Supply Chain Award * Canadian Council Ministers of Environment- Pollution Prevention Award * Alberta Recycling Council- Recycler of the year These are just a few of Frito-Lay’s accomplishments. They have been recognized with these awards because of programs like their new 155 all electric truck fleet. Another environmental success story is the world’s first 100% compostable chip bag. However, Frito-Lay will need to continue to improve their environmental performance in order to help reduce expenses as well as, to differentiate themselves from competitors.
But, for a company who has already set the bar so high, how can they further improve their environmental initiatives. 3. 2 Financial Issues Although Frito-Lay’s revenue is not declining, it has flattened from 2009-2010, which is an issue. Sunchip sales have hit a double-digit revenue decline and Tostitos have hit a mid single revenue digit decline. These two brands are two of the largest at Frito-Lay so naturally, Frito-Lays total annual revenue increased marginally by 1%. Also, this 1% increase from 2009-2010 is only due to exchange rate fluctuations.
For instance, this year the American dollar fell slightly as the Canadian dollar grew slightly. If it were not for this, Frito-Lay would have had zero growth. Secondly, Frito-Lays operating profit is also in trouble. Based on the figures, the growth looks healthy and stable with a 9% growth from 2009-2010 and a 10% growth from 2008-2009. However, the growth in 2009-2010 is unnatural because it was attributed to low commodity costs, which Frito-Lay has no control over. Therefore, if the commodity cost increase in 2011 then Frito-Lay will have to increase the costs of their products.
This could ultimately result in loss of sales and market share because of increased prices on products. 4. 0 Strategy 4. 1 Strategic Objective: Make product line more health-conscious. While enjoying success in the past, the majority of Frito-Lay’s products are generally considered to be “sin foods”, meaning that they are relatively unhealthy. For example, their most popular product, the Lays brand chip line, has very high fat and sodium levels. As obesity problems grow in North America, Frito-Lay will encounter increasing difficulty selling goods that add to the problem.
Due to the increasing emphasis being placed on healthy eating, many consumers may choose to switch over to a healthier snack food, such as fruit or granola bars. Frito-Lay is aware of this fact and has made some valiant efforts to make their products seen as more healthy. For example, they have reduced the amount of trans-fats in most of their chips and even offered a line that is baked rather than fried. 4. 2 Strategic Objective: Promote pollution prevention as a sustainable strategy. For Frito-Lay, their biggest environmental issue is in their design.
Because their products are single use, a lot of waste comes from the transportation and packaging. Therefore, it would be recommended for the company to pursue pollution prevention in order to mitigate the adverse affects of doing business. As customers become more aware of the environmental impacts of the products they use, making the internal processes more sustainable can only help to promote the corporate image of the company. Furthermore, as resources become scarcer, it is becoming increasingly important to find ways to reduce our usage of the ones we have.
Therefore, it would be extremely beneficial for Frito-Lay to move toward a closed-loop system. Four main areas the company should focus on are: A. Reducing energy consumption; B. Reduce water consumption; C. Reducing waste generation from products, as well as at the production plants; and D. Educating workers and the community. A. Reducing Energy Consumption To reduce energy consumption, it would be advisable for Frito-Lay to: * Install heat recovery systems, which reduce natural gas usage. * Retrofit lighting and ventilation.
* Install regenerative blowers. Install ceramic infrared oven burners. B. Reducing water consumption * Previously, water was disposed of after one use in the chip and corn cooking process. Now, there is technology available that can reuse and recirculate the water in corn and chip cooking processes. This is a positive step toward making the system close-looped. The new processes should be implemented in all Frito-Lay plants. * It is also possible for the company to conserve water by replacing the steam used for equipment cleaning with water heated from the boiler’s waste heat. C. Reducing waste generation Installations of ceramic infrared ovens (which last 5 years) rather than metal burners (which last 18 months) can help reduce equipment disposal waste.
* Retrofitting lights will control the amount of light bulbs needing to be thrown away. * A major goal for the company to pursue would be to make all packing biodegradable or recyclable by 2015. E. Educating stakeholders, such as workers and the broader community In order to walk the talk about the environmental initiative they are pursuing, Frito-Lay should: * Inform workers about how to make sustainable choices in their personal lives. Visit schools to promote pollution prevention. * Continue building the Environmental Training Program for employees, which promotes environmental awareness. * Encourage participation in local sustainability events. Through active movement toward these goals, Frito-Lay will be able to differentiate itself from its competitors, giving it a competitive advantage and higher bargaining power with both customers and suppliers. Also, it will encourage customer loyalty, which will reduce the threat of new entrants. 5. 0 Strategic Evaluation 5. 1 Customers
Assumption: Customers will become increasingly supportive of companies that promote positive environmental initiatives. * Supportive evidence: * More people are becoming aware of environmental issues. * As pollution builds up and resources become scarcer, many customers are looking to do the environmentally friendly thing. * Products, such as organic, 100% natural, or biodegradable, are becoming increasingly popular. Counter Assumption: Customers will be unresponsive to companies that support environmental progress * Supportive Evidence: Some consumers are still indifferent to how sustainably companies function. * Often times, consumers are unwilling to pay more for environmentally friendly products.
Assumption: Customers will become increasingly more health conscious. * Supportive evidence: * As obesity is increasing, many people are looking to make healthier choices. * Snack items such as chocolate and chips are decreasing in popularity. Counter Assumption: Customers will always have weaknesses for “sin” foods and therefore there will always be a market for them. Supportive Evidence: * People will always have weaknesses; snack food is one of them. Because Frito-Lay is arguably the most popular chip brand, it will probably be around as long as humans still want to purchase chips. 5. 2 Competitors Assumption: Frito-Lay will continue to be the top player in the salty snack food industry.
* Supportive evidence: * It has held the top market share for many years. * It is the most well-known chip brand globally. Counter Assumption: Another brand will overtake Frito-Lay in the market * Supportive Evidence: Because Frito-Lay is so well-known, the company is able to charge a relatively higher price for the products. * If a new company is able to create the same good for a cheaper price, they may become more popular than Frito-Lay and steal much of the market share. Management Assumption: Management will continue to place environmental initiatives high in importance. * Supportive evidence: * It is both beneficial to customers and the company to pursue environmental initiatives. * Companies are increasingly investing in environmental initiatives.
Many companies now have CSR and environmental departments, with employees specializing in both areas. Counter Assumption: Management will find other areas of business, such as employee benefits or advertising, more worthy investments. * Supportive Evidence: * There is only so much money to go around, and there may be more crucial investments that management feels the company resources should be put toward. 5. 3 Government Assumption: North American and international governments will continue to allow Frito-Lay to freely operate.
Supportive Evidence: * Globalization is becoming more popular. * Many countries are opening up their boarders to free trade. Counter Assumption: Limits will be put on Frito-Lay’s ability to operate within other countries. * Supportive Evidence: * Some stricter countries, such as Russia, may not agree with Frito-Lay’s operating style and want the company within their boarders 5. 4 Suppliers Assumption: Suppliers will continue to be able provide potatoes and wheat in the quantities Frito-Lay needs to support their current output levels. Supportive Evidence:
* Potatoes and wheat are two of the most highly produced agricultural products. * Their suppliers specialize in producing large quantities and it is unlikely Counter Assumption: Eventually the world will run out of space and fertile soil to sustain current levels of production. * Supportive Evidence: * Similar to the argument by Thomas Malthus, the population is growing exponentially. If we continue at the current growth rate, we will not be able to produce enough food to support human life. This includes chips. 6. 0 Conclusion
Frito Lay is currently the most powerful convenient food company in the world. They have obtained this powerful market share by adapting to customer needs quickly. However, Frito Lay currently has flat, slow sales and is beginning to slow down their environmental initiatives. In order to increase sales, they must make product lines more health conscious. Secondly, Frito Lay must also promote pollution prevention and green design strategies into their business methods. This is very important especially in the “green era” because it could potentially improve their corporate image and increase sales.