Frito-Lay Devours Snack-Food Business
Once again, Frito-Lay is chewing up the competition.
The announcement Wednesday that Anheuser-Bush Cos. is selling off its Eagle Snacks business highlights the danger of trying to compete against Frito-Lay in the salty-snacks game. The company owns half of the $15 billion salty-snacks market. What’s more, despite all the talk about health trends, Frito-Lay continues to grow faster than just about any other food company thanks to fatty delectables like Sizzlin’ Fajita Fritos and Lays Salsa `n’ Cheese potato chips.
``Frito’s a fortress,″ says Michael Branca, an analyst at NatWest Securities. ``And it continues to expand its realm. I’d tell anyone else trying to get into the business, don’t try to expand, don’t try to impinge on Frito’s territory or you’ll get crushed.″
Eagle is only the latest example. Borden Inc. sold off many of its regional snack companies last year as part of a huge restructuring, and England’s United Biscuits Holdings PLC put its snack business up for sale this summer after years of weak results. Industry executives say dozens of regional companies have collapsed in the past year or two under Frito-Lay’s weight.
It’s not that the market is shrinking. In fact, more than half of all Americans will consume potato chips, pretzels or other salty snacks in the next two weeks, up slightly from 10 years ago, according to Harry Balzer at NPD Group in Chicago, an industry consulting firm.
``They’re cheap, they’re convenient, and they’re tasty,″ Mr. Balzer says.
Yet Frito-Lay seems to be the only player to reap the benefits. In fact, the company’s targeted promotions and aggressive retail tactics have even spurred some regional competitors to consider antitrust proceedings against the company.
``The talk 1/8of a lawsuit 3/8 is intensifying,″ says an owner of a large regional pretzel company. ``But no one wants to go up against them in court.″
Frito-Lay says it competes ``fairly and aggressively″ in the marketplace and has never engaged in any predatory actions. And indeed, both analysts and the industry say that the key to the company’s success has been a balance of wild innovation in creating new products and operating discipline in bringing the products to store shelves. Behind both, of course, is the marketing and financial muscle of Frito’s $28 billion parent, PepsiCo Inc., based in Purchase, N.Y.
``A lot of this business is about deep pockets,″ says William Levy, an industry consultant. ``If Anheuser-Busch can’t swallow it, not too many companies can.″
Leading the Frito-Lay charge is Steven Reinemund, an ex-Navy officer known within PepsiCo for his long hours and relentless ambition. Mr. Reinemund has vowed not to let the company become a complacent leader and has even set a goal of speeding up volume growth to the ``midteens″ by the end of the decade, a big leap for a food company.
``I wake up every morning thinking, `I haven’t sold one bag of Fritos yet,‴ he says. ``We’re constantly raising the bar on ourselves and our future.″
Frito-Lay is feeding much of its growth with new products. The company’s approach has been two-pronged _ expanding its core line of Fritos, Doritos, Rold Gold Pretzels and Lays potato chips while branching out into new ``better for you″ products like Baked Lays, Baked Tostitos and Rold Gold Fat Free Pretzels. Its cheesier Doritos have turned the previously sleepy chip into a billion-dollar brand, and spicier flavors have made Lays the No. 1 potato chip.
Frito-Lay’s test products are increasingly outlandish. It’s testing Doritos 3D’s, a puffed-out corn chip, and Chocolate Rold Gold pretzels. The company is even teaming up with Sara Lee Corp. to develop new products and deliver cakes and baked goods.
``They’re the Mozart of salty snacks,″ says Emanuel Goldman, an analyst at PaineWebber. ``Brilliant theme and variation.″
The result: The company’s volume has grown in the double-digits for nearly two years, with half the growth coming from healthy snacks and half coming from what Frito-Lay likes to call ``full-flavored″ offerings.
Frito-Lay also kills the competition with its distribution. Over its 35-year history, the company has built a network of 42 plants, 12,800 delivery people and more than 900 tractor trailers into a retail delivery powerhouse. The company was one of the first to give its drivers hand-held computers to transmit sales back to headquarters.
Frito-Lay is working on another overhaul of its distribution operation to better serve its expanding range of retail customers _ everything from drugstores and discount giants to grocery stores and convenience marts.
In fact, competitors say that it is Frito-Lay’s tactics with retailers that make it an invincible foe. Because many retailers are charging more and more for shelf space _ $40,000 a foot annually in some instances _ many regional companies say Frito-Lay is paying retailers to squeeze out competing brands.
``Frito can afford it,″ says a regional snack company executive. ``But we can’t. It’s become a real-estate business.″
Frito-Lay can also afford to out-promote its competitors. In 1993, the company spent more than $60 million on advertising, while Eagle spent less than $2 million.