Frito Lay And The 4 P's 3b724z

PRODUCT/PRICING

Frito Lay and Chip Product/Pricing Tracy Goodhew Capella University BUS-FP-3030 February 14, 2016

PRODUCT/PRICING Frito Lay and Chip Product/Pricing The second and third P’s of the marketing mix strategy are; product, and pricing. How a company distributes product, and, where they propose to place it for sale continues to be a main focus for a company to be successful. And let’s not forget that, even if a company is able to get those proponents exactly right, if they price the product incorrectly, the previous two successes won’t make a difference in the world. Bringing a product to market is an entangled web of decisions, all relying on each other for the success of the product, and the company. This paper will continue with the focus on Frito Lay and the strategy behind ‘chip’ selling, in the snack food industry. Specifically, the place, and price, strategies used, the company’s unique distribution system, and possible changes that could be implemented and challenges that may create. Place Frito Lay has one of the most unique, though some may consider, outdated, distribution methods today. When I say outdated, specifically, I am speaking of distribution of the product to the store level. The company long ago adopted the approach of utilizing its route service representatives (RSR’s) to deliver the product directly to the store. Not only that, but the representatives still, to this day, place the product on the shelves as well. This shows Frito Lay, “using its prowess in distribution to gain leverage over its category” (Leinwand, P., & Mainardi, C., 2016). It is also a major factor in Frito Lays economic success. The snack food industry is, like most things, highly competitive. Frito Lay has been a major player in the industry for many years, holding the vast majority of the market share. To do this the company has had to ‘fend off’ many competitors in the industry, as well as, many new company’s entering the market, trying to get a share of the pie. Frito Lay has had to change with

PRODUCT/PRICING the times, introduce new products, and remain competitive with its pricing in order to stay on top. Using their distribution strategy as a driving force, Frito Lay has continued to rely on RSR’s to order, and then deliver, and merchandise (or place) the product onto store shelves. This strategy has been responsible for much of the company’s economics success, calling upon service (7 days a week for most grocery stores), to give it a ‘leg-up’, on the competition. Much of the reason behind this type of placement success is focusing on the customer. In Frito Lay’s case, the customer is the store it is delivering, servicing, and placing the product in, not the actual end-. Most stores, whether a 7-11 type store, or a grocery retail store cut as much cost as possible in their staffing. This opens up a need for help with servicing the store, i.e. placing the product. Frito Lay offers this to all of its customers, regardless of size, for free, based on need. Smaller stores do not need daily service, whereas, grocers do. Having a route representative in the stores everyday boosts customer relationships (in most cases), and helps boost sales and market share. This is purely one aspect of the placement strategy, as the strategy is integrated with pricing, scheduling, and arrangements of mass orders and discounts by chain. There are many aspects involved in Frito Lays economic success, but much of its success relies on this distribution and placement method. Most of Frito Lay distributes via DSD (direct to store delivery), by individual routes. “They have company owned route vehicles throughout their distribution system. Their department is broken down to 22 geographic areas which represent the sales orientation. All areas have at least of one of Frito-Lay's 42 plants. The Area Vice President is responsible for the Zone Managers, who are responsible for subdivisions or cities or zones. The zones are broken down to districts, which are divided into routes” (Sweeney, T., 1996). This system has many upsides and has proven successful for a number of years, however, it has downsides as well.

PRODUCT/PRICING One of which is, the continuing economic success is interdependent upon the customer. In this case, the store that Frito Lay supplies product to. If the store has slow sales, it will affect Frito Lay, and the RSR handling that . Problems such as the ‘shelf-life’ of the product need to be ed for. Frito Lay products all have a code date which constitutes that products shelf life. Since Frito Lay “guarantees that everything will be sold” (1996), and an out-of-code (stale) product must be ed for, meaning, Frito Lay will pay for that stale product in either manpower, or credit back to the store. Labor costs add up if/when an RSR has to move a slow moving product to a different, faster moving location. Likewise, if the product still does not sell then a ‘credit’ must be given to the customer. This one bag of chips, for example, now costs the RSR lost wages and the company profit. Speaking from personal experience, as I work for Frito Lay as a route sales representative, I can attest to the fact that the company addresses many of the weaknesses of the product placement. The Frito Lay product line, in the case of a grocery chain, has a set schematic in a particular aisle in the store. The competitors’ products are normally in the same aisle as Frito Lays product, as well as the grocery stores private label of snack items. Often the competition offers its products for lower cost than Frito Lay. Another problem with this placement is that not all customers go into the store to buy, for example, a bag of chips. Many consumers won’t even go down this particular aisle which leaves no chance for impulse buys. One way Frito Lay addresses the latter issue is to try to gain placement in other areas of the store, such as setting up a display on the store perimeter assuring the product is seen by the majority of consumers. Part of the placement strategy is knowing that 75% of sales come from the snack aisle, but only 25% of the consumers go down the chip aisle. However, 100% of shoppers go through the check stands, so chips need to be placed within a certain perimeter of the check

PRODUCT/PRICING stands to potentially capture the 75% who have not entered the snack aisle. As a sales representative, that is one of my favorite Frito Lay statistics. Price There are several pricing strategies used in today’s market. Some examples include: value based pricing, penetration pricing, cost based pricing, and product line pricing (LMM, 2016). Companies may use one, or, a mixture of these elements. In Frito Lays case, they use a mixture of cost based pricing, which consists of calculating the cost of producing the product. Factors involved include labor, equipment, utilities, raw materials, fuel, etc. Then consideration must be given to profits, it has been said that Frito Lay also used the price skimming strategy, consumer satisfaction, supply and demand, competition, and environmental factors. On top of the previous considerations, the company is also the most recognized brand available in North America. This being the case, Frito Lay is also able to put pricing strategies into play, leaving room for discounts and promotions to its customers while still maximizing company profits. Thereby, the pricing strategy is directly linked to the company’s economic success. Of the 4 P’s, product, price, place, and promotion, price is the only factor that does not cost the company money. It costs to make a product, distribute a product, and promote a product. The ability to price the product effectively is what has kept Frito Lay as the leading snack food company leading the contributions to the company’s economic success. I believe that changes could be made in the pricing structure, however, Frito Lay has ed for many. Every year, Frito Lay implements small sometimes, barely noticeable changes to increase company profits. For example, the company may change the reduce the ounces per bag by a quarter to a half ounce while leaving the price the same.

PRODUCT/PRICING However, Frito Lay has a tendency to ‘overdue it’, in my opinion in introducing new products into the market. Many times these products are tested by rolling them out in mass quantities into stores. They may be timed to run with the current ad which lasts one to two weeks. After that the product goes to regular price with the brand. The change would not be so much in the overall pricing strategy, but the requirements before launch. If the product is to be tested in-store, then it should be done with a smaller bag to save on cost when if it is not popular. I would suggest rolling out large pallet displays of $1.49 bags instead of $4.29 bags. This would not have a huge impact on management at all. Changes and Challenges Frito Lay has relied on the same distribution method to place its products for decades. While this method seems to work, there are downsides to it as well. The company places a lot of responsibility into its route service representatives. Sometimes too much, as I have seen as a Frito Lay employee. The RSR’s of the company are responsible for their individual s which vary by route. This includes, ordering the right amount of product, distributing the product, placing the product, increasing market share, invoicing, servicing the store, setting up and taking down displays, maintaining proper inventory levels per , moving product to better locations if product is not producing sales or nearing out-of-code date, assuring no out-ofcode dates are on sales floor, just to name a few. Without delving into a complete RSR job description, one of the problems with this approach is that it generates an extremely high turnover rate. This cost the company profit in dollars needed to recruit, hire, and train replacements. It also costs in servicing s, customer satisfaction, added stress on route coverage, etc. I would propose a change to this distribution method. While many of the smaller s benefit from and have a need for DSD

PRODUCT/PRICING service, most of the large s held by Frito Lay could benefit from a different distribution method. This can be done without losing the preferred 7 day-a-week service these s rely on. My change to the distribution would be to take the RSR’s out of the delivering part of the mix Frito Lay could either, contract out the deliveries, or, better yet, use its own fleet to deliver products to stores. This would involve daily routing in larger trucks to large retail s. The placement of products would then be done by either a merchandiser, or, the RSR, giving the stores the same amount of service as before. This would free up time for the RSR’s to promote additional sales and gain market share. Management would face new challenges involved in a different routing system, however, more product and deliveries could be made with less trucks. Most likely management would also be faced with re-structuring RSR routes to service more s, which, if not done properly would leave Frito Lay the same problems of RSR’s having too much work and too little time. If this change were to take place I believe it would be cost efficient, and contribute to the company’s economic success. Cost saving measures would include a lower turnover rate and a lower leave of absence rate due to on-the-job-injuries.

PRODUCT/PRICING References Esha, T., Gaurav, A., Prasad, K., & Swapnil, P. (2014). 4 p's Leinwand, P., & Mainardi, C. (2016). Creating a strategy that works. Retrieved from http://www.strategy-business.com/article/Creating-a-Strategy-That-Works?gko=d53a6 LMM. (2016). The marketing mix; pricing strategy. Retrieved from http://learnmarketing.net/Price.htm Sweeney, T. (1996). memorandum. Frito-Lay Investigation: 07/29/1996: Memorandum: Meeting,