Frito-Lay Investigations : 08/07/1996a: Memorandum: Telephone Interview

Memorandum

Today, Jill Ptacek spoke with [REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] planning for its different food categories is based on a "planigram" which allocates selling space to different food offerings based on an evaluation of product movement. [REDACTED TEXT (b7D)] stated that [REDACTED TEXT (b7D)] does no pre-established category allocation. Its advance volume-estimation is also driven by what it realizes about the size of its given [REDACTED TEXT (b7D)] store and by the local demographics. To properly evaluate the store's category award treatment, [REDACTED TEXT (b7D)] calculates the buying expectations of the neighborhood's customers, and assesses the historical movement of product in comparable stores throughout the chain. The same logical approach is used for products like sodas and most of the other category items. [REDACTED TEXT (b7D)] also weighs the gross profitability and total dollar sales likelihood factors into the planigram calculation. This information, [REDACTED TEXT (b7D)] has found, is essential to keeping its shelves filled and product selling rapidly. [REDACTED TEXT (b7D)] also factors in historical market share/sales plus the hours of personnel utilization per category. The latter is important in terms of retarding costs by food area and category.

[REDACTED TEXT (b7D)] does offer satellite space to different manufacturers such as end caps and towers and sometimes the off-shelf displays are devoted to salty snack promotions as part of the marketing plan.

[REDACTED TEXT (b7D)]

Frito-Lay has developed a growing market share at [REDACTED TEXT (b7D)] adding space with Eagle's exit in early 1996. However, this growth has begun to erode because of [REDACTED TEXT (b7D)] focus on the development of its own private snack line and the advertisement for such products. [REDACTED TEXT (b7D)] potato chips now claim [REDACTED TEXT (b7D)] snack sales and its tortilla chip line accounts for [REDACTED TEXT (b7D)]

The [REDACTED TEXT (b5)] revealed to us their goal of taking around [REDACTED TEXT (b5)] (or perhaps more) of their own shelf space in the longer term to be devoted to [REDACTED TEXT (b7D)] private stock. That would mean about [REDACTED TEXT (b7D)] for potato chips and [REDACTED TEXT (b7D)] for tortilla chips.

[REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] is willing to accept new small snack competitors, especially if their distribution and quality are close to ideal. [REDACTED TEXT (b7D)] stated that [REDACTED TEXT (b7D)] suffers from a lack of sound distribution practices and has failed to completely service the broad [REDACTED TEXT (b7D)] retail territory. [REDACTED TEXT (b7D)] stated a new snack maker could make a pitch since about [REDACTED TEXT (b7D)] of [REDACTED TEXT (b7D)] snack product category is non-Frito and another brand is feasible. [REDACTED TEXT (b7D)] In 1996 Eagle snacks left the market, a third major competitor who no longer exists for [REDACTED TEXT (b7D)] and its customers; so, turnover seems to be commonplace in [REDACTED TEXT (b7D)] snack gondolas.

The effect on [REDACTED TEXT (b7D)] retailing when Eagle snacks left the market was that the [REDACTED TEXT (b7D)] market share went up for grabs, necessitating the reshaping of the snacks aisle and [REDACTED TEXT (b7D)] considered the impact of possible consumer rejection when selecting Eagle's successors. The result of this shelf space reallocation was that [REDACTED TEXT (b7D)] calculated the percentage of business of surviving snack manufacturers and provided extra space for them on a space for sales basis; however, [REDACTED TEXT (b7D)] private line snacks also received the greatest extra space. No bids were requested of the manufacturers who found Eagle gone.

Shelf Space Fees Charged at [REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] does not charge "pay to stay" shelf space fees. [REDACTED TEXT (b7D)]insisted that [REDACTED TEXT (b7D)] divides its space purely based on consumer demand and not on a contractual financial payments made by snack manufacturers.

He added, at [REDACTED TEXT (b7D)] new food items require an allowance fee to be paid to the chain if the manufacturer is offering a comparable fee to other retailers in the competing area. [REDACTED TEXT (b7D)] policy is to let them in but corrcborate that these payments are being asked at the competing retailers. He did not say how [REDACTED TEXT (b7D)] accomplishes this. The [REDACTED TEXT (b7D)] makes the decision of allowing new products to come into the chain based on two key criteria: whether the consumer needs to have the new item presented to him/her, and whether [REDACTED TEXT (b7D)] will reap a suitable profit from stocking this new item. If the profit calculation is not very high, even though consumer demand seems enthusiastic, [REDACTED TEXT (b7D)] will probably not permit entry of the new product, citing a simple lack of space. [REDACTED TEXT (b7D)] said he does recall any manufacturers gaining tacked-on shelf space through fees offered to enhance their position at [REDACTED TEXT (b7D)] His memory is that [REDACTED TEXT (b7D)] told all such manufacturers no in each case, and he says that it is not a profitable matter to elicit these fees on the basis of one upmanship, for either vendor or [REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)]states that when a new product is accepted at [REDACTED TEXT (b7D)] the manufacturer's previously allocated space is used to house the product, as a customary rule. Other companies' product space isn't shorted to make room for a certain manufacturer's brand new item. Instead, [REDACTED TEXT (b7D)] reworks and redesigns his planigram to fit the new product into the retail picture without bumping competitors. In addition, [REDACTED TEXT (b7D)] explained that [REDACTED TEXT (b7D)] creates no formal contracts for space allocation with manufacturers, but always leans on its planigram as the foundation for alterations at the category level. [REDACTED TEXT (b7D)] described for us how his planigram operation takes into account individual UPC identities and SKUs which must be used to reflect category and sub-category products within [REDACTED TEXT (b7D)] For instance, potato chips, cheese snacks and pretzels would represent "categories" in the database, while sub-categories would represent features like barbeque, onion, ridged, flavored, etc. The term SKU refers to single case pack selling units. In the event of the chain adding something really new to its (and the manufacturer's) retail line, the database indicates its placement in the manufacturer's quarters and [REDACTED TEXT (b7D)] adjusted planigram shows the event happening "in most cases, usually coming out of the vendor's space."

[REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] Calculation On Snack Profitability

[REDACTED TEXT (b7D)] said the principal component of a successful snack sales program is not the number of stores available to generate a certain sales figure, but instead, and certainly in [REDACTED TEXT (b7D)] case, the prime criterion of high and steady sales volume, high enough to support and maintain the snack maker's capital investment and justify the monetary and other risks of an enterprise such as offering the public an almost complete house label line in today's market. Even if [REDACTED TEXT (b7D)] meets its goal to fill 30 per cent of its retail snack shelf space which it projects as possible someday, it is sales volume that will drive its snacks program and provide the thriving level of payback to keep it going.

[REDACTED TEXT (b7D)] Snack Shelf Management

[REDACTED TEXT (b7D)] arranges its snack shelves by manufacturer, not by product. [REDACTED TEXT (b7D)] which houses low-fat and no-fat snacks for the fat-discriminating shopper. Frito-Lay and other manufacturers are represented in this separate rack.

[REDACTED TEXT (b7D)] criteria for new product placement include customer demand, historical dollar sales, and the ability of the new product to enjoy at least one "unit facing;" in grocery parlance, it must possess a [REDACTED TEXT (b7D)] minimum space, with [REDACTED TEXT (b7D)] and be clearly displayed to the public. Without decidedly visible placement of this sort, [REDACTED TEXT (b7D)] said a new product is likely to fail. He continued by saying there is a chicken-and-egg puzzle in considering sufficient facing. Does a manufacturer sell more because space has been provided to make the product appear more successful, or does he acquire more space because the product jumps off the shelf and is sold regardless of its initial placement factors? [REDACTED TEXT (b7D)] stated that this issue is pondered frequently at [REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] stated that [REDACTED TEXT (b7D)] does not employee category captains, per se. However, manufacturers of different product lines do provide "analysts" charged with helping to determine how best to display product categories at [REDACTED TEXT (b7D)] and whose expertise is expected to help the grocer significantly [REDACTED TEXT (b7D)] and the resulting savings fund investment in critical aspects, such as buildings and related expenses, and the manufacturers contribute these services and time without seeming to tilt their own category in favor of themselves. [REDACTED TEXT (b7D)]

The Planigram

[REDACTED TEXT (b7D)] performs planigramming based largely on gondola statistics and its assessment of the strategic needs for the chain. [REDACTED TEXT (b7D)] decides what to do with different end caps which he has been assigned to parcel out. He evaluates what lines need to be promoted for maximum store profit and his decision is based on "space to sales." [REDACTED TEXT (b7D)] admitted the adjustments [REDACTED TEXT (b7D)] makes are an "inaccurate science," in terms of fair space assignment. [REDACTED TEXT (b7D)] emphasized that his end cap sales are very difficult to calculate with precision and thus factor into the allocation picture. [REDACTED TEXT (b7D)] was asked about the hand-held calculators which Frito-Lay, like Pepsico, its parent, employs to help it assess sales from secondary displays [REDACTED TEXT (b7D)] did not know whether Frito is much better off because of its gadgetry in terms of sales impact.

Frito-Lay's Program [REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] considers some of its end caps to be "defensive" displays, placed for the public without any retail price discounting whatsoever, and the public may not even notice the lack of a price break. These snares are full-price, impulse-purchase secondary traps that often exceed the normal sales price for the snack products ensconced there. This is especially prevalent at [REDACTED TEXT (b7D)] during holiday periods when impulse-buying rises. Both the snack vendor and the chain make out well.

Besides Frito's program, the promotional fees provided by vendors usually get treated as follows: [REDACTED TEXT (b7D)] not normally charge for display fees to its snack vendors; 2) there is a "continuing off-invoice allowance" that some manufacturers pay [REDACTED TEXT (b7D)] These promotional, off-invoice allowance fees are not permitted to rise and fall by much to avoid confusion, especially to the shopper comparing the same product whose bag price might fluctuate greatly. So any allowance that a manufacturer gives to [REDACTED TEXT (b7D)] is a steady number and this discount is passed on smoothly to the consumer.

Flex Funds

[REDACTED TEXT (b7D)] accumulates flex fund amounts, also known as "promo allowance" funds, which are taken from virtually all manufacturers and also have the name, "market development funds." These dollars are used by the manufacturers and the store to promote and push specific products. [REDACTED TEXT (b7D)] described Proctor & Gamble as a strong and clever market development fund user and its funds are earmarked intelligently for "specific" named products. Their program is easy to follow. Other manufacturers offer money too, but do not specify when and how that money should be used at [REDACTED TEXT (b7D)] How [REDACTED TEXT (b7D)] uses the money to enhance sales of the disorganized firm's products is normally far less successful.

In the salty snack food category, sales are driven by product movement figures alone. [REDACTED TEXT (b7D)] asks promotional fees and the result is greater profit for the chain and much larger consumer sales from those salty snack shelves.

Jill asked [REDACTED TEXT (b7D)] what the result would be if Frito-Lay and [REDACTED TEXT (b7D)] requested the same end caps for their potato chip lines at [REDACTED TEXT (b7D)] The question came down to which would generate the most sales and justify the awarding of that end cap. [REDACTED TEXT (b7D)] stated that stimulation of incremental sales would be critical in this matter and if both parties were able to generate, for instance, 2 times normal sales in this space, the issue would resolve thus: [REDACTED TEXT (b7D)] selling [REDACTED TEXT (b7D)] units versus Frito selling [REDACTED TEXT (b7D)] units -- Frito would definitely win because [REDACTED TEXT (b7D)] profitability would depend on that decision for a far superior payback. The matter of units sold would dictate who would come out with the satellite space in this and in almost all cases. However, if [REDACTED TEXT (b7D)] were to sell [REDACTED TEXT (b7D)] worth of product in that space and Frito-Lay were to sell [REDACTED TEXT (b7D)] might lean toward [REDACTED TEXT (b7D)] getting the end cap if its combined dollar sales volume plus bag margin could outdo Frito. It would not be question of who had a better market share or reputation in snacks. [REDACTED TEXT (b7D)] stated that he would never be able to sell a new item if its inclusion were a matter of just market share percentages. [REDACTED TEXT (b7D)] will take a chance on anyone's product if the calculations look right. Figured into an end cap award would be the ultimate factors of the net return margin (volume times bag margin) , plus the end cap fee presented to [REDACTED TEXT (b7D)] as an additional cash payment that sweetens the profit returns to [REDACTED TEXT (b7D)] In short, the total volume sales generation, including the revenue stream and end cap payment would determine [REDACTED TEXT (b7D)] final decision on who gets end caps .

[REDACTED TEXT (b7D)] does its end cap and other planning 12 weeks ahead of the activity to be staged, with continuous updating until that time. A manufacturer will come to [REDACTED TEXT (b7D)] and offer his program and be evaluated by [REDACTED TEXT (b7D)] staff [REDACTED TEXT (b7D)] looks for maximization of sales and profitability and creates its master plan to reflect those issues. Normally the manufacturer comes in to [REDACTED TEXT (b7D)] with a one-time yearly plan and follows up with about three updates during the year for the partnership to stay on track. [REDACTED TEXT (b7D)] stated this is not a "re-bid" process, but just a timely correction effort. [REDACTED TEXT (b7D)] does frequent reconsideration of its programs with manufacturers and can overturn a running program if actual sales come up short or other matters fail to materialize correctly. [REDACTED TEXT (b7D)] is always reevaluating how its operation is living up to the agreed-upon program made with vendors . Those agreements are mutually worked out as a contract of sorts with goals that both parties are to adhere to. If a rebate (growth program) is dangled, [REDACTED TEXT (b7D)] will accept this and operate in ways to ensure that increasing amount which would be triggered by greater sales on a sliding predetermined volume scale. The current program that Frito-Lay offers for [REDACTED TEXT (b7D)] Another aspect was the exit of Eagle Snacks contributing to Frito's slight 1995 increase that aided the growth of other small manufacturers as well as [REDACTED TEXT (b7D)] pointed out that over the last several years Frito-Lay has been generally gaining ground in market share and sales, and that the entire salty snack category has been growing at [REDACTED TEXT (b7D)] over the last few years.

Treatment of Frito-Lay Shelf Space Versus Sales Volume

[REDACTED TEXT (b7D)] explained to us that at [REDACTED TEXT (b7D)] Frito-Lay has been "under-spaced" compared with its market share so other companies could have critical and sufficient "facings" in what he insisted is a limited amount of snack shelf space in his chain. The bottom line factor, he proclaimed, is consumer choice, and it's emphasized throughout [REDACTED TEXT (b7D)]

To meet Frito's growth urges, [REDACTED TEXT (b7D)] been dealing out satellite space and advertisements on its behalf to generate public interest in Frito. The chain has found creative ways to push this promotional program and does not intend to limit Frito. Jill asked if Frito-Lay is being "capped" at [REDACTED TEXT (b7D)] and, if so, why. [REDACTED TEXT (b7D)] answer was that [REDACTED TEXT (b7D)] does not manage its snack vendors according to a market share arrangement but looks to store sales alone to dictate how vendors will be allocated empty selling space. When the next planigram is produced, Frito might get more or less space, but bumping another vendor to please F-L would probably upset some consumers and [REDACTED TEXT (b7D)] prefers variety over growth program inducements anyway.

[REDACTED TEXT (b7D)]

Most salty snack manufacturers at [REDACTED TEXT (b7D)] are considered "niche vendors. Asked whether [REDACTED TEXT (b7D)] would consider a company like [REDACTED TEXT (b7D)] which might be interested in marketing through [REDACTED TEXT (b7D)] said it would be a matter of defining [REDACTED TEXT (b7D)] profitability and accepting such a company would be evaluated each year, application-style, for bottom line value. The company could come in each year and see whether vendor status would be a mutually worthwhile venture. The impression was that [REDACTED TEXT (b7D)] would likely strike out, repeatedly.

What the Salty Snack Consumer Really Wants and Needs

[REDACTED TEXT (b7D)] stated that most salty snack consumers really look for three kinds of snack quality varieties: (1) a high quality high priced line of snacks such as Frito-Lay; (2) a high quality lower priced line of snacks like that of [REDACTED TEXT (b7D)] private brand; and (3) a medium to low quality chip snack with a medium to lower price, such as [REDACTED TEXT (b7D)] added that in finding [REDACTED TEXT (b7D)] as a private brand supplier to its chain, it met the criterion of competing with Frito-Lay both in quality and then in pricing.

Criteria for New Snack Vendors [REDACTED TEXT (b7D)]

[REDACTED TEXT (b7D)] said that the factors that determine whether a new snack competitor could enter [REDACTED TEXT (b7D)] would be a "long litany of things," which might swing his decision. He added that a new manufacturer's characteristics would have to include and represent guaranteed sales, a sound advertising scheme and a flavor profile which matches his market areas' demographic tastes. He said that some of this information would not be a black and white decision but instead would be generally worked out.

Another [REDACTED TEXT (b7D)] consideration in bringing aboard a new snack maker is whether the category would be able to grow incrementally or whether the entire snack line would simply trade dollars from one vendor to another (the new one and maybe just temporarily) because the products would be roughly the same. But if someone with a genuinely new product were to come in and help grow the whole category by fresh sales leaps, that would be another matter. Another factor is [REDACTED TEXT (b7D)] finite space for snacks, resulting in the possible necessity of taking an established vendor's shelf space in order to permit a new snack company to come in and field its products.

The final major factor [REDACTED TEXT (b7D)] emphasized was that a new company might depress [REDACTED TEXT (b7D)] private brand long term profits by being the newest product "on the block," as it were. This would quite possibly nix the prospect of a new company coming soon to [REDACTED TEXT (b7D)]

Current Snack Maker Performance at [REDACTED TEXT (b7D)]

At the current moment, [REDACTED TEXT (b7D)] is experiencing good taco chip growth and volume expansion. Also, [REDACTED TEXT (b7D)] private brand is doing satisfactorily and Frito's Baked Lays chips are [REDACTED TEXT (b7D)]

Frito-Lay's Growth Program Specifics

[REDACTED TEXT (b7D)] stated that Frito-Lay's growth program does not include a specific amount of space to be utilized for its growth needs. No physical space was factored into the F-L [REDACTED TEXT (b7D)] incentive agreement; however, the growth program does envision a specific amount of advertisement and end cap and satellite space options for Frito during special periods of the year.

[REDACTED TEXT (b7D)] Concern About Future Frito Marketing & Market Share

[REDACTED TEXT (b7D)] stated that they would consider the arrival of a successfully monopolistic Frito to be unlikely in the future. Such a development, they felt, would lead to a lack of consumer choice and unrest with reduced variety and would definitely result in Frito pricing rigidity down the line which would clearly hurt the consumer [REDACTED TEXT (b7D)] likened this kind of development to being a shopper for a new car and having to go to seven dealers who offered him the very same car no matter where he stops. This unsatisfactory situation would not work in the salty snack category, they added, and [REDACTED TEXT (b7D)] would always be looking for other manufacturers to offer variety to the public [REDACTED TEXT (b7D)] named now defunct [REDACTED TEXT (b7D)] in terms of balancing Frito in marketing snacks. If [REDACTED TEXT (b7D)] were to look around for a useful surviving regional snack maker today, [REDACTED TEXT (b7D)] which is not sold normally in supermarkets, but does a good business in convenience stores, could perhaps rise to fill the role as a future competitor for Frito in [REDACTED TEXT (b7D)] and be a reliable player in supermarkets. When the bids to become [REDACTED TEXT (b7D)] private chip manufacturer in 1995 went out, [REDACTED TEXT (b7D)] was also asked to submit numbers, but was not interested.

As for Frito-Lay becoming monopolistic in [REDACTED TEXT (b7D)] is watching to see that Frito-Lay's list price for its line does not change upward (which it has not done for some time even with the departure of Eagle Snacks). This is being closely watched by [REDACTED TEXT (b7D)] and its fellow retailers. Another factor that might keep Frito honest and "competitive" is the [REDACTED TEXT (b7D)] private brand which the chain intends to continue pushing to the public.

[REDACTED TEXT (b7D)] private brand chips, both potato chips and tortilla chips, now collectively account for [REDACTED TEXT (b7D)] per cent of the chips market share at [REDACTED TEXT (b7D)] Its tortilla chip has been around for several years and is [REDACTED TEXT (b7D)]