As America alters snack habits, Frito-Lay aims for edges
Food • Richer, poorer consumers new targets middle of market wanes.
Published: June 16, 2012 11:08PM
Updated: June 16, 2012 11:02PM
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Frito-Lay, a unit of PepsiCo, is building a “company within a company” to pursue what might be called a 1 percent-99 percent strategy — creating high-end snacks, as well as those that appeal to what it diplomatically calls “value” customers.

Frito-Lay has long dominated the snack-food business by relentlessly focusing on the middle swath of America that eats chips and pretzels and party mix without regard to the effect on the waistline.

Now, though, Frito-Lay, a unit of PepsiCo, is building a “company within a company” to pursue what might be called a 1 percent-99 percent strategy — creating high-end snacks, as well as those that appeal to what it diplomatically calls “value” customers.

The effort is all about what Tom Greco, president of Frito-Lay North America, has called the “bifurcation” of American snackaholics.

By that, he meant that “the rich are getting richer and the poor are getting poorer,” said Ann Mukherjee, chief marketing officer at Frito-Lay North America.

“Demographics, the aging population and changing ethnic mix, and bifurcating income are the trends reshaping the way people are eating,” Mukherjee said. “We’re snacking more often during the day, and we’re looking for snacks that are more satisfying physically and healthier.”

Frito-Lay is a “perennial rock” in PepsiCo’s portfolio, as described by Judy Hong, a stock analyst at Goldman Sachs, and that has helped cushion the company as its cola business struggles.

One major investor, Donald Yacktman of Yacktman Funds, has suggested that PepsiCo rename itself Frito-Lay to reflect the growing importance of that business, and others such as Nelson Peltz and Relational Investors have agitated for it to uncouple the snacks business from the drag of its beverage operations.

But Frito-Lay’s traditional business — Doritos, Tostitos, Lay’s, Rold Gold and other middle-market brands — has slowed as consumer tastes migrate to nuts, dried fruits and snacks made from whole grains.

Although the overall $22 billion salty snacks market is losing sales, its $2 billion premium end has grown on average about 7 percent over the past two years, according to Goldman Sachs. Goldman expects sales of snacks in the bottom end of the market to grow about 4 percent a year for the next few years. The vast middle, however, is forecast to grow at just half that rate.

“The challenge for them is how to continue to grow their core business when some of their mainstream brands are losing share to some of the smaller premium and value brands, as well as to other snack categories,” said Hong. “Pretzels and snack bars and energy bars, trail mixes and nuts are also growing at a faster pace.”

Those other snacks are where Frito-Lay’s large competitors such as General Mills, Kellogg and Kraft are increasing their activities, which makes the two extremes of the salty snacks market even more attractive.

Frito-Lay has until now largely left the premium end of the market to niche competitors such as Pop Chips, Pretzel Crisps and Pirate’s Booty, and ceded the bottom to grocery store brands.

“These traditionally have been niche markets dominated by small players and regional brands,” said Harry Balzer, the chief food industry analyst at the NPD Group, a research firm. “That leaves a lot of room for a mass player like Frito-Lay to come in and gain market share.”

The company has begun introducing items such as Olive Coast, kettle-cooked chips with a Mediterranean twist, and Taqueros, a low-priced tortilla chip to be sold in places such as dollar stores.

Existing brands that appeal to more upscale customers are getting new emphasis, as well, such as Stacy’s Pita Chips and Sabra, a line of refrigerated dips that are often packaged with crackers and pretzels that is a joint venture with the Strauss Group. And Cracker Jack is being recast as a brand aimed primarily at Frito-Lay’s value shoppers.

“Whether you look at it in terms of price points or customers, there’s just more happening on the edges of the market than in the middle right now,” said Daniel Naor, senior vice president for growth ventures at Frito-Lay North America.

Naor’s unit operates as a distinct business within Frito-Lay. Started 18 months ago, it already generates roughly $400 million of Frito-Lay’s $13.2 billion in North American sales and has expectations of adding another $100 million in revenue this year.

Naor compared it to Toyota’s Lexus brand.

“In the background, there are some common elements — the same factories make both products — but the materials used may be different and they are sold in different outlets,” Naor said.

Some new premium products are already being sold in Citarella, a high-end food market with stores in New York City, for instance, as well as in the deli sections and so-called natural aisles of major grocery chains. Later this summer, Taqueros will go on sale in dollar stores, bodegas and other discount outlets.

Referring to Taqueros, Naor said, “It will have different packaging than our mainstream brands and be heavily aimed at the Hispanic market, where we are targeting it more as part of a meal occasion than a snack.”

Balzer said it was not just Latino families who were adding chips to their meals as side dishes.

“They are the easiest side dish to serve with the number one dinner tonight, which will be the sandwich,” he said. “Snacks aren’t just snacks anymore.”