Frito Lays Dips Case

Frito-Lay's Dips

* How would you characterize the dip category in general?

Dips are a complementary product; they are served along with chips, crackers, or raw vegetables. The market for dips is highly fragmented and difficult to measure. More than 80% of all dips are accounted for by supermarkets, with a total dip retail dollar sales volume of $620 million (in 1985).

The dip category became more popular in late 1983 and early 1984, an explanation for this increase is the growing popularity of Mexican food, including nachos, which stimulated the trial and acceptance of Mexican-style dips. Even though the market for dips is large, it is estimated that about 20% of all dip volume consumed by households in the U.S. is homemade. Also many consumers use refrigerated salad dressings for dips, especially for vegetables, which can be considered the main dip substitute.

* How might the dip category be segmented?

The main segments in the dip market are the "chip dip" category and the "vegetable dip" category. The total dip market is divided in two product types, segmented on its usage; prepared dips (2/3 of total) and dip mixes for at-home preparation (1/3 of total). More than half of the prepared dips sold in supermarkets require refrigeration, and the remaining 45% are "shelf-stable", which means that they are packaged in metal cans, don't require refrigeration and can be placed anywhere in the supermarket. Dips are segmented in four different flavor categories: sour cream-based dips (50%); cheese-based dips (25%); bean and picante dips (10%); and cream cheese-based dips (15%).

* What is Frito-Lay's competitive position within the segments it pursues?

Frito-Lay is the major competitor in shelf-stable dips; with a total market share of 21.77%. They carry a highly profitable product line and had phenomenal sales growth between 1981($30M) and 1985 ($87M).

In the last two years (1984 and 1985) however, competitive activity accelerated; well-financed companies began to pursue the dip market (e.g. Campbell Soup and Lipton), numerous new products were introduced and advertising expenditures increased by nearly 600% (1984-1986).

The major competitors in the prepared dips category are Kraft (mainly cheese dips), Borden, a large number of regional dairies, and numerous store brands. It is estimated that 35% of refrigerated salad dressing volume is used for dips; the competition in this area includes brands such as Marie's, Bob's Big Boy, Marzetti's, Walden Farms, and a few local brands in different areas of the country.

Frito-Lay established their competitive advantage in the dip market because of that they are the nationally recognized leader in the manufacture of salty snack foods. Since dips are most frequently used with salty snacks, such as potato ships and corn chips, Frito-Lay's distinctive competency is the distribution and location near the salty snacks.

* What sales volume and market share(s) will be required of the dip line to preserve its profit contribution given budgeted promotion expenses?

Sales in 1985

Profit contribution in 1985

Total fixed costs in 1986

Advertising and merchandising

General and administrative overhead costs = $

=

= $

= $

= $ 87,336,000

10.3 %

11,300,510

6,527,000

4,728,510

1986 sales requirement = = $ 109,713,757.30; increase 1985 - 1986 = = 25.62 %

* What are the pros/cons of focusing attention on the "chip dip" segment?

+ Frito-Lay already has a strong competitive position in the chip dip market, and the dips complement their existing product-lines (salty snacks).

+ There's a major opportunity in the chip dip segment to build penetration: research indicated that only 20% of chips were currently eaten with dips, and that only 45% of the all U.S. households used dips (1985) whereas 97% used salty snacks.

+ The chip dip is the larger segment (67%).

+ The frequency of shelf-stable dips purchases can be increased through promotion.

+ Increased competitive activity; a lot of new styles of dips had been introduced since