Frito-Lay’s French onion Dip Analysis

Frito-Lay Inc.

Memo

Date: March 19, 2007

Re: Frito-Lay’s French Onion Dip Analysis

Frito-Lay has decided to introduce a new product; sour cream based French Onion dip. However, there are two markets this new dip can be marketed in; the chip dip market along with all other Frito-Lay products or the vegetable dip market, an entirely new market for the company.

There are certain assets and/or resources, as well as capabilities, that the company possesses that may help to uncover the best market for the new French Onion dip product.

One of Frito-Lay’s best assets is its brand. The company has a national reputation for being a quality salty food manufacturer. Strong channels of distribution exist for the brand as well. Physical assets of the brand include distribution centers and the trucking fleet. This brand channel also has very powerful capabilities; new products of similar distribution type can be placed in both mom and pop shops and supermarkets across the nation with ease.

Other market factors to asses while looking at the best market for the new French Onion dip product include industry size, growth potential, and profit levels.

The overall market size for chip dip is potentially very large. 97% of households use salty snacks, most of which can be supplemented by some product in the dip category. That fact, coupled with the fact that currently, only 45% of households use dips, could signal not only a potentially a very large market, but a large amount of market growth possibility. However, the total sales of company dips have declined in the past year possibly providing evidence that the market is saturated and there is not as much market potential as the data may suggest. Other market factors, such as the dropping of the enchilada bean dip from the product line and, consequentially, the loss of those sales may again signify that that market is overly competitive and saturated.

The sour cream based French Onion dip is expected to have the same gross margin as other dip products whether it is placed into the Chip dip market of the Vegetable dip market. However, because of extra costs associated with creating a new channel, as the chip one will more than likely not work for distributing the vegetable type dip, the COGS for the non-chip product will be 2.3% higher. This will cut deeply into the overall profitability for the vegetable type dip being that Profit contribution of dips is roughly 10%.

Using Porters 5 Force’s industry analysis can further help to break down the attractiveness of the two markets.

The threat of new entrants, because of already high competition, moderate costs associated with capital equipment, somewhat low products differentiation, and possibly small cost advantages of buying in bulk, is determined to be a moderate to a small threat to the firm for both markets of dip.

The power of suppliers, because of sellers having a very low differentiable product, a high number of fragmented companies selling milk/cream, and the somewhat small chance that a milk/cream producer can forward integrate and produce dips themselves, is more then likely quite small for, again, both the dip markets

The power of buyers, because of somewhat undifferentiated dip products, low profit margins on dips, and the inability for dips to save retailers money, is moderate to high. However, the somewhat high importance of chips/dips in a retailer’s product mix as well as a retailer’s