
21 Jun 2012 US: Frito-Lay takes new tack on snacks
Frito-Lay has long dominated the snack-food business by relentlessly focusing on the middle swath of America that eats chips and pretzels 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,” Ms. 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 like 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.
While the overall $22 billion salty snacks market is losing sales, its $2 billion premium end has grown on average about 7 percent over the last 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 Ms. 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 like General Mills, Kellogg and Kraft are increasing their activities, which makes the two extremes of the salty snacks market even more attractive…..