When the chips are down: one by one, most Frito-Lay foes have fallen. Now, with its introduction of Stax potato chips, the snack food giant is betting that Procter & Gamble--and Pringles--will be next.
But P&G may require greater stores of resilience to weather the tsunami known as Frito-Lay. The PepsiCo unit's long-awaited and long-delayed launch of Pringles look-alike Lay's Stax finally hit stores in September, six months after originally planned.
Despite initial mixed reviews for Stax, veterans of the chip wars expect Frito-Lay to mount a full offensive aimed at driving P&G from the snack business, just as it did Anheuser-Busch and Keebler a decade or more ago. The canned potato crisp business may not be big enough for two players to compete in it profitably, and who blinks first not only may determine who's left standing in the U.S. potato snacks business, but how the category reshapes itself globally.
"I was there when [Frito-Lay] drove [Anheuser-Busch's] Eagle Snacks out of the business, and I will tell you, I wouldn't bet against them," says Jeffrey Stamp, a former Frito-Lay food technologist who helped develop Baked Lays, and who is currently a product development consultant with Richard Saunders International, Cincinnati. "These guys don't take any prisoners."
It's no secret that the food division isn't a high priority with P&G, which is placing increasing emphasis--and capital--on beauty and health care brands. With P&G's Sunny Delight beverage up for sale, the company's Pringles and Torengo chips brands, as well as its Folgers and Millstone coffees, are all that remain of a portfolio that once spanned category after category.
P&G's gradual withdrawal from food has likely signaled to Frito-Lay that Pringles is vulnerable to a full frontal attack, particularly, Stamp believes, since P&G's marketing an product activity in recent years have focused mainly on flavors and advertising rather than product innovation and upgrades.
"This is the gladiator war here," Stamp observes. "If they drive P&G out of this area, they've got everything they want ... The Eagle attrition took seven years. I have no doubt they'd take that long [this time] too ... Knowing people on both sides of it, I think it's going to be fun to watch."
A related question is how long P&G will slug it out in a business that is decidedly non-core. In 2001, for instance, P&G tried to spin Pringles (along with its juice drink business) into a joint venture with Coca-Cola Co. until CocaCola executives scuttled the deal.
At the time, Pringles was recovering from a massive sales hit due to an attempted 15 percent price increase that didn't go over well with retailers, particularly mass merchandisers such as Wal-Mart, Target and Kmart, traditionally the brand's greatest source of strength. Pringles has since rolled back prices and begun to resume growth. But Stax puts that rebound in jeopardy.
"Our snack business is picking up ... but [during] a very important test period in the U.S. as Frito-Lay introduces Stax," P&G Chairman-CEO A.G. Lafley acknowledged in March.
In September, following speculation in the European business press that P&G would sell Pringles, Folgers and Millstone to finance a takeover of German health and beauty products marketer Beiersdorf, P&G Chief Financial Officer Clayton Daley vehemently denied the businesses were for sale.
Privately, Lafley has told people close to the company that Pringles will have until at least mid 2005 to combat Stax before any decision is made about its long-term future. In the meantime, Pringles may take the battle closer to Frito-Lay's core bagged snacks business or other new segments.
"Our business is headed in the right direction," says P&G spokeswoman Tonia Hyatt. "We believe healthy competition is good for the category. I guess imitation is the sincerest form of flattery."
Stax delayed attack
If nothing else, P&G has had plenty of time to prepare for the Stax attack.
Frito-Lay began test marketing the product in spring 2000 in Cedar Rapids, Iowa, and then removed it from the market a few months later. The product remained little more than a vague threat until late 2002, when Frito-Lay told retailers it would launch the product in spring 2003. However, production problems pushed the launch back to after Labor Day, causing Frito-Lay to miss the key summer selling season.
In a classic competitive gesture, Frito-Lay paid to have vinyl mockups of Lay's Stax cans wrapped around all the turnstiles at the new Great American Ballpark in P&G's hometown of Cincinnati when the venue opened in March. There they remained through the summer, though the product itself didn't debut until season's end.
In an April conference call, PepsiCo Chairman-CEO Steve Reinemund blamed the late start on dock strikes on the West Coast and other "unexpected startup challenges," including lower than desired throughput on production lines.
"This kind of start-up problem is not unusual," he said. "it just happens that this product is a little more visible than some of the other issues we've dealt with."
Speaking in an October conference call, Reinemund said that Stax "is off to a very good start and we're selling all that we can make. The [direct-store delivery] system achieved over 90 percent distribution in large-format [stores] in just two weeks, and we're all very excited about the product."
Still, the delay clearly hurt, if for no other reason than had Stax hit the market as planned, it would have enjoyed full distribution just as the May tornado cut Pringles production capacity. Under that scenario, P&G would have been powerless to run aggressive price promotions to counter the Frito-Lay launch. In September, Stax instead confronted an aggressive pricing counteroffensive by P&G. While Pringles were selling for $1 or less in key outlets, the Stax product was carrying a suggested retail price of $1.49.
Frito-Lay projects it eventually will be able to sell $300 million to $500 million worth of Lay's Stax per year. That's a fairly ambitious goal, given that Pringles sales total around $300 million, or about 6 percent of the U.S. salty snack market, according to Information Resources Inc. (Executives familiar with the brand peg sales at Wal-Mart Stores, clubs, and other outlets excluded by IRI at another $200 million or more.) Pringles currently trails Frito's Lay's and Ruffles potato chip brands in the U.S., its performance paling in comparison to Frito-Lay's $3 billion U.S. salty snacks business.
Stamp sees Stax as "a revival of the old Munchos brand done a lot better," referring to a form-fried snack brand Frito-Lay launched without much success in the 1980s. Stax doesn't compare to Pringles in quality at this point, he says, but the product is "probably 80 percent of the way there"--sufficient to command much of the market as Frito-Lay works to make improvements.
Pringles' uphill battle
Pringles faces a fight made harder by P&G's own mistakes in the late 1990s, says Jeff Dufresne, a former Pringles brand manager and currently president of Brandstorm, a new product consulting division of Cincinnati-based advertising agency Northlich.
"Even prior to Stax, Pringles blew up its business model," said Dufresne, who as the product's brand manager in the early 1990s developed the teen and young-adult-focused advertising that hit at "Lay's greasy broken chips," helping to transform Pringles from divestiture candidate to billion-dollar-plus global brand. Pringles subsequently expanded into 125 countries.
By the late 1990s, however, Pringles' U.S. volume and share had slipped by more than a third, which Dufresne blames on price cuts and a shift in focus to younger kids and morns. By aiming Pringles at younger kids, he says, marketers run the risk of making them appear "uncool" to 'teens and young adults, traditionally the brand's core consumers. P&G also expanded Pringles' production capacity too fast, thereby eroding profitability, he said.
Current management has moved to fix these problems, but now must try to shepherd the brand to recovery during a major competitive assault.
Ultimately, however, the key battle could be outside North America, Dufresne says. In many overseas markets, Pringles is a considerably stronger brand than in the U.S. With labor laws in Europe and many overseas markets preventing development of DSD systems, Frito-Lay doesn't enjoy the major competitive edge it has over P&G in the U.S. Accordingly, he believes Pringles' success outside the U.S. is most likely what drove Frito-Lay to mount a challenge to a brand posing little threat to its dominance here.
Should Stax gain a foothold in the U.S., Dufresne believes the next step for Frito-Lay is to export the brand overseas from its U.S. plant, just as Pringles did in the early days of its global expansion. Among the advantages of canned potato crisps are their shipability, density and extended shelf life, all attractive attributes in an export product.
"If Pringles had taken Lay's Stax on when it was at its peak, it would be a much different battle," Dufresne says. "Right now, Pringles is struggling to recover from a series of three to five years of soft business results. This on top of that is going to make it a pretty tough category for both Pringles and Lay's."
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|Date:||Dec 1, 2003|
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