Frito-Lay's New Demographic 'Snacktics'

Focusing on high-end and "value" customers rather than traditional middle

PLANO, Texas -- Frito-Lay, a unit of PepsiCo, is building a "company within a company" to pursue what might be called a 1%-99% 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, according to a New York Times report.

"Demographics, the aging population and changing ethnic mix, and bifurcating income are the trends reshaping the way people are eating. We're snacking more often during the day, and we're looking for snacks that are more satisfying physically and healthier," Ann Mukherjee, chief marketing officer at Frito-Lay North America, told the newspaper.

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% over the last two years, according to the report, citing Goldman Sachs. Goldman expects sales of snacks in the bottom end of the market to grow about 4% 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 like General Mills, Kellogg and Kraft are increasing their activities, which makes the two extremes of the salty snacks market even more attractive, the report said.

Frito-Lay has until now largely left the premium end of the market to niche competitors like 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," Harry Balzer, the chief food industry analyst at research firm NPD Group, told the paper. "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 like Olive Coast, kettle-cooked chips with a Mediterranean twist and Taqueros, a low-priced tortilla chip to be sold in places like dollar stores.

Existing brands that appeal to more upscale customers are getting new emphasis as well, like 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," Daniel Naor, senior vice president for growth ventures at Frito-Lay, told the Times.

In the past, Frito-Lay might have pushed new products using its direct-store distribution (DSD) system, which relies on Frito-Lay truck drivers to deliver products directly to stores. Naor's unit is instead cultivating grocery store deli managers and brokers who sell niche snacks and using warehouses to supply them, relying on relationships that Frito-Lay has already established with outlets like schools and vending machine operators.

That, Hong said, "will allow them to nurture these brands with more patience as they grow."

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 natural aisles of major grocery chains. Later this summer, Taqueros will go on sale in dollar stores, bodegas and other discount outlets.

Taqueros, Naor said, "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."