PepsiCo – Frito LayExploring Channel Marketing & Channel Conflict Management

Prepared by N. Randhawa PepsiCo (Frito-Lay): Business Marketing

Executive Summary• Snack Foods industry is a highly competitive, pyramid market

• Retail consolidation shifts power away from suppliers (manufacturers) to retailers (distribution)

• PepsiCo (Frito-Lay) uses intensive distribution, many retail intermediaries to get the product to end customers

• Securing national accounts with preferred supplier relationships in B2B sales process is complex and important

• Managing the channel offering and positioning is important to add value and balance brand equity with reseller equity

• BUT, channel conflict naturally occurs as retailers drive competition through private label (seeking profits)

Slide 2MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

Snack Foods Industry Background

• Snack foods and beverages manufacturing industry is BIG BUSINESS! (PepsiCo $66B in revenue 2013)

• High competition, few large players, many retail intermediaries

• High gross margins; 30-40% typical

• Slow growth, complex industry

• See industry PEST analysis (appendix 1)

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• Pyramid market

• Fragmented market, concentrated at one end

• Retail consolidation has shifted buying power

from food manufacturers to large supermarkets

PepsiCo (Frito-Lay): Business Marketing

Retail Consolidation

• Retail consolidation shifts power away from suppliers

• Lots of consolidation activity in Canada

• For example, Loblaws announces acquisition of Shoppers Drug Mart in July 2013 for $12.4B… deal closed March 2014

• Growing distribution with national presence in multiple formats (grocery, superstore, convenience)

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Retailers Operating Under Multiple Banners

• To achieve more national market coverage, while tailoring to consumer tastes/preferences

• Further market concentration

• For example, Loblaws has many banners

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PepsiCo Brands & ChannelsPepsi

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Gatorade

Frito-Lay Quaker

Tropicana

Business products for

resale

PepsiCo

Retailer

1

Retailer

2

Retailer

3

Consumer

• Intensive distribution

• Many retail intermediaries

• Short distribution channel

• Greater emphasis on personal selling in B2B

• Direct-store-delivery (DSD distribution)

• See Frito-Lay SWOT (appendix 2)

PepsiCo (Frito-Lay): Business Marketing

Selling Process in B2B… How Frito Lay Secures Accounts• Personal selling and fostering buyer-seller relationships is

important (client centred, willing to listen and flexible)

• Understand delivering “value” through growing profitability and managing cost implications

• Use formal contracts with forecasts, quotas, quality standards and other terms

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Frito-Lay Selling Objectives:

• Retain existing accounts (account retention is less costly than account acquisition)

• Become preferred supplier to strategic large retail accounts

• Concentrate on high-profit potential accounts and grow market share/category

• Pursue product leadership strategy, offering innovative flavours and driving sustainability agenda

PepsiCo (Frito-Lay): Business Marketing

Purchasing Manager Orientation• Purchasing managers have different buying orientations based on their goals

• Helps define their span of influence on the purchase decision

• Frito-Lay deals with many intermediaries, each with different buying orientations

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Buying Procurement Supply Management

Primary Goal of Orientation

Lowest Price Lowest Total Cost Best Value

• WalMart exerts power over its supplier Frito-Lay

• Looking for best deal (price, quality, availability)

• Costco purchases in bulk format

• Focused on end customer value

• Strong, highly collaborative relationship

PepsiCo (Frito-Lay): Business Marketing

Adding Value in Purchasing & Supplier/Retailer Relationships• Frito-Lay uses many retailers to distribute their chips

• Spend significant capital on integrating purchasing activities with strategic customer firms (eg. Wal-Mart inventory system integration)

• Frito-Lay has some strategic alliances with restaurants to block competitive threats from competing firms (box out competitor products)

‾ Eg. Subway restaurants sell Frito-Lay chips only

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• Market oriented

‾ Easy to do business with, easy to contact, fast to provide information, knowledgeable

‾ Always meets promises, delivers reliable service, consistent high performance, training

Channel Selection at the Retail Level is ImportantConsider the following in channel decision making:

1. Which channel and intermediaries will provide the best coverage of the target market?

2. Which channel and intermediaries will best satisfy the buying requirements of the target market?

3. Which channel and intermediaries will be the most profitable? (See appendix 3 for more factors)

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This leads to effective distribution… strategic retailers can provide mass coverage for significant fraction of the market

• eg. WalMart has 4,344 stores in US and 391 in Canada

• eg. Shoppers Drug Mart has 1,241 stores in Canada

Managing the Channel OfferingCore elements:

• Financial returns – Frito-Lay provides healthy profit margins and trade spend to retail intermediaries

• Quality products – High quality chips, lots of flavours, assortment

• Competitive price – Price based on volume expected, national coverage, purchase orders

• Reliable delivery – Large fleet with reliable delivery service and shelf assortment responsibility

• National reputation – Large global brandSlide 11MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

Capability-building

programs

Core elements

Incentive programs

Managing the Channel OfferingCapability-building elements:

• Promotional support – Frito-Lay spend millions each year on advertising their branded products and trade spend

• Responsiveness systems – Inventory control systems through hand-held devices

• Training – All staff subject to formal training in their fields to ensure high quality and consistency

• Company policies – Financing, payment terms, preferred supplier agreements, etc

• Market research – Continued focus on product innovation through flavour profile testing and sustainable packaging (SunChips)

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Capability-building

programs

Core elements

Incentive programs

Managing the Channel OfferingIncentive programs:

• Supplier sales force incentives –National account structure along with regional accounts representatives. Compensated on salary plus commission on sales.

• Dealer firm incentives – Trade marketing spend to retail intermediaries for promo support, shelf space, listing SKU’s, price competitiveness vs. other retailers.

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Capability-building

programs

Core elements

Incentive programs

Managing the Channel Positioning• Important for Frito-Lay to build its marketplace equity to:

1. Determine nature of relationship between supplier (Frito-Lay) and its resellers (retail intermediaries)

2. Determine respective profit margins of the relationship

• Frito-Lay brand equity is strong:1. Valuable brand – hard to copy2. Premium price3. Large share of market4. Perceived higher quality

• However, retail intermediaries are strengthening their reseller equity by offering private label brands where customers have more choice

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BUT… Channel Conflict Arises When Retailers (Grocery Chains) Compete with Private Label

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PepsiCo

Retailer

1

Retailer

2

Retailer

3

Consumer

• Brand name

• Majority share of market, few big brands

• Higher prices for “value”

• Private label

• Competing with suppliers for consumer “share of wallet”

• Lower prices

PepsiCo (Frito-Lay): Business Marketing

Channel Conflict in Snack Foods

• Channel Conflict occurs when one channel member believes another channel member is engaged in behaviour that is preventing it from achieving its goals

• Frito-Lay’s retail channel members compete with them to sell similar products to similar customers (chips)

• Private label is increasingly competing with national brands on the basis of price and flavour/product differentiation

• Power of distributors (retailers) is growing as they become gatekeepers of consumer markets (act as buying agents of customers rather than selling agents for suppliers/manufacturers such as Frito-Lay)

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Lots of Private Label Brands in the Market

Examples of snack food private label…

• Loblaws: President’s Choice, No Name

• Shoppers Drug Mart: Simply Food

• Sobeys: Compliments

• Metro: Irresistibles

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Why Do Retailers Compete With Private Label?Benefits to Grocers:

• Increase “share of wallet” of consumers

• Increase dollars spent per visit to the store (basket size)

• Greater margins for themselves than from supplier’s national branded products

• Leverage the market and reduce power of suppliers

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• Increase competition in the category

• Provide “destination product line” where consumers must purchase products at the retail store

• Control your own destiny – reduce reliance on suppliers

• Reseller equity is higher than brand equity – the power is with the retailer/distributor

Why Do Retailers Compete With Private Label?Benefits to Customers:

• More affordable prices – price competition between national brand and private label

• Increased focus on product innovation – testing new flavours, adapting to local market preferences, ethnic food

• More value… more choice!

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Why Do Retailers Compete With Private Label?Concerns for Suppliers (Manufacturers):

• Reduced sales due to private label presence

• Delisting and spacing concerns

• Price wars with private label

• Further scrutiny from purchase managers around manufacturing costs and trade spend (effective margins)

• Protect brand equity to enhance marketplace equity

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Recommendations & Lessons Learned• B2B is more complex and professional than B2C

• Understanding your customer firm’s expectations and under-promising and over-delivering is sure to lead to profits

• Sales process in B2B is effective when you understand your purchaser’s buying orientation, so you can deliver what they want

• Channel management is important to balance brand and reseller equity

• Channel conflict naturally arises as businesses seek profits – it’s no different in the snack foods industry

• Working collaboratively with your channel distribution partners to achieve common goals is a win-win

• Focus on consultative selling and leverage the partnership capabilities

• Focus on product innovation and brand management to compete with private label

• Most importantly…. business marketing is fun!!

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Appendices

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Appendix 1: Snack Foods Industry PEST Analysis

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Political• Food and Drug Administration (FDA)

regulatory compliance required in US

• Global and local markets – high need for adaptability

• Government intervention – land and water use

Economic Highly competitive industry – pricing levers

used

Economic recessions helps boost sales as people stay home to enjoy snacks

Access to labour in developing countries and quality control

Social Strong advertising – big brands have

major brand equity

Trend towards ethnic foods, health and nutrition, lower sugar and sodium

Technological Lean supply chain

Innovate products through reformulation

Trend towards marketing online via social media

PepsiCo (Frito-Lay): Business Marketing

Appendix 2: Frito-Lay SWOT Analysis

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Strengths• Strong, well-known brand• Large market position/share• Diverse product portfolio• Concentrating on expansion in

emerging markets• Product innovation

Weaknesses Heavy reliance on distribution

channels (retail intermediaries)

Opportunities Meeting changing customer

preferences…

Health and nutrition space

Increased focus on ethnic foods and local tastes

Sustainable practices

Threats Increased competition from private

label

Increasing input costs (spices, potatoes, corn, etc)

Rising labour and healthcare costs in North America

PepsiCo (Frito-Lay): Business Marketing

Appendix 3: Additional Factors in Channel Selection

• Sales performance, sales strength

• Reputation in marketplace, market coverage

• Product lines

• Management succession

• Management ability

• Attitude, size

• Financial and credit condition

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Appendix 4: Bibliography• Business Market Management, Third Edition, J.C. Anderson, J.A. Narus and D.

Narayandas, Pearson Prentice Hall, 2009

• Marketing Channels – A Management View, Eighth Edition, B. Rosenbloom, Thompson -South Western, 2011

• PepsiCo website. http://www.pepsico.com <accessed November 21st, 2014>

• PepsiCo 2013 Annual Report. http://www.pepsico.com/investors/annual-reports-and-proxy-information <accessed November 21st, 2014>

• Snack Food Production in Canada. IBISWorld Industry Report 31191CA. October 2014.

• Supermarkets & Grocery Stores in Canada. IBISWorld Industry Report 44511CA. February 2014.

• MKTG 6250 - Business Marketing. Professor J. Milne’s in-class slides. <Fall 2014>.

• PepsiCo Company Profile. MarketLine Report. October 2014.

• Snack Foods Manufacturing. Hoovers Report. November 2014.

• Loblaws Acquisition of Shoppers Drug Mart. http://www.loblaw.ca/English/shoppers-drug-mart-acquisition/default.aspx <accessed November 25th, 2014

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