Frito-Lay plays both ends against the middle
For more than 50 years, Frito-Lay in Purchase has ruled the business of snack foods by making the potato chips, pretzels, corn chips, tortilla chips and cheese-flavored snacks that appealed to just about everyone. But times change and tastes change and those middle-market snack foods are being abandoned in favor of fancier, if not healthier, snacks at the premium end of the market.
The $22 billion salty snacks market is losing sales, according to Goldman Sachs, but the $2 billion premium end has averaged about 7 percent annual growth over the last two years. At the lower-priced end of the market, Goldman Sachs has forecast 4 percent yearly growth for the next few years. In the middle market, only 2 percent annual growth is expected.
Frito-Lay”™s response to these projections? Not surprisingly, to focus on the top and bottom of the market.
“They”™ve been moving that way anyway,” said Caroline Levy, analyst at Calyon Securities in New York City. “The Sabra joint venture, they”™ve had that a long time, they”™ve built a plant on the East Coast,” in Virginia in 2010.
Sabra Dipping Co., the kosher and vegetarian hummus maker, in 2008 was acquired in a joint venture by the Frito-Lay division of PepsiCo and the Strauss Group, the second largest food and beverage company in Israel. Started in Queens, Sabra, the world”™s largest manufacturer of hummus, relocated its headquarters to White Plains to be closer to its parent PepsiCo in Purchase. The Sabra business was expanded from North America to markets around the world in 2011.
In another move beyond the salty-snacks market, PepsiCo formed a global nutrition group in October 2010 to develop more products made with fruits, vegetables and whole grains.
Levy said growth in snack foods is going to have to come from sources other than the traditional ones such as volume.
“Volume is going to be less of a growth driver than in the past because the government is trying to crack down on big portion sizes. So it makes complete sense to premiumize their portfolio,” she said. “Higher price per ounce is going to be the theme in the food and beverage industry in the U.S.”
Levy said she thinks PepsiCo will try to make more acquisitions like Stacy”™s Pita Chips, which it bought in 2006.
Ali Dibadj, analyst at Sanford C. Bernstein & Co. in New York City, agreed that “premiumizing” is a good idea.
“The struggle that Frito-Lay has is that its products are stuck in the middle, they don”™t have appeal at the low end or the high end of the market, and at the high end a lot has to do with healthier, organic, natural snacks,” he said. “They”™ve gotten into it a little with Stacy”™s Pita Chips. And these are typically higher margin products.”
Dibadj added that it”™s not just making the products, but how they are marketed that will determine if PepsiCo is successful with this strategy.
“They can do it. It will take some learning, though. It”™s marketing in a different way. It”™s not ”˜big bang, taste this thing,”™ it”™s more health conscious, marketing to the premium consumer. People”™s tastes are changing.”
Or are they?
Harry Balzer is chief food industry analyst at the research firm NPD Group in Port Washington. “There is a desire, whether it”™s 1900 or 2000, to try new flavors, that”™s the spice of life,” he said. “People will try something because it”™s a novelty, but if novelty is the only thing it offers it won”™t be around long term. If it”™s a time saver or a money saver, it”™ll be around for a while.” Balzer said the real change is that snack foods are more and more being eaten at the main meal. “Fifty percent of snacks are being consumed as part of a main meal,” he said. “Think of the chips you get with a Subway sandwich.”
Balzer, though, noted “It is difficult to get growth in the food business. To get growth you have to take market share from somebody and Frito-Lay, they have the power of distribution, advertising power, money and other resources.”
Levy said Frito-Lay might find competition at the low end of the market from grocers”™ private-label brands. “Supermarkets are starting to make their own brands of chips. Kroger has done very well with their private-label potato chips. They”™re trying to move toward where the consumer is.”