PRODUCT/PRICING

Frito Lay and Chip Product/Pricing

Tracy Goodhew
Capella University
BUS-FP-3030
February 14, 2016

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Frito Lay and Chip Product/Pricing
The second and third Ps of the marketing mix strategy are; product, and pricing. How a
company distributes product, and, where they propose to place it for sale continues to be a main
focus for a company to be successful. And lets not forget that, even if a company is able to get
those proponents exactly right, if they price the product incorrectly, the previous two successes
wont make a difference in the world. Bringing a product to market is an entangled web of
decisions, all relying on each other for the success of the product, and the company.
This paper will continue with the focus on Frito Lay and the strategy behind chip
selling, in the snack food industry. Specifically, the place, and price, strategies used, the
companys unique distribution system, and possible changes that could be implemented and
challenges that may create.
Place
Frito Lay has one of the most unique, though some may consider, outdated, distribution
methods today. When I say outdated, specifically, I am speaking of distribution of the product to
the store level. The company long ago adopted the approach of utilizing its route service
representatives (RSRs) to deliver the product directly to the store. Not only that, but the
representatives still, to this day, place the product on the shelves as well. This shows Frito Lay,
using its prowess in distribution to gain leverage over its category (Leinwand, P., & Mainardi,
C., 2016). It is also a major factor in Frito Lays economic success.
The snack food industry is, like most things, highly competitive. Frito Lay has been a
major player in the industry for many years, holding the vast majority of the market share. To do
this the company has had to fend off many competitors in the industry, as well as, many new
companys entering the market, trying to get a share of the pie. Frito Lay has had to change with

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the times, introduce new products, and remain competitive with its pricing in order to stay on
top. Using their distribution strategy as a driving force, Frito Lay has continued to rely on RSRs
to order, and then deliver, and merchandise (or place) the product onto store shelves. This
strategy has been responsible for much of the companys economics success, calling upon
service (7 days a week for most grocery stores), to give it a leg-up, on the competition.
Much of the reason behind this type of placement success is focusing on the customer. In
Frito Lays case, the customer is the store it is delivering, servicing, and placing the product in,
not the actual end-user. Most stores, whether a 7-11 type store, or a grocery retail store cut as
much cost as possible in their staffing. This opens up a need for help with servicing the store, i.e.
placing the product. Frito Lay offers this to all of its customers, regardless of size, for free,
based on need. Smaller stores do not need daily service, whereas, grocers do.
Having a route representative in the stores everyday boosts customer relationships (in
most cases), and helps boost sales and market share. This is purely one aspect of the placement
strategy, as the strategy is integrated with pricing, scheduling, and arrangements of mass orders
and discounts by chain. There are many aspects involved in Frito Lays economic success, but
much of its success relies on this distribution and placement method.
Most of Frito Lay distributes via DSD (direct to store delivery), by individual routes.
They have company owned route vehicles throughout their distribution system. Their
department is broken down to 22 geographic areas which represent the sales orientation. All
areas have at least of one of Frito-Lay's 42 plants. The Area Vice President is responsible for the
Zone Managers, who are responsible for subdivisions or cities or zones. The zones are broken
down to districts, which are divided into routes (Sweeney, T., 1996). This system has many
upsides and has proven successful for a number of years, however, it has downsides as well.

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One of which is, the continuing economic success is interdependent upon the customer. In this
case, the store that Frito Lay supplies product to. If the store has slow sales, it will affect Frito
Lay, and the RSR handling that account. Problems such as the shelf-life of the product need to
be accounted for. Frito Lay products all have a code date which constitutes that products shelf
life. Since Frito Lay guarantees that everything will be sold (1996), and an out-of-code (stale)
product must be accounted for, meaning, Frito Lay will pay for that stale product in either manpower, or credit back to the store. Labor costs add up if/when an RSR has to move a slow
moving product to a different, faster moving location. Likewise, if the product still does not sell
then a credit must be given to the customer. This one bag of chips, for example, now costs the
RSR lost wages and the company profit.
Speaking from personal experience, as I work for Frito Lay as a route sales
representative, I can attest to the fact that the company addresses many of the weaknesses of the
product placement. The Frito Lay product line, in the case of a grocery chain, has a set
schematic in a particular aisle in the store. The competitors products are normally in the same
aisle as Frito Lays product, as well as the grocery stores private label of snack items. Often the
competition offers its products for lower cost than Frito Lay. Another problem with this
placement is that not all customers go into the store to buy, for example, a bag of chips. Many
consumers wont even go down this particular aisle which leaves no chance for impulse buys.
One way Frito Lay addresses the latter issue is to try to gain placement in other areas of the store,
such as setting up a display on the store perimeter assuring the product is seen by the majority of
consumers. Part of the placement strategy is knowing that 75% of sales come from the snack
aisle, but only 25% of the consumers go down the chip aisle. However, 100% of shoppers go
through the check stands, so chips need to be placed within a certain perimeter of the check

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stands to potentially capture the 75% who have not entered the snack aisle. As a sales
representative, that is one of my favorite Frito Lay statistics.
Price
There are several pricing strategies used in todays market. Some examples include:
value based pricing, penetration pricing, cost based pricing, and product line pricing (LMM,
2016). Companies may use one, or, a mixture of these elements. In Frito Lays case, they use a
mixture of cost based pricing, which consists of calculating the cost of producing the product.
Factors involved include labor, equipment, utilities, raw materials, fuel, etc. Then consideration
must be given to profits, it has been said that Frito Lay also used the price skimming strategy,
consumer satisfaction, supply and demand, competition, and environmental factors.
On top of the previous considerations, the company is also the most recognized brand
available in North America. This being the case, Frito Lay is also able to put premium pricing
strategies into play, leaving room for discounts and promotions to its customers while still
maximizing company profits. Thereby, the pricing strategy is directly linked to the companys
economic success. Of the 4 Ps, product, price, place, and promotion, price is the only factor that
does not cost the company money. It costs to make a product, distribute a product, and promote
a product. The ability to price the product effectively is what has kept Frito Lay as the leading
snack food company leading the contributions to the companys economic success.
I believe that changes could be made in the pricing structure, however, Frito Lay has
accounted for many. Every year, Frito Lay implements small sometimes, barely noticeable
changes to increase company profits. For example, the company may change the reduce the
ounces per bag by a quarter to a half ounce while leaving the price the same.

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However, Frito Lay has a tendency to overdue it, in my opinion in introducing new
products into the market. Many times these products are tested by rolling them out in mass
quantities into stores. They may be timed to run with the current ad which lasts one to two
weeks. After that the product goes to regular price with the brand. The change would not be so
much in the overall pricing strategy, but the requirements before launch. If the product is to be
tested in-store, then it should be done with a smaller bag to save on cost when if it is not popular.
I would suggest rolling out large pallet displays of $1.49 bags instead of $4.29 bags. This would
not have a huge impact on management at all.
Changes and Challenges
Frito Lay has relied on the same distribution method to place its products for decades.
While this method seems to work, there are downsides to it as well. The company places a lot of
responsibility into its route service representatives. Sometimes too much, as I have seen as a
Frito Lay employee. The RSRs of the company are responsible for their individual accounts
which vary by route. This includes, ordering the right amount of product, distributing the
product, placing the product, increasing market share, invoicing, servicing the store, setting up
and taking down displays, maintaining proper inventory levels per account, moving product to
better locations if product is not producing sales or nearing out-of-code date, assuring no out-ofcode dates are on sales floor, just to name a few.
Without delving into a complete RSR job description, one of the problems with this
approach is that it generates an extremely high turnover rate. This cost the company profit in
dollars needed to recruit, hire, and train replacements. It also costs in servicing accounts,
customer satisfaction, added stress on route coverage, etc. I would propose a change to this
distribution method. While many of the smaller accounts benefit from and have a need for DSD

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service, most of the large accounts held by Frito Lay could benefit from a different distribution
method. This can be done without losing the preferred 7 day-a-week service these accounts rely
on.
My change to the distribution would be to take the RSRs out of the delivering part of the
mix Frito Lay could either, contract out the deliveries, or, better yet, use its own fleet to deliver
products to stores. This would involve daily routing in larger trucks to large retail accounts. The
placement of products would then be done by either a merchandiser, or, the RSR, giving the
stores the same amount of service as before. This would free up time for the RSRs to promote
additional sales and gain market share.
Management would face new challenges involved in a different routing system, however,
more product and deliveries could be made with less trucks. Most likely management would
also be faced with re-structuring RSR routes to service more accounts, which, if not done
properly would leave Frito Lay the same problems of RSRs having too much work and too little
time. If this change were to take place I believe it would be cost efficient, and contribute to the
companys economic success. Cost saving measures would include a lower turnover rate and a
lower leave of absence rate due to on-the-job-injuries.

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References
Esha, T., Gaurav, A., Prasad, K., & Swapnil, P. (2014). 4 p's
Leinwand, P., & Mainardi, C. (2016). Creating a strategy that works. Retrieved from
http://www.strategy-business.com/article/Creating-a-Strategy-That-Works?gko=d53a6
LMM. (2016). The marketing mix; pricing strategy. Retrieved from http://learnmarketing.net/Price.htm
Sweeney, T. (1996). memorandum. Frito-Lay Investigation: 07/29/1996: Memorandum: Meeting,