Volume Calculation

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Sun Chips Case Analysis
Mike Meserole Peter Stupak Ronald King
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Agenda

• Problem identification
• Proposed solution
• Company background
• SWOT analysis
• Porters five forces analysis
• Analysis of the test market
• Evaluation of alternatives
• Recommendations

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Problem Identification

• To Determine the Future Marketing Strategy for
  Sun Chips Multigrain Snacks

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Recommendation

• National Rollout of Sun Chips
• Increase AM spending to 30M
• Two Flavors
• Natural and French Onion
• Three Package Sizes
• 2 ¼, 7, and 11oz

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Company Background

• Division of Pepsi-Co, Inc.
• Leading U.S. manufacturer of snack chips
• 8 of top 10 snack chips are manufactured by
  Frito-Lay
• U.S. sales of 3.5 billion in 1990

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Results of Studies

• Consumer Research
• Favored three flavors
• Original/Natural
• French onion
• Mild cheddar
• Perceived as a healthier product and an
  everyday snack

• Premarket Test
• 22 million advertising expenditure
• First year sales of 113 million
• Original/Natural and French onion produced the
  lowest cannibalization rate

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SWOT Analysis Strengths

• Established company name
• Capture nearly one-half of retail sales for snack
  chips
• Plenty of capital available
• Test market research ability
• Established distribution strategy

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SWOT Analysis Weaknesses

• Competitive pricing
• High new product failure rate
• Manufacturing capacity is limited

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SWOT Analysis Opportunities

• Develop products for fast-growing snack food
  categories
• Create new products to meet changing consumer
  preferences and needs
• Grow established brands through line extension
• International marketing of products

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SWOT Analysis Threats

• Competitors could be first to market
• Competitors can copy technology and release
  similar product
• Change in consumer preferences
• Risk of losing capital investment

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Porters Five Forces
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Competitive Rivalrywithin Industry

• Competitive advantage
• Industry growth
• Product differences
• Switching costs
• Brand identity
• Exit barriers

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Bargaining Power of Suppliers

• Supplier concentration
• Importance of volume to supplier
• More important customers
• Presence of substitute inputs

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Bargaining Power of Customers

• Bargaining leverage
• Buyer volume
• Brand identity
• Product differentiation
• Price sensitivity

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Threat of New Entrants

• Brand identity
• Access to distribution channels
• Economies of scale
• Capital requirements
• Switching costs
• Proprietary products and learning curve
• Expected retaliation
• Absolute cost advantages

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Threat of Substitutes

• Switching costs
• Buyer inclination to substitute

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Test Market

• Positive response of Consumer Research and PMT
  lead to Test Market
• Minneapolis-St. Paul, Minn. metropolitan area
• 1.98M households identified as snack chip users
• Natural and French Onion flavors (2 ¼, 7, 11 oz)
• Priced similar to Doritos
• 22M A M spending equivalent

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What are the Numbers???(Test Market Analysis)
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Cumulative Trial Repeat Rates
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Volume Calculation
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Selling Price Calculation
Similar calculation yields Average Retail Price
3.8726 /lb
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Projected Sales Gross Profit
Total Volume 31,046,985 lbs
Average Selling Price 2.7004 /lb Projected
Sales 83,839,278 Projected Retail
Sales 120,231,344
Gross Profit 1.30 /lb x 31,046,985 lbs
Gross Profit 40,361,081
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Cannibalization Analysis
Gross Margin Sun Chips 1.30 /lb Gross
Margin Others 1.05 /lb
Cannibalization 30 Cannibalization Volume
30 x 31,046,985 lbs 9,314,096 lbs
Profit Increase (1.30 /lb - 1.05
/lb) x 9,314,096 lbs 2,328,524
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Incremental Profit Analysis
Sun Chips Incremental Volume 70 x 31,046,985
lbs
21,732,890 lbs
Incremental Profit 1.30 /lb x 21,732,890 lbs

28,252,756 Cannibalization
Profit 2,328,524
1st Year Profit 30,581,280 not including
AM spending
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Sustained Sales Profit
Repeater Volume 18,248,051 lbs
Average Price 2.7004 /lb (3.87 /lb
Retail) Sustained Sales 49,277,037
(70,666,692 Retail) Sustained Gross Profit
23,722,467 Sustained Profit Increase with 30
Cannibalization (70 x 18,248,051 lbs x 1.30)
(30 x 18,248,051 lbs x .25)
17,974,330 not including
AM spending
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Estimated 1990 US Retail Sales (Millions) of
Top Selling Snack Chips in Supermarkets
Sun Chips
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Alternatives

• Continue the Test Market to collect more data
• Expand the Test Market
• Eliminate the Sun Chip project
• National introduction of Sun Chips
• Use Test Market strategy
• Increase AM spending
• Add larger package size
• Add additional flavor

Any Combination
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Alternative 1 Continue Test Market and Collect
More Data

• Pros
• Obtain more accurate information
• Lowers risk by performing more research
• Cons
• Opportunity cost
• Lost revenue and market niche
• Risk losing first to market advantage
• Allows competitors time to develop a similar
  product

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Alternative 2 Expand the Test Market

• Pros
• May be more representative of the entire U.S.
  population
• Lowers risk by performing more research
• Could provide key demographic information for
  products (size, flavor)
• Cons
• Risk losing first to market advantage
• Allows competitors to develop products
• Original test market may have been accurate

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Alternative 3 Eliminate the Sun Chip Product

• Pros
• Limit risk and potential losses
• Eliminate projects future expenses
• Funds can be spent elsewhere
• Companys superior image will remain in tact
• Cons
• Risk of losing potential profits
• Risk of losing access to a potentially growing
  and uninhabited segment of the market
• Not pursuing would violate company
  product-marketing strategies

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Alternative 4 National Introduction of Sun Chips

• Pros
• Huge potential profits
• Portray healthier image
• First to market advantage
• Easy to add to distribution strategy
• Gain access to new segment of market
• Cons
• Risk of potential losses
• Potential damage to company image
• Segment of market may not be profitable

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National Rollout Options (cont)

• Increase advertising and marketing expenditures

brand awareness would increase with additional
spending and felt that spending the national
introduction equivalent of 30 million could
stimulate brand trial as well
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National Rollout Options (cont)
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National Rollout Options

• Increase advertising and marketing expenditures
• Pros
• Increase brand awareness and trial rates
• Increase volume
• Larger sustained profits
• Cons
• Reduced 1st year profits
• Trial rates are projected based on PMT data

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National Rollout Options (cont)

• Add larger package size

a fourth, larger package could add about
one-half ounce to the average annual purchase
amount per repeat (and repeater) purchase
occasion
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National Rollout Options (cont)
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National Rollout Options (cont)

• Add larger package size
• Pros
• Increases volume and profits
• Additional purchase options
• Cons
• Stretches production capacity
• Increases inventory
• Increases number of SKUs
• Limits marketing efforts

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National Rollout Options (cont)

• Add new cheddar flavor

flavor extension could increase the repeats
per repeater to an average of 3.5 times per
yearaddition of another flavor could increase
the cannibalization rate to 35
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National Rollout Options (cont)
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National Rollout Options (cont)

• Add new cheddar flavor
• Pros
• More consumer options
• Increase sales and profits
• Increase repeats per repeater
• Cons
• Increases number of SKUs
• Expensive to produce
• Higher cannibalization rates
• May not be popular with consumers
• Large scale production not perfected

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Recommendation

• National Rollout of Sun Chips
• Increase AM Spending to 30M
• Two Flavors
• Natural and French Onion
• Three Package Sizes
• 2 ¼, 7, and 11oz

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Future Considerations

• Additional flavors (mild cheddar)
• Perfect large scale production of new flavors
• Larger package sizes (15 oz)
• Once product has foothold in market
• Consumer survey indicates demand for larger size
• Explore additional markets (International)