Frito hopes gourmet chip will fatten profits

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Frito-Lay is angling for an invitation to wine and cheese soirees this spring with the launch of a new Lay's brand, Bistro Gourmet.

The entry, expected to be supported with $25 million in marketing beginning in May, is the first major foray the $2 billion snack giant has made into the premium chip arena. The segment until now has been dominated by small national players such as Lance's Cape Cod potato chips and a host of regional players, most of which have garnered annual sales gains of more than 20%.


The Bistro Gourmet line is a thick, robust-flavored chip that comes in four varieties including roasted garlic & herb and applewood & smoked cheddar. Reflecting the chip's premium positioning, it will carry the Lay's name only in tiny type on the packaging.

TV and print advertising from BBDO Worldwide, New York, as well as point-of-purchase materials, will further reflect the upscale nature of the brand.

Such a positioning appeals to Frito, which for years has sought alternatives to price hikes to enhance profit margins on potato chips. Current margins -- despite ongoing weight changes that lowered 16-ounce bags to 12.25 ounces for the same price during the last four years -- still fall far short of those for corn-based chips, said Skip Carpenter, analyst at Credit Suisse First Boston.

"Frito is looking for any way to improve their margin structure and profitability, and gourmet chips will of course demand a higher price point," he said.

Such higher-price, thick-cut premium potato chips, often referred to as kettle chips, have become a growing niche category as consumers "are looking for something different and crunchier," said Bernard Pacyniak, editor of Stagnito Communications' Snack Food & Wholesale Bakery magazine.

Cape Cod leads the segment with sales up 22% to $35 million in outlets outside convenience stores for the 52 weeks ended Sept. 10, according to Information Resources Inc. Regional offerings include Agrilink Foods' brand in the Northwest, Tim's Cascade Style potato chips; and Krunchers! kettle cooked all natural potato chips, a brand licensed to Jay's potato chips in the Chicago area and Guy's potato chips around Kansas City.


Frito's higher-price, fat-free Wow! entry, while also was intended as a more profitable niche, has lost momentum along with the downfall of the fat-free trend, dropping more than 30% in dollar sales for each of the Lay's and Ruffles varieties.

Despite the disappointment of Wow!, however, "Frito-Lay has been on fire with strong innovation, favorable volume growth and production efficiencies all serving to offer healthy gains across the board," Mr. Carpenter said. And Frito's position is likely to be strengthened, he said, as other players in snack foods -- including Nabisco, consumed by Kraft Foods; and Keebler Foods, gobbled up by Kellogg Co. -- are distracted with mergers.

Frito also will continue to flex its muscle with innovation in 2001. In addition to Bistro Gourmet and a continued push on the successful Flavor Rush Ruffles brand introduced earlier this year, Frito plans to extend its Chee-Tos line with two entries. In January, Frito will launch a new shape for the popular cheese snack, Chee-Tos Whirls, and in March will follow with Mystery Chee-Tos, a variety that still features the traditional orange color but turns consumers' mouths any variety of colors when eaten.

Spending on measured media for Frito brands totaled $91 million in 1999, Competitive Media Reporting figures show.

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