Exploring Channel Management at Pepsico Frito Lay from a scholarly view.

1. PepsiCo – Frito Lay
Exploring Channel Marketing & Channel Conflict Management
Prepared by N. Randhawa PepsiCo (Frito-Lay): Business Marketing

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

3. 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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MKTG 6250 – Prof. Milne – N. Randhawa
• 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

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

5. 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
Slide 5
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

6. PepsiCo Brands & Channels
Pepsi
Slide 6
MKTG 6250 – Prof. Milne – N. Randhawa
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

7. 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
Slide 7
MKTG 6250 – Prof. Milne – N. Randhawa
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

8. 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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MKTG 6250 – Prof. Milne – N. Randhawa
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

9. 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
Slide 9
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing
• 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

10. Channel Selection at the Retail Level is Important
Consider 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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MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing
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

11. Managing the Channel Offering
Core 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 brand
Slide 11
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing
Capability-
building
programs
Core elements
Incentive
programs

12. Managing the Channel Offering
Capability-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)
Slide 12
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing
Capability-
building
programs
Core elements
Incentive
programs

13. Managing the Channel Offering
Incentive 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.
Slide 13
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing
Capability-
building
programs
Core elements
Incentive
programs

14. 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 copy
2. Premium price
3. Large share of market
4. Perceived higher quality
• However, retail intermediaries are strengthening their reseller equity
by offering private label brands where customers have more choice
Slide 14
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

15. BUT… Channel Conflict Arises When Retailers
(Grocery Chains) Compete with Private Label
Slide 15
MKTG 6250 – Prof. Milne – N. Randhawa
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

16. 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)
Slide 16
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

17. 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
Slide 17
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

18. 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
Slide 18
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing
• 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

19. 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!
Slide 19
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

20. 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
Slide 20
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

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

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

23. Appendix 1: Snack Foods Industry PEST
Analysis
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MKTG 6250 – Prof. Milne – N. Randhawa
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

24. Appendix 2: Frito-Lay SWOT Analysis
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MKTG 6250 – Prof. Milne – N. Randhawa
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

25. 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
Slide 25
MKTG 6250 – Prof. Milne – N. Randhawa PepsiCo (Frito-Lay): Business Marketing

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