Chipping Away At Frito LayStephanie Anderson Forest
Over the past decade, Roger A. Enrico has been on the front lines of the cola wars. The charismatic Pepsi-Cola chief, with advertising help from the likes of Michael Jackson and Madonna, narrowed the market-share gap between Pepsi and industry leader Coca-Cola.
Nowadays, Enrico finds himself on the other side of the fence. After seven months as chairman of Frito-Lay Inc., PepsiCo Inc.'s most profitable unit, he is becoming quite familiar with feeling hungry competitors on his heels. With more than 40% of the $12.6 billion U. S. market for salty snacks, Frito is in no danger of toppling from the No. 1 spot. But under pressure from a growing roster of national players and more value-conscious consumers, Enrico is overhauling the $3.5 billion company. Vows Enrico: "We're going to make a major change in the way we manage this company."
DISCOUNT FRENZY. Enrico, whose first PepsiCo job was as associate product manager at Frito-Lay in 1971, is already starting. He has slashed prices to come within striking distance of discounting competitors, primarily Anheuser-Busch Cos., whose Eagle Snacks Inc. unit is the country's fastest-growing snack-food maker. So far, analysts say, Eagle's gains haven't come at Frito's expense. But "Eagle is a concern," says Enrico. "Not for what they are now but for what they have the potential to become." The battle has taken its toll on Frito's bottom line (chart). First-quarter operating profits of $133 million were down slightly from a year earlier on sales of $814.6 million, a gain of 11%.
The discounting frenzy isn't likely to let up soon. Despite its premium image, Frito can no longer enjoy the luxury of premium pricing. For instance, before the price wars, a bag of Lay's potato chips could cost as much as 15% to 20% more than the competition's. "Consumers are more quality- and value-conscious than ever before," says Enrico. He now has to give shoppers more for their money. And he'll spend as much this year on quality improvement--such as upgrading raw materials and cutting down on the number of broken chips in a bag of Ruffles--as Frito did in the last seven years combined.
He'll also exploit his company's dominance of the market. The cornerstone of this strategy: new products, new sales outlets, new machines. He'll sell offerings such as multigrain Sunchips through broader distribution channels, including the fast-growing warehouse clubs, and he'll make the chips in more efficient factories.
All those changes require shaking up Frito's highly stratified bureaucracy. For help, Enrico has called in consultants McKinsey & Co. to review operations at Frito's Plano (Tex.) headquarters and four field offices. The study will focus only on Frito's 3,000 management, administrative, and professional positions. Analysts say layoffs, possibly as many as 400 to 600, and a write-down are likely after the study ends in September. Enrico isn't offering any estimates on the review's results, but he says they're "not going to be insignificant." He spearheaded a similar streamlining at Pepsi, writing off a total of $26.8 million for decentralization of domestic and international operations. "He's prone to shake things up a bit," says Joseph J. Doyle, an analyst with Smith Barney, Harris Upham & Co. in New York.
ROOM TO IMPROVE. For Frito, grabbing market-share gains won't be a snap. Aggressive competitors such as Eagle Snacks are coming on strong. "We've been picking up a lot of shelf space," says Eagle Snacks President Kevin F. Bowler. And Keebler Co.'s new grain-based Pizzaria chips are competing head-to-head with Frito's Sunchips, which were a hit in test markets.
Getting significant efficiency gains out of factories and the distribution system will be quite a feat for what's already a tightly run operation. Frito's 40 plants produce 10,000 packages of snacks per minute. And the company's 10,000-strong sales force uses handheld computers to pinpoint stores where sales are stronger or weaker than expected.
The new boss insists there's room for improvement, though. Enrico predicts he can save $75 million annually if he makes bigger deliveries to just a few high-volume accounts. He also figures he stands to gain by relying on fewer suppliers and working more closely with those that are left.
As the new strategy kicks in at Frito, its chief says that the company "won't be as predictable as it was before." Considering Enrico's handiwork at Pepsi-Cola, that's probably a safe prediction.