Reference no: EM131327601

FRITO-LAY ADAPTS TO THE CHINESE MARKET
In the 1930s, two men in different parts of the United States began businesses that would eventually come to dominate the global snack food market. In 1932, Elmer Doolin, an ice cream salesman, stopped for lunch at a local San Antonio café.He noticed a package of corn chips at the café and purchased it for five cents. This small purchase would come to change his career and his life.The chips Doolin purchased were made from corn dough, used for centuries by Mexicans to bake bread. Impressed with the product, Doolin sold his ice cream business and purchased the corn chip producer's business for $100. The brand, Frito, was created in the kitchen of his mother, along with the early production of the corn chips.

Doolin would bake the chips at night and sell them during the day. Early sales were in the range of $8-10 a day.As business expanded, the company was moved from San Antonio to Dallas. Frito became a major chip producer in the southwestern United States.

Around the same time, an entrepreneur in Tennessee named Herman W. Lay was selling potato chips produced by an Atlanta company. Lay sold the chips from his personal automobile until 1938,when the chip manufacturer fell on hard times. Lay managed to buy the business and changed its name to H.W.Lay and Company. The company's products became popular with consumers for their good taste and convenience, making Lay the dominant producer of snack foods in the southeastern United States. After World War II, the two companies began to cooperate in the area of product distribution.

At this time they were still limited to their respective geographic markets,with Frito in the southwest and Lay in the southeast.In 1961, the two companies merged to form Frito-Lay, Inc., and in 1965 the company was merged again, this time with the Pepsi-Cola Company.

The Pepsi-Cola Company became PepsiCo and consisted of the Pepsi-Cola Company, the Frito-Lay Company, and Tropicana Products.The company now also markets the popular brands Quaker Oats and Gatorade. Although the US market is the largest market in the world for snack foods, because of its saturation Frito-Lay has expanded significantly into international markets.The company tries to capitalize on its economies of scale and global brand image to compete with local brands.The typical entry strategy is to first learn which company is the leading snack company in the foreign market, and then attempt to purchase that company. If that fails, Frito-Lay aggressively competes against that local company.Frito-Lay's international operations add $9 billion to PepsiCo's $25 billion revenue. International markets have in many cases been more profitable for PepsiCo than the domestic market of the United States.

Pepsi entered China in 1981 to sell soft drinks, and since that time has invested more than $1 billion.In 1994 Frito-Lay entered the Chinese market with its popular Cheetos brand snack. Potato chips were not introduced into the Chinese market until 1997,because of the Chinese ban on potato imports.FritoLay had to establish its own farms in order to grow potatoes acceptable to company standards.Early adaptation to local markets required Frito-Lay to make significant changes.

For example,Frito-Lay's Cheetos sold in China do not contain any cheese, because of the propensity of the Chinese to be lactose intolerant. Instead of cheese flavoring, Cheetos are offered with barbecue or seafood flavoring. In addition, the packaging was made smaller so that the price would be more acceptable. Other international adaptations had previously been made in other markets by Frito-Lay, including the popular Thai product, Nori Seaweed Chips. Frito-Lay found that the Chinese market was not a single entity. Regional tastes and preferences had to be considered and products altered accordingly.

Chinese living in Shanghai, for example, prefer sweeter foods, and Chinese living in the northern region prefer a meaty taste. Frito-Lay also has found that having a good understanding of culture helps sell products.The Chinese belief in the Great Unity,or yin and yang,has marketing and product development implications. Yin and yang are the opposing forces in the universe and seek balance. The Chinese also seek balance, including balance in their foods. Fried food is seen as hot and not appropriate in the summer months, so Frito-Lay developed a new product, cool lemon potato chips.This product consists of chips dotted with lime specks and mint and packaged with cool climate images to connote winter months.

Promotion in China has required other adaptations,including advertisements showing the peeling of potatoes to indicate the product's basic ingredient. Promotion in China has successfully related the collectivist tendencies of the Chinese people and the desire of the Chinese to try new products outdoors in a conspicuous fashion. Early adopters in China want others to see their consumption of Western products. As with many Western products, young consumers are the first to try the product, and in the case of Frito-Lay the focus has been on young women. As Jackson Chiu, sales director for Frito-Lay, states: "We market to girls and the boys follow." Frito-Lay has been very creative in its promotion efforts in China; however, one advertisement resulted in a small problem.

Using the picture of Mao Zedong's cook in its promotion resulted in the company being ordered to offer an apology and to pay the cook 10,000 yuan (US$ 1,200) for violating a Chinese law that requires getting permission before using someone's picture. Frito-Lay's entry into the Chinese market has also caused some controversy. Some critics charge that companies like Frito-Lay have caused the Chinese diet to become unhealthy.Many Chinese can remember when food was rationed,long food lines existed, and consumers were offered little choice.Today the Chinese have a large variety of food options, and snack foods are a popular choice.As a result of their dietary changes,the Chinese have become more overweight.

In the past ten years, the percentage of the Chinese population considered overweight has risen from almost none to a little under one-third of the population. A common way of greeting someone is the Chinese equivalent of "Have you eaten yet?" The Chinese are now able to answer "yes" more often to that question,and many are selecting foods that are considered by some to be unhealthy. Concerned with the health effects of its products, not only in China but also in health-conscious markets such as the United States, PepsiCo has begun to change its product offerings.

Based on medical advice, PepsiCo has divided its products into three groups:

(1) "Good for you" foods such as Gatorade and oatmeal;

(2) "Better for you" foods such as Nacho Cheesier Baked Doritos;

(3) "Fun for you" foods such as Pepsi-Cola.

The "Good for you" foods are naturally healthy or engineered to be healthy.The "Better for you" foods contain more wholesome ingredients or have reduced fat and sugar. The fun food isn't considered to be especially healthy. PepsiCo is moving product development towards the "Good for you" and "Better for you" groups.According to nutrition expert Professor Marion Nestle of New York University,"Frito-Lay products are still high in calories, salt, and rapidly absorbed carbohydrates." For now the Chinese do not seem too concerned and Frito-Lay continues to develop this rapidly expanding market.

CASE DISCUSSION

1. Evaluate the approach Frito-Lay used as it entered the Chinese market.Would you consider the approach to be ethnocentric, polycentric, or geocentric? Explain your answer.

2. In your opinion,is the company being socially responsible by selling products that may be considered unhealthy?

3. What lessons can be learned by examining the experiences of Frito-Lay in China?