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On June 3, I spoke with [REDACTED TEXT (b4), (b7D)]
Exempt under b7D
[REDACTED TEXT (b7D)]
Despite the fact that Keebler and Eagle have exited the market, Frito-Lay continues to pay for shelf space. [REDACTED TEXT (b4), (b7D)]
Frito-Lay has a very strong product and a lot of brand awareness. [REDACTED TEXT (b4), (b7D)]
In 1985, the players in the chip market were basically Frito and a number of regionals such as Jay's and Golden Flake, etc. Frito had about 40 percent of the retail space. About that time, Eagle and Keebler entered the chip market, and Borden went on a buying binge to try to go national. Before that time, there had been little shelf buying going on, although some small amounts ($80) may have been paid. Eagle and Keebler went after Frito's space. Frito-Lay aggressively matched their offers. In the end, the space didn't come from Frito, but from the regionals who couldn't offer the same sums of money [REDACTED TEXT (b7D)] stated that while Eagle and Keebler had good products and good shelf space, they poorly positioned their products. For example. Eagle was using Tony Randall and Jack Klugman to sell its youth-oriented chips, and Keebler's ads appealed more to women than to men, who are the predominant chip buyers. On the other hand, Borden's main problem was the quality of their chips. When Eagle exited, [REDACTED TEXT (b7D)] but Frito-Lay bid on Eagle's space in the [REDACTED TEXT (b7D)] Frito ended up getting most of the new shelf space that was available. [REDACTED TEXT (b7D)] Potato chips are more costly to make than tortilla chips, with smaller margins, [REDACTED TEXT (b7D)]
Frito-Lay sometimes offers two bags for [REDACTED TEXT (b7D)] that normally were [REDACTED TEXT (b7D)] a piece. [REDACTED TEXT (b7D)] but they thought Frito may not have been going below cost because of the additional volume that Frito gets from having their products placed on endcaps and other satellite displays. An endcap display plus a discount increases the volume of sales by at least three times what a vendor would receive if the vendor merely placed a sale sign on the product on the gondola, and sometimes create up to 10-20 times more in sales.
[REDACTED TEXT (b7D)] Convenience stores rarely carry tortillas and also prefer to have smaller bags of chips. [REDACTED TEXT (b7D)] At the time when Keebler, Eagle, and Borden were all present in the market, they found that shelf space was continually being bid up. For example, Frito-Lay would offer [REDACTED TEXT (b7D)] for a foot and Keebler would then bid it up, etc., etc. Now, the price is not being bid up, but the retailers still want the dollars and so ask for money for incremental space or to retain space. [REDACTED TEXT (b7D)] said that the overall amount of space in a grocery store devoted to salty snacks is unlikely to change.
Frito-Lay has category managers they place in certain accounts, such as Sam's Club or Safeway. [REDACTED TEXT (b7D)]
Grocery stores like Frito-Lay because they offer high retail prices. The stores have tight margins and so not only do they like Frito because of the higher profits, Frito's various payments increase their margins as well. [REDACTED TEXT (b7D)] claimed that the best outcome for them would be to have slotting allowances go away altogether, which they realized may mean prohibiting grocery stores from receiving shelf payments. [REDACTED TEXT (b7D)] stated that they have stores that they have not entered because the shelving allowances are higher than they can afford to pay. If they already have a position in a store, they have a slightly better chance of retaining that position. [REDACTED TEXT (b7D)] said the results of the shelving practices has been to slow their level of geographic growth. The fees for shelving space are higher on the east coast than the west coast.
Frito also buys up the holiday promotional times from the grocery stores. Even though it would seem to be in the best interest of the store to permit two brands of chips to be on sale, the only reason [REDACTED TEXT (b7D)] can think of to explain a store's unwillingness to offer their product for sale on the same date as Frito is that Frito-Lay has sought exclusivity. Their strategy now is to have their sales offered the week before the holiday. [REDACTED TEXT (b7D)] hasn't seen many instances of gondola exclusivity, just Frito-Lay buying up shelf space. [REDACTED TEXT (b7D)] stated Frito-Lay tries to emphasize to grocery stores the volume that Frito sells, and then argues their shelf space should be commensurate with their sales volume. However, Frito includes in their volume sales presentation sales made from endcaps and satellites, thus making it look as though their volume levels are high enough to justify more space on the gondolas.
Because of the high prices for shelving space in [REDACTED TEXT (b4), (b7D)]
With respect to the issue of whether companies would try to enter the [REDACTED TEXT (b7D)] market from outside that geographic area, [REDACTED TEXT (b7D)] said there is a [REDACTED TEXT (b7D)] mile radius in which they can ship from their plants. Chips are fragile and customers don't like broken chips -- going beyond [REDACTED TEXT (b7D)] miles means increased breakage. Shipping beyond [REDACTED TEXT (b7D)] miles also is cost prohibitive as shipping costs increase; chip bags take up a lot of volume with little weight and [REDACTED TEXT (b7D)] pays by the truckload, not by the price per pound. Frito-lay has between 40 and 50 plants so they can easily cover the country.
[REDACTED TEXT (b7D)] didn't think Pringle's are in the same market as potato chips -- the people who shop for Pringle's are people who are shopping for a non-messy product. People who buy Pringle's don't often cross-over to regular chips and vice versa.
[REDACTED TEXT (b7D)] Frito is very good at segmenting their products to different classes of purchasers, [REDACTED TEXT (b7D)]
Thus far, [REDACTED TEXT (b7D)] hasn't seen any price increases in the [REDACTED TEXT (b7D)] While [REDACTED TEXT (b7D)] stated they would be better off if there were no slotting fees, they conceded that as Frito-Lay already does a large volume of business and is a well-known brand [REDACTED TEXT (b7D)] may not be able to increase their market share significantly even if shelf fees were eliminated.
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