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Frito lay cracker jack case analysis

04/01/2021 Client: saad24vbs Deadline: 10 Days

Individual Case Assignment – Cracker Jack


I) Problem Definition


The problem definition is stated as follows: To decide on whether or not to acquire Cracker Jack


given our current lack of offering a ready-to-eat caramel popcorn to increase the overall


performance of Frito Lay.


The objective of this problem is to decide if Frito Lay should submit a bid to purchase Cracker


Jack. The fact that Frito Lay currently does not offer a ready-to-eat caramel popcorn is the


constraint of this problem. The success measure of this problem is to increase overall


performance of Frito Lay.


II) Strategic Alternatives There are three strategic alternatives concerning Cracker Jack and the possibility of offering a


ready-to-eat caramel popcorn:


a) Do nothing b) Buy Cracker Jack c) Internally develop a new ready-to-eat caramel popcorn brand


Do nothing


The do nothing option is cost effective and resources spent on acquiring Cracker Jack could be


spent elsewhere within the company. Frito-Lay could use the money to purchase Cracker Jack


on a more aggressive marketing campaign for their current line of products. However, not


purchasing Cracker Jack could mean losing market share to competitors like General Mills,


Nabisco, and Procter & Gamble (pg. 267). If Cracker Jack is not purchased, this could mean


potential lost profit to shareholders and the New Ventures division within Frito Lay could be


underutilized.


Pros


• Cost effective


• Spend resources elsewhere within the company


Cons


• Lose market share to competitors


• Potentially lose profit to shareholders


• Missing out on an opportunity to leverage New Ventures division


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Inserted Text

declining sales f RTE category, and old fashioned associations of Cracker Jack,

Buy Cracker Jack


There are several pros for buying Cracker Jack. The first is the purchase of a brand with 97%


brand awareness (pg. 260). Second, Frito Lay would gain market share and potential profits for


shareholders by entering a new market. Lastly, purchasing Cracker Jack fits the New Ventures


mission “to drive significant Frito-Lay growth by seeking and creating new business platform


and products which combine the best of Frito-Lay advantages with high-impact consumer food


solutions” (pg. 255). One of these Frito-Lay advantages is the sales and distribution networks


that Frito-Lay enjoys.


While there are several advantages to buying Cracker Jack, there are also some disadvantages.


First, the cost to purchase would be approximately $61 million. (See table below for


calculations). Frito-Lay could also potentially spend these resources elsewhere within the


company if it forwent purchasing Cracker Jack. Also, two issues that sales and distribution


raised were the high number of SKU’s and high direct-store-delivery costs (pg. 273). Lastly,


Cracker Jack’s main competitor, Crunch-n-munch, may get more aggressively competitive by


cutting prices, offer an improved product, or offer a line extension if it felt threatened by Frito-


Lay’s marketing of Cracker Jack.


Discounted Cash Flow Analysis of Purchasing Cracker Jack


Time period (n) 0 1 2 3 4


Year 1997 1998 1999 2000 2001


Projected Direct Product Contributiona 3.300 9.800 32.100 38.000 58.200


After taxes = Direct Product Contribution * (1-.354b) 2.132 6.331 20.737 24.548 37.597


Present value discount factor (1/(1.15c^n)) 1.000 0.870 0.756 0.658 0.572


After tax cash flow (Present value) 2.132 5.505 15.680 16.141 21.496 60.954


aDirect Product Contribution values for each year taken from Exhibit 7 on page 266 bCorporate income tax rate for PepsiCo, Inc. taken from page 274


Pros


• Buy a brand with strong brand equity (KSF)


• Gain market share


• Potentially gain profit for shareholders


• Fits New Ventures division's mission


• An opportunity to leverage Frito Lay's sales and distribution


Cons


• Expensive ($60.95 million dollars)


• Lose resources elsewhere


• High number of SKU's


• Direct-store-delivery costs are high


• Crunch-n-Munch may get more aggresively competitive


cAverage risk-adjusted discount rate for average risk project taken from page 274


Internally develop a ready-to-eat- caramel popcorn brand


While internally developing a ready-to-eat caramel popcorn brand has the opportunity to gain


market share in the ready-to-eat caramel popcorn market segment, internally developing a brand


is the most expensive at $75 to $100 million dollars, has a low probability of success, and would


take longer than purchasing Cracker Jack (pg. 274-275).


III) Recommendation


It is recommended that Frito-Lay purchase Cracker Jack. Frito-Lay has resources that when


combined with Cracker Jack’s brand could create for high synergies within the company. Frito-


Lay has a strong store-door-delivery sales force, broad distribution coverage, and brand


marketing skills (pg. 255). Their store-door-delivery sales force is the largest in the world and


Frito-Lay is a leading national advertiser (pg. 255). Cracker Jack has a rich, authentic brand


heritage, with 95 percent brand name awareness among heavy users of caramel popcorn (pg.


260). Cracker Jack’s strong brand equity is their driving key success factor. A Frito-Lay study


of Cracker Jack’s brand led one team member to say, “Cracker Jack is a trademark living off


residual heritage with untapped opportunity” (pg. 268). The ready-to-eat caramel popcorn


industry is an under marketed category with Cracker Jack being even less marketed than its chief


rival, Crunch ‘n Munch (pg. 258). Crunch ‘n Munch outspent Cracker Jack $4,437,300 to


$188,000 in 1996 on advertising (pg. 259). Despite this difference in advertising, Cracker Jack’s


dollar sales market share was 26% compared to Crunch ‘n Munch’s 32% in 1996 (pg. 257). If


the Cracker Jack brand was sold with Frito-Lay’s store-door-delivery sales force, distribution


networks, and brand marketing skills, this would create a profitable opportunity for Frito-Lay.


There are some risks associated with Frito-Lay purchasing Cracker Jack. The first risk is that


Cracker Jack’s chief competitor, Crunch ‘n Munch, will get aggressively competitive and may


lower prices or offer a new or improved product. While this may happen, Cracker Jack has the


superior brand and, with the right marketing, would outperform Crunch ‘n Munch. Another risk


is that Frito-Lay wouldn’t get their return for purchasing Cracker Jack. Frito-Lay’s broad


Pros


• Gain market share


Cons


• Most expensive option ($75-$100 million)


• 1 in 10 chance of success


• Longest timeline (2-3 years)


distribution coverage and superior sales ability should be sufficient to generate a positive return.


If for some reason, Frito-Lay is not able to get their return, they will still own a brand with


superior brand recognition and would be able to resell the brand if necessary. Lastly, another


risk is resources will be spent on Cracker Jack and not towards Frito-Lay’s current products.


Frito-Lay’s current products like Doritos, Lay’s, and Ruffles have high brand equity (pg. 254)


and this is important to maintain and grow sales. Cracker Jack would also fit in with Frito-Lay’s


current offerings. To Frito-Lay, purchasing Cracker Jack represented a “step out” versus a


“leap” into sweet snacks (pg. 256).


With Frito-Lay recording $1.63 billion in net sales in 1996 (pg. 254), the purchase price of


Cracker Jack of approximately $61 million is not too high for Frito-Lay to make a serious bid on


Cracker Jack. Frito-Lay would likely generate positive shareholder return with an investment in


Cracker Jack.

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