Frito lay cracker jack case analysis

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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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.