Potato Chips Brand Analysis in China and the US...Potato Chips Brand Analysis in China and the US Evidence from: Lay’s (PepsiCo) and Pringles (Kellogg’s) GCOM 7661 Consumer Behavior

Potato Chips Brand Analysis in China and the US

Evidence from: Lay’s (PepsiCo) and Pringles (Kellogg’s)

GCOM 7661 Consumer Behavior across the Globe

Group 7- Caroline Wimbleton, Caterina Moroso, Jan Kluger, Katherine Campbell, Sonic Cho,

and Wanxin Cao

Final Group Report

Executive Summary…………………………………………………………………………Page 1

The Potato Chip Market………………………………………………………………….Pages 1-2

Lay’s Brand Overview…………………………………………………………………...Pages 2-5

Competitive Landscape…………………………………………………………………………..Pages 5-6

Methodology……………………………………………………………………………..Pages 6-8

Results……………………………………………………………………………………….Page 8

Discussion………………………………………………………………………………Pages 8-11

Recommendations……………………………………………………………………..Pages 11-12

Conclusion………………………………………………………………………………….Page 12

1

Executive Summary

The objective of this report is to outline the background, methodology, results, and

implications of research from the perspective of a consulting team for Lay’s potato chips. The team

analyzed consumer perceptions of Lay’s, and its competitor Pringles, in both the American and

Chinese markets. The target consumer for five deconstructed interviews and an online survey was

a male or female between the age of 21 and 26 who purchases potato chips as a a snacking option.

Analysis on survey results involved utilizing the Fishbein model, and limitations such as a small

sample size were considered for future research directions. The conclusions from this research

noted a market dominance of Lay’s, as well as a superior brand perception of Lay’s in the Chinese

market that creates an opportunity for increasing prices to maximize profits.

The Potato Chip Market

Global Trends

While snack foods comprise a large percentage of consumable expenditure worldwide

each year, 2017 marked a slow in growth for the market when compared to total consumer

product goods (CPG). Snack foods experienced only a 0.8% growth rate, while total CPG

experienced a 1.2% growth rate worldwide. Despite this, salty snacks were among four

microsegments of snack foods that improved in both dollar and unit sales (Wyatt, 2017).

Specifically, the potato chips segment is one of the fastest growing segments in snacks industry

globally (Statista, 2017). Going forward, the annual growth rate (AGR) forecast for the potato

chip segment is 4.4% from 2018 until 2023 (Mordor Intelligence, 2017). In 2018, the market

share growth for Lays, specifically, is approximately 6.7%, while Pringles’ worldwide amounts

to only about 2.2% (Bakery and Snacks, 2013).

There are currently two key trends influencing the industry: consumer preference for healthier

alternatives and convenience snacking. The first is rooted in the shift to a more health-conscious

population.

- Health Trends- Consumers around the world have recently shifted to healthier mindset.

Due to more available information about how diet affects lifestyle as well as the length and

quality of life, more and more consumers are paying attention to nutrition labels.

- Convenience trends- In line with the health-conscious trend, consumers now. Highly

prioritize individual packaging, which is part of an overall convenience trend.

2

Convenience, however, can sometimes require a tradeoff in that it is less healthy due to

high preservatives involved. Despite this, the trend continues to increase.

The United States Market

The United States snack market is characterized by both sweet and salty products.

American consumers are known to enjoy snacks both on-the-go and as part of their regular grocery

shopping habits. The top seller for snacks in the United States is salty snacks, which reached

revenues of $7.5 billion in 2015 (ift.org). One of the most popular types of salty snacks is potato

chips. There are multiple attributes of potato chips that affect consumer behavior, including brand,

flavor variety, price, and nutrition, to name a few. In the United States, flavor is a major attribute,

with over 50% of the American market preferring plain flavored chips to other flavors.

The Chinese Market

According to the data from Statista, potato chips segment makes up of 60% in all snacks

in western countries while in China, the portion is only around 15%. Thus, there is a large potential

for market share increase in Chinese market. In 2017, revenue in the potato chips segment

amounted to $426 million and the market is expected to grow annually by 4.9% (CAGR 2018-

2021). Volume of consumption reached 44.6 million kg by 2017. In general, the trend of price is

increasing. However, the market is quite concentrated which is dominated by 8 companies

including Lays, Capicao, Oishi, 薯愿, Pringles, I’believe, Xiaowangzi and Qinqin.

Lay’s Brand Overview

Lay’s (also called Frito-Lay), was founded in 1932 by Herman W Lay, and is now a famous

American potato chip brand with a worldwide presence. The company merged with PepsiCo in

1965, and its products are sold in more than 200 countries and districts. With a reputation for good

taste, various localized flavors, and a youth-centric image, Lay’s has established itself as a youth

brand and continues to win over consumers’ brand preferences. In order to manage all markets

efficiently, PepsiCo divides Lay’s operations into 6 geographical divisions, with two main

divisions - Frito-Lay North America and Asia, Middle East & North Africa. With the consideration

of large differences among different markets, Lay’s uses different brand names and develops new

flavors to meet customers’ expectations; this has led to expansion and even dominance in its

markets. In response to the recent trend of customers’ health concern, Lay’s is establishing itself

as a market leader in changing the composition of chips to include more healthy ingredients and

3

baking methods. Lay’s success depends on its ability to understand its distinctive capabilities and

communicate that value proposition to customers, leading to a substantial competitive advantage.

Summary of Global & Marketing Strategy

In general, Lay’s international expansion strategy is the combination of aggregation and

adaptation strategy. On the one hand, it takes advantage of its good brand image and recognition

among customers as well as its economies of scale, using its core representative product lines to

enter the new market. On the other hand, it is customized to meet different demands by developing

a wide range of flavors, different package sizes, different brand names and tailored marketing mix

strategies. Lay’s international strategy is illustrated to be successful as it is dominant in a majority

of markets and reaches synergies.

By analyzing the marketing mix of Lay’s, we find chips are still in the maturity stage of

product life cycle as there is no declining trend in the market. Lay’s uses extensive product strategy

by focusing on several attributes such as quality, features, style and branding. For pricing strategy,

Lay’s mainly uses combination of cost-based, customers’ perceived value - based, and competitive

pricing strategies which helps it maximize the profits and maintain a dominant market position.

As Lay’s insists in being accessible to customers, it distributes in various channels, including

offline (from small-sized retailers like convenient stores or gas stations to large-sized retailers like

hypermarkets) and online. As the brand is well-known in markets, Lay’s doesn’t invest that much

in advertising but it keeps reminding customers of its core values and brand image by sponsoring

special events like basketball games and maintain a strong presence on social media. To conclude,

Lay’s marketing mix strategy is successful as it owns a large market share in relation to competitors

and has a large, loyal customers base.

Exhibit 1: Lay’s International Strategy

LAY’S INTERNATIONAL STRATEGY

Combination of Aggregation and Adaptation Strategy

4

PRODUCT

OFFERING

United States: In its home market Lay’s mainly offers classic flavors with a

few limited editions for the single market

China: In the host market, Lay’s is expanding its product line to appeal to local

consumers, whilst maintaining its core international flavors.

Limited flavors: cucumber, raised pork, tomato seafood, Pepsi & chicken

(Shangaiist, 2013)

COMPETITION The international markets (especially in developing countries) are characterized

by both global and local competitors.

United States: PepsiCo owns most top brands in the market. The main

competitor remains Pringles, owned by Kellogg’s.

China: Lay’s is mostly competing with local brands. Pringles is the largest

foreign competitor, but it owns significantly less market share.

(Bakery and Snacks, 2017)

PRICING Prices and competitive conditions are usually uniform across western countries,

however there are still significant differences between United States and China,

as Lay’s charges the highest price worldwide in the latter (41% more than in its

home country).

Lay’s Classic (300g) è Prices adjusted to PPP

Global Average Price $3.20

US Average Price $4.28

China Average Price $6.05 (CNY 38.00)

(Humuch, 2018)

5

POTENTIAL

SYNERGIES

PepsiCo achieves competitive advantage through economies of scale and scope

for core departments, however marketing strategies are still adapted to the host

markets.

Furthermore, PepsiCo developed production and distribution facilities for the

Chinese market specifically, due to its growth potential.

Competitive Landscape

The potato chip industry is characterized by both multinationals and local firms.

Competition is based on both price and product differentiation, in which consumers demand for

attribute variety at a low price. Despite a significant number of global players, the competitive

landscape in the United States and China differs greatly.

Potato chips segment makes up of 60% in all snacks in western countries while in China

the portion is only around 15% (Bakery and Snacks, 2017). In the United States, Lay’s is the key

player in the market with around 30% of market shares and its parent company PepsiCo owns the

majority of the top-10 brands, though the industry is still fragmented (Bakery and Snacks, 2017).

In contrast, in China, the market is quite concentrated and is dominated by 8 companies comprised

of 2 foreign brands and 6 local brands. Similarly, Lay’s owns significant market share. Considering

both American and Chinese markets, Lay’s key competitor is Pringles.

Key Competitor: Pringles

Pringles Brand Overview. Pringles was founded in 1967 by P&G to meet customers’

complaints of broken, stale and greasy chips and the “injustice” of a half-empty bag. It introduced

the first stackable chips and tube packaging that grew rapidly in popularity and became dominant

in the market. In order to keep competitive, Pringles invested a lot to develop new flavors.

However, in 1975, regulations introduced by United States Food and Drug Administration banned

Pringles from using the word “potato chip” since Pringles were made by hydrated potatoes; to

combat this, the company creatively started using the word “potato crisp”. Then in 2012, P&G

sold Pringles to Kellogg’s which is another American multinational food manufacturing giant.

Now, Pringles operates in more than 140 countries and districts and has become the second largest

chips brand in the world (behind Lay’s).

6

Global / Marketing Strategy. As for its marketing strategy, Pringles relies on packaging

innovation and design as the core element of promotion. It has launched several popular

campaigns to repeat the importance of its unique tube packaging to consumers. As a result, its

value proposition has created loyalty amongst consumers. All of its marketing campaigns match

its value proposition of unique design. For example, its slogan “once you pop up, you cannot

stop” matches the values it wants to deliver to customers. For its pricing strategy, it implements a

higher pricing strategy. Compared to Lay’s, it charges 48% more expensive globally and 4% in

US while 40% in China (Pringles, 2018). To enter the global market, Pringles also adopts an

adaptation strategy similar to Lay’s, including the customization of flavors to suit local tastes,

using local brand names, and creating different slogans for different markets.

Exhibit 2: Pringles Pricing Strategy

PRINGLES INTERNATIONAL PRICING

Pringles Original (165g) è Prices adjusted to

PPP

Global Average Price $2.61

US Average Price $2.46

China Average Price $4.67 (CNY 29.00) +89%

Comparison to Lay’s è 300g

Global Average Price $4.75

US Average Price $4.47

China Average Price $8.49

Source: Global Brand Prices, 2016

Methodology

This study focused on two specific customer segments, determined by geographic location

and age. Due to the notable differences in culture and consumer preferences, the Chinese and

American markets were chosen as geographical segments. The second dimension, age, was chosen

based on the fact that consumer habits vary with age subsequently income levels. Given the age

range of the team, the team analyzed results from 20-26-year olds.

In order to gain insights about what to include in our survey, we started by conducting five

in-depth interviews with chip consumers to better understand what is important to consumers when

7

purchasing chips. Interviews were conducted with 3 American consumers and 2 Chinese

consumers.

Exhibit 3: Respondents’ Demographics

Respondent Gender Age Home Country

Respondent 1 Male 22 China

Respondent 2 Female 23 China

Respondent 3 Female 21 United States

Respondent 4 Female 24 United States

Respondent 5 Male 23 United States

Respondents were all asked following set of questions:

- How often do you buy chips?

- What aspects do you consider to be most important when buying chips?

- Do you always buy the same brand of chips or does it vary?

- How price sensitive are you when buying chips?

- Which is the most important factor for you when buying chips?

- Are you a health-conscious person?

- Do health aspects influence your chip purchasing decisions?

*No specific brand was mentioned in the interview, as this methodology served as a means to

understand the general consumer purchasing behavior in the industry*

Drawing from the five in-depth interviews, the key aspects to consider in potato-chips

purchasing attitudes are: price, taste, brand, package design, package size, and nutritional

information. An online survey, consisting of 15 questions was constructed on the online platform

Qualtrics. The questions focused on the evaluation of the selected attributes following the Fishbein

Model. The questions targeting the product attribute importance employed a scale from 1 (not at

all important) to 7 (extremely important). The evaluation of the attributes was measured on a 7-

8

point scale from negative 3 (undesirable) to positive 3 (desirable). Finally, participants were asked

to evaluate both brands (Lay’s and Pringles) in terms of each attribute. The survey concluded with

demographic questions about age, income level, marital status, and geographic location. The

survey was distributed using a shareable link to consumers in both the United States and China.

Data from respondents outside of the previously dictated geographic locations and age ranges were

taken out of the analyzed set. In total, the team collected 65 surveys - 32 from Chinese consumers

and 33 from American consumers. Survey results that did not fit our aforementioned criteria (age

and geographic location) were thrown out. Raw data from the survey can be found in the attached

Excel sheet.

Results

Exhibit 4: Fishbein Model Calculations

Discussion

The team analyzed the results of the survey using the Fishbein Model. This model measures

the attitude of a consumer toward a specific action using both their evaluation of an attribute and

their belief about whether or not a specific product possesses that attribute. In this case, the team

is looking at consumers’ evaluation of chip attributes, specifically: taste, price, brand recognition,

package size, and flavor variety; additionally, the survey allowed the team to look at consumers’

belief about whether or not two brands, Pringles and Lays, possess these attributes.

Attribute Importance

While the Fishbein Model does not consider attribute importance, which is one of its main

drawbacks, the team still asked respondents about attribute importance for each attribute being

studied. This gave us deeper insight into consumers’ opinions. The attributes that respondents

indicated were the most important when purchasing chips were choice of flavor and taste. This

9

was the case for both the Chinese and American markets, but the American respondents felt more

strongly about the importance of choice of flavor and taste than the Chinese respondents.

The attributes that respondents indicated were the least important when purchasing chips

were sodium level and protein level for both Chinese and American respondents. Perhaps this is

because it is widely known that chips are inherently both high in sodium and low in protein, which

removes this from consideration when purchasing chips.

Please see below for a comparative ranking of attributes from most important to least

important in both the Chinese and American markets:

China United States

Taste Taste

Choice of Flavor Choice of Flavor

Recognition of Brand Price

Price Recognition of Brand

Fat Level Package Size

Package Size Availability of Nutrition Information

Package Design Package Design

Carbohydrate Level Fat Level

Availability of Nutrition Information Availability of Ingredient Information

Availability of Ingredient Information Carbohydrate Level

Sodium Level Sodium Level

Protein Level Protein Level

10

Evaluation of attributes

On average, all respondents in both markets ranked all attributes as desirable. However,

some attributes were ranked as more desirable than others. For example, “good taste” was seen

as extremely desirable with the average of all respondents being 2.75/3. “Large package size”

was also seen as desirable for all respondents, but only at 0.77/3. This further emphasizes the

importance of certain characteristics, such as price and taste, when consumers are purchasing

chips.

Evaluation of brands

Overall, across both markets, Lay’s was the preferred brand of respondents. The gap

between the two brands was higher in China than the United States, but the United States

respondents had higher scores for both Pringles and Lay’s than Chinese respondents. This was

determined by looking at the Fishbein model results, which can be seen previously in Exhibit 4.

One possible reason for the different evaluations of both brands on price could go hand in hand

with the different package sizes. As Lay’s offers larger sizes than Pringles, the price per package

might be higher for Lay’s than for Pringles while the price per weight is lower. If this turns out to

be the major driver of these attitudes in further research, Lay’s could focus on mentioning the price

/ 100 grams on the bottom of advertisings or offer a broader variety of package sizes.

In China Lay’s potato chips are also cheaper than Pringles chips, while Lay’s is perceived a higher-

quality product. Combined with the fact that Chinese consumers consider the price for potato chips

to be much less important than consumers in the US, this offers the potential for Lay’s to higher

prices without affecting sales numbers significantly to increase its margin and equalize the

consumer attitudes towards the overall Lay’s products with the product prices.

Recommendations

Since chips are a low-cost, widely available product, it is likely that the majority of

consumers use low effort when making decisions about which chips to buy. This means that their

attitudes can be easily changed based on marketing strategies, mood, and recommendations from

friends/family. It is important to keep this in mind when developing marketing strategies for the

brands.

11

Based on the survey results and analysis, following are some recommendations for Lay’s

to keep current leading position as No.1 in the marketplace and pursue more market shares to make

the expansion.

1) Reinforce the market position by continuing investing in R&D. Though Lay’s is in

traditional industry, the key to success is to keep innovative in brand’s competitive

advantage like Lay’ s various flavors. It is very important to tailor flavors to suit local

markets’ tastes but also Lay’s has to balance the diversified flavors with the healthy trend

in the market.

2) Adopt the aggressive pricing strategy to maximize the profits. Currently, compared to

its competitor Pringles, its price is relatively lower and the gap between the real price and

customers’ perceived price is quite large. As well as since customers are not sensitive to

prices, it is possible or feasible for Lay’s to price higher but needs to base on accurate

calculation and larger questionnaire size.

3) Enhance the brand image of health brand to meet market’s trend. As in recent years,

customers start to pay more attention to a healthy lifestyle, which creates obstacles for the

expansion of the chip markets. Lay’s needs to advertise more about its improved

ingredients and nutrition to deliver its value of offering safe and healthy foods.

4) Implement expansion strategy to gain more market shares. Though Lay’s is dominant

giant in chips industry, there are still space for market growing. On the one hand, exploring

new customer segments, such as in China where only 15% of the snacks market is potato

chips. Lay’s needs to find a way to educate consumers to take a trial on its chips. On the

other hand, acquiring local brands to make a strong brans portfolio to increase market

control would be beneficial.

Combining its own capabilities and competitive advantages with market new opportunities

and keeping innovation, Lay’s will be dominant in the market for a long time. As brought up in

the presentation Q&A, Lay’s might also consider expanding its flavor innovation competitors

beyond the US into other markets, such as China.

Conclusion

Research Limitations

12

While this research yielded interesting results, it is important to note the limitations of the

study. First, the questions for the distributed survey were based on interviews with only 5

respondents, which were chosen based on availability and relation to the team. To improve the

generalizability and reliability of this study, the number of interview respondents should be

increased and should be randomized. Furthermore, the survey only yielded results from 32-33

respondents for each segment. While this is technically enough respondents to yield statistically

significant results, the validity of the results could be enhanced by more respondents. Finally, due

to the age segmentation, results cannot be extrapolated for the entire Chinese or American

consumer base. Other considerations are the fact that respondents could have brand loyalty to a

chip brand other than Lay’s or Pringles, which could potentially make them less familiar with these

two brands.

Finally, as was briefly discussed before, the Fishbein Model does not take into

consideration how important respondents find each attribute in making purchasing decisions. Had

the TORA model been used instead, it would have likely yielded more accurate results. This is

because the TORA model takes normative values into account and would be a valuable tool if the

study was to continue. The team did, however, analyze attribute importance of respondents to gain

a more complete picture of consumers’ preferences in the chip market.

Implications for Future Research

Future research should aim to broaden the results of the study by looking at more consumer

segments and brands. Expanding the research to include more age ranges would result in a better

understand of consumer chip preferences for China and America as a whole. Concerning the

Chinese market in particular, the analysis of local competitors would provide more significant

results, as Pringles does not own a considerable market share to influence the market.

13

REFERENCE LIST

Bakery and Snacks (2013) https://www.bakeryandsnacks.com/Article/2013/06/17/Kellogg-

Pringles-expansion-in-Europe

Bakery and Snacks (2017) https://www.bakeryandsnacks.com/Article/2017/07/13/Top-10-US-

snack-brands-Sales-soar-for-Frito-Lay-s-Ruffles-brand

Global Brand Prices (2016) http://www.globalbrandprices.com/China/Pringles/

Humuch (2018) http://www.humuch.com/prices/Large-Bag-of-

PotatoChipsLays/______/297#.WpJMu2aQ0Wo

Lay’s. (2018). https://www.fritolay.com/snacks/product-page/lays

Mordor Intelligence (2017) https://www.mordorintelligence.com/industry-reports/potato-chips-

market

P&G News (2012) http://news.pg.com/blog/heritage/pringles-–-bidding-farewell-pg-original

Pringles. (2018). https://www.pringles.com/uk/home.html

Shangaiist (2013)

http://shanghaiist.com/2013/04/26/10_strangest_chip_flavors_in_shangh.php#photo-8

Statista (2017) https://www.statista.com/statistics/262117/sales-share-of-the-leading-10-potato-

chip-brands-in-the-us/

14

http://www.ift.org/food-technology/daily-news/2016/march/08/potato-chips-drive-22-billion-us-

salty-snacks-market.aspx

https://www.mordorintelligence.com/industry-reports/potato-chips-market

Wyatt, S.L. (2017). 2017 State of the snack food industry. Information Resources, Inc.