Frito-Lay with Chinese Characters

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 one hundred dollars. 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 due to 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, due to 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, due to the Chinese ban on potato imports. Frito-Lay 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 due to the propensity of the Chinese to be lactose intolerant. Instead of
cheese flavoring, Cheetos is 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, have 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 limon 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
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 (1,200USD) 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 in Chinese is the English
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.
Recently the company opened its sixth manufacturing plant in China and plans to expand its brand and
product offerings into Central and Western China, ever mindful of differing regional tastes and
preferences. While Frito-Lay has been successful in China, its parent company, PepsiCo still only
accounts for

3.5 percent of the savory food market in China. However, Frito-Lay is

planning to introduce newly developed flavored chips from abroad into the US market including
Szechuan Chicken to increase the variety of domestic offerings.

CASE DISCUSSION POINTS:

1 Evaluate the approach Frito-Lay used as it entered the Chinese market.

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

3 Are there any things MNCs can learn from their experiences that can be used in the domestic
market? Explain.