Cashing in the chips

by Arjun Mohan who juggles 2 laptops, 3 jobs, 4 businesses and 50 credits in the second year of PGP at IIM Kozhikode without breaking anything, not even a sweat.
PepsiCo, through its Lays brand, created a market for potato chips in India in the nineties. The brand which is now a household name is extremely popular among the young Indians. But lately, Lays has been facing a lot of heat in the market it created.
It all started with ITC pinging the market with Bingo followed by similar products by Parle, Haldiram and Balaji. These players used the supply chain and retail network Lays painstakingly build over years. They bought potatoes from the same contract farmers and sold their products in the same shops nudging Lays in the ribs. The last 2 years have seen the competition intensify with local players such as Prakash snacks (Yellow Diamond) entering market and Parle relaunching its product (under Parle’s brand) with a 20% free offer. With so many players in the market, the competition on price points intensified and customer loyalty enjoyed by the segment eroded. In the 3 year war period, market share of Lays eroded from 66% to 58%, with the major share erosion in the states of Maharashtra and Gujarat where Balaji snacks, Prakash snacks and Parle Agro had a strong product portfolio and distribution network.
2011 began with the AC Nielsen report above which pointed at PepsiCo’s losing grip on the chips market. The strategy adopted by PepsiCo India to counter the insurgence of its competitors is, to me, nothing less than legendary and in all probability will go in as a Harvard case study.
The company realized that in India there exists a market for differentiated varieties of chips. So PepsiCo started exactly the way Kotler suggested, by segmenting the chips market. They positioned their flagship product Lays in the higher segment and made numerous changes to the product. The quantity was increased to 32 g from 28 g and price increased to Rs. 15 from Rs. 10. The package was also redesigned by making it thinner and taller than the standard packaging adopted by the industry. This allowed Pepsi to differentiate their product from the Parle, Diamond and Balaji. To further establish the “difference”, they erected the retail stores with special shelves exclusively for Lays chips and paid the retail stores to give exclusive racks for Lays. The new retail planogram just had one motive – “Never keep Lays beside cheap competitors”. No wonder then that the second largest marketing expenditure incurred by Pepsico after mass media advertisement is in retail promotions.
For the cost conscious segment, Pepsi launched a new product – Lehar potato chips. Lehar copied its competitors in packaging and pricing and was positioned side by side with Balaji, Diamond and Haldirams. While the premium product Lays was always backed heavily by advertisements and promotions, Lehar received absolutely zero marketing allowing PepsiCo to compete heavily on price. With this master stroke of copying the copy cats, PepsiCo is turning the tables around and eating into the market share its competitors chipped away from it.
Lehar, the JV partner Pepsi used to enter India is a brand Pepsi uses for most of its products for the ‘aam aadmi’ such as its soda and now its chips. Pepsi also entered the namkeen segment with Lehar creating a strong competitor for Haldirams and Balaji. One cannot really tell if Pepsi is interested in capturing this segment which is concentrated in a few central Indian states or its strategy is just to prevent Balaji and Haldirams from growing strong (Both Balaji snacks and Haldirams made their money selling namkeen).
When I saw both Lehar and Lays in a shop in Mumbai, the first thing that came to my mind was the possibility of cannibalization. But  PepsiCo has launched Lehar potato chips only in the markets where it is facing competition from cheap copycats. In all other markets, they have launched Lehar namkeen alone. Recent market studies shows that this strategy is immensely successful with both Lays and Lehar showing increase in market share and sales. Will this strategy be successful in long term before competition catches up is something we will have to wait and see.

 

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