At Frito Lay Canada, innovation is as crucial an ingredient as salt. In fact, Marc Guay, president of the Mississauga, Ont.-based potato chips giant, claims it’s at the ‘core of what we do.’ And, when you look at the lineup of new and improved products the CPG firm has cooked up over the last couple of years – like baked Lays, multigrain Tostitos and a slew of new Doritos flavours – it’s hard to argue otherwise.

‘Innovation is the lifeblood of our business,’ says Guay. ‘I can think of some years where innovation accounted for more than 100% of our growth. So if not for innovation, the business would be flat.’

And it is anything but.

Frito Lay Canada is part of Frito-Lay North America, and total North American sales are over $10 billion. Independently, Frito Lay Canada is the market leader in potato chips, tortilla chips and assorted salted snacks, employing approximately 5,000 people in manufacturing, sales and marketing roles, with six manufacturing facilities and many distribution centers from Victoria, B.C. to St John’s, Nfld.

The company has had a presence in Canada since the ’60s. A division of PepsiCo, Frito Lay merged with Hostess Food Products, which was then a part of General Foods, to create Hostess-Frito Lay in the late ’80s. In 1992, PepsiCo bought GF’s share of the business and in 2002 the company was re-branded as Frito Lay Canada.

Guay, a 20-year company veteran who once was VP of sales and marketing, says that since the mid ’90s, Frito Lay Canada has consistently exceeded key financial targets, and substantially grown market share. He’s also proud of exporting ‘Canadian expertise’ around the world. ‘Several Canadian products, advertising or supply-chain related initiatives have been picked up by other Frito Lay countries in the last few years,’ explains Guay. ‘Also, many of our executives (up to 20 in the last couple of years), have taken on bigger roles in the U.S. and Europe. Included in this group were some of our most talented marketing executives.’

And top PepsiCo brass have formally acknowledged that Canada’s Frito Lay op is leading the global pack on many fronts. In 2002 and 2005, Frito Lay Canada won the Don M. Kendall Co-Founders Award, which rewards the ‘crème de la crème’ in all of PepsiCo, for ‘businesses that have delivered superior and consistent performance over a rolling three-year period.’ And it did so in the top-tier, large, developed countries category, up against the likes of the U.S, U.K, Australia, Mexico and Brazil. The jury, comprised of the most senior PepsiCo International execs, judges countries on their innovation, consumer focus, customer collaboration and people development programs, and Frito Lay Canada has been a finalist for a record eight consecutive years.

Seems Canada is quite the breeding ground for good ideas.

Guay explains that he and his staff approach innovation in two ways. The first he calls platform innovation, which essentially involves creating a new category. Guay points to the debut of baked Lays as an example. The company’s other focus is product innovation, which could include new flavours, shapes, sizes and formats.

But, he notes, they aren’t churning out new ideas haphazardly. ‘Our challenge is not to come up with ideas. It’s to work our way down to a number that we can execute. We’re not a company that either likes or can afford to throw ideas out there, and hope that 10 will stick. So after we’ve done our research and have landed on the top 10 or 20, then we build our plans to make sure those ideas are incremental to our base and are sustainable.’

Guay says this policy pays off for their retail customers too. ‘We see products launched in the market that are supported in year one, and then the organization moves on to the next wave of ideas. Quite frankly, Canadian retailers don’t like that – it’s not very productive.’

Guay says sustainability is something they’ve really held themselves to over the last few years. ‘Innovation for the sake of innovation, I don’t think is sustainable. If you’re a traditional CPG company, you may have four or five half-a-million-square-foot warehouses across the country and you have unlimited spacing. Here, with our portfolio, we have a couple of thousand trucks out there that can maybe withstand 120 to 145 cases, so we have to be very selective.’

The approach has contributed to a pretty vast remit for the brand managers. ‘That’s why our marketers manage their portfolio,’ says Guay, ‘so we don’t have someone in charge of innovation who works in isolation. The person who works on building the core, or advertising and promos is very much a general manager of their brand.

‘I don’t know if it was always a deliberate strategy for us to focus on sustainability and incrementality, but certainly the last couple of years, they’re two metrics that we measure our success against.’

And the philosophy is paying off – Frito Lay was the third-fastest-growing food company in Canada last year. The last few years have been tough for the category, yet Guay has managed to consistently grow the business through the anti-carb craze and the obesity focus – such as an active lobby against childhood obesity targeting snacks in schools, as well as advertising to kids. And despite ongoing escalation of health-related market challenges, he envisions infinite growth ahead, as time-pressed consumers grab snacks more often.

Thinking even beyond the snack attack market, Frito Lay plans to convince Canadians to reach for chips during meals too. ‘Tostitos as a meal foundation are a great idea,’ Guay says. ‘My wife and I will throw Tostitos in the bottom of a pan, toss in chicken, jalapenos, onions and chicken broth, sprinkle cheese on top and throw it in the oven and you have a delicious, affordable meal that took you 15 minutes to cook.’

To disseminate how their brands can be used as a foundation for a quick meal, last year the company introduced an online recipe program; it plans to further press the idea in 2007 through marketing and advertising, including efforts in-store to reach consumers at the point of purchase.

Sound crazy? Not when you consider that in the U.S., potato chips are part of 25% of all lunches. ‘It’s part of the culture,’ says Guay, who adds that his crew has been working hard with QSRs over the last couple of years to add chips to lunch menu combinations. ‘It’s quick, easy and affordable. What more can you ask for in a side? You’ll see a pretty big campaign and push against that occasion [this year].’

What else is Frito Lay dipping its hand into? Strategy sat down with Guay at the company’s headquarters to find out.

What are the biggest trends and challenges affecting your business today?

An aging demographic, a diverse ethnic mosaic and more time-starved consumers are big trends. Older demos are more careful about what they eat. They’re concerned about their health, they want to live longer and they tend to be more educated as a result.

[At the same time], there are more women in the workforce with less time to prepare meals and do grocery shopping. Consumers are looking for solutions more than ingredients.

With ethnic diversity, it’s more about making sure that our products and our messages are reaching new Canadians.

How have you responded to those trends?

With health and wellness, it’s a two-pronged approach. Ninety-five percent of our portfolio is in the indulgent space, so we’ve tried to improve the ingredients to deliver a healthier proposition. So, for example, over the last two years, we converted our oils to sunflower oil.

Then we also innovate in the area of better-for-you snacks. An example would be the lightly salted Lays. We think that sodium intake is going to be the next big thing. We launched it this year and it’s performed beyond our expectations. We also expanded our efforts in the area of multigrain with Tostitos in May.

And as part of PepsiCo, we were the first food company to launch a program that helps consumers make educated food choices. We launched Smart Spot in early 2005; it helps busy consumers make quick choices as they shop. It now spans over 135 of our products [picked by an independent advisory board]. Consumer awareness of the program has been well over 50%. So it’s not only about having better-for-you products, but also about communicating effectively to consumers.

You mentioned sodium intake will be the next major concern. How did you determine this?

[We do research] to determine trends and what consumers care about. Saturated fats and trans fats are at the top of consumers’ concerns, but sodium is right up there in the top five as well. I think it follows the evolution of the demographic curve – the older you get the more sodium becomes a concern. We try to be ahead of the curve and not reactive, because then you’re seen as being opportunistic.

How have you responded to the multicultural trend?

Obviously Canada is one of the more diverse countries in the world. So it’s a tremendous opportunity. This year, we launched two products that allowed us to address the specific palette of the large majority of immigrants who come from Asia, with our wasabi and curry Lay chips.

We launched our sales go-to-market system, which is direct to store, and it allowed us to be very specific in where we launched these two products. We targeted Toronto and Vancouver, where the largest [number] of Asian-born Canadians reside. We also supported the launch of these products with localized TV advertising in Mandarin and a newspaper campaign in Chinese and Hindi newspapers.

It’s been a huge success. Sales of the curry flavour have been three to four times higher than we expected. On the strength of that success, we’re launching across the country in early 2007, because we found that these flavours also appeal to Canadians who have been here for a few generations.

These are Canadian initiatives then?

Yes. Frito-Lay has businesses in over 100 countries, but it was funny to see that in the Delhi Times in India, there was an article on the curry chips and Canada. The general manager in India sent me a note saying: ‘What are you doing launching curry chips? We don’t even have them here in India!’

How many of your new product introductions are homegrown initiatives?

It varies from year to year. Some years as we build our brand strategies, we’ll find that growth can be addressed by a new flavour. With Doritos, [for example] we have a continuum of flavours from cheesy to spicy. And then our marketing team will look for the flavour that we need across the world, and most times they’ll find it. The flavour sweet chili, for example, was sourced out of England.

But as we also built our plans for this year, we knew that the health and wellness trend was something that we just couldn’t avoid on Doritos, even if Doritos is historically a teen brand. Teens are concerned about what they eat, and they’re educated. We’re now the only country in the world to have sunflower oil on our Doritos brand.

I call it the best of both worlds – we have the resources and network of intelligence around the world to steal great ideas, but we also have the flexibility and the autonomy to branch out when we have a specific need here in Canada.

Which of your ideas have been picked up elsewhere?

The move to sunflower oil [with Lays] was picked up by the U.K. this year. They face the same environment that we do of educated consumers and strict labeling laws, so it’s a move that’s paid huge dividends for them. And the United States converted to sunflower oil in the fourth quarter of 2006.

Another idea we’re pretty proud of is our Munchies snack mix brand, which we created here in Canada a few years ago. One of our marketers saw the opportunity to mix existing brands within our portfolio, such as pretzels, Cheetos, mini Doritos and Sun Chips, and created Munchies. And that’s

now a brand that’s being sold across [about] 25 countries.

From a marketing perspective – how much do you create in Canada versus adapting from elsewhere?

Canada is a unique country, and one of the great things about PepsiCo is that we run a fairly decentralized organization. The leadership of PepsiCo trusts our local management to know their consumers, their customers and their environment better than some marketing person in New York or Dallas.

So we do a lot of our own campaigns, but we only do so after making sure there wasn’t a U.K., Australian, or American campaign that we could leverage at a lower cost. That’s our first question – is someone somewhere in the world doing something that addresses our needs here?

Sometimes the answer is yes. Some of the Tostitos creative that we’ve used in the last couple of years has come from the U.S., and we’ve used some creative out of Mexico on Doritos. But for a lot of brands, particularly in the potato chip category, we’ve been on the leading edge, and when you’re on the leading edge, you can’t steal from anybody else, you have to break new ground.

With Smart Spot, we branched out from the global campaign and developed our own. The TV campaign shows a consumer shopping in the store and there are green balls [which is part of the program’s branding identification] falling from the shelves. It’s a very hard-hitting ad, which focuses on the smart spot. In the U.S., advertising was focused on healthy lifestyles [instead].

Describe how you work with your marketing partners here and how you manage the working relationship across the various disciplines.

I believe we have the best lineup of partners in the consumer packaged goods business. In fact, we consider them to be part of our team…not outsiders who happen to join the process at specific points in time. They are with us every step of the way from strategic brand planning to post analysis. Many of them are incented on how well we do as a business.

Our key creative partners are: Capital C, Mark IV, BBDO/OMD, Proximity, SDI Marketing, Fleishman Hillard, Davis Packaging and CIM.

How do we get good work? I would say collaboration…our partners tell us they are more a part of a team here and they get to participate from the start of the brand planning process and are not just brought in at the last minute. This past year, under the leadership of one of our marketing directors, each of the core brands built a ‘Brand Board of Directors’ consisting of agency partners from each team. These boards have met every quarter to build each of the plans and stay integrated – there is strong ownership around the success of every brand, every initiative, by everyone involved.

In terms of your internal structure and marketing’s role, describe the culture.

We’ve always had a very collaborative culture. When we recruit across all functions and across marketing, we look for leaders first and then we make sure that they have the technical skills. The reason for that is it’s 1,000 little things that have to be done from the seed that we plant to the retail shelf, so the ability to work across function is critical. There are a lot of teams in our environment and I would say there isn’t one function more important than the other. There are business teams – one for Western Canada, etc., and they all work collaboratively. All the way down to our field teams.

Also, we have stepped up our investment in marketing for the last eight or nine years.

What kind of increases have you made?

[Marketing spend] is definitely growing more quickly than sales, which isn’t the case for most other companies. Among the largest food companies in Canada, we’re at number three in terms of growth at 8%, so it gives you a sense of the increases in our marketing effort. Let’s face it, there’s a lot more competition for the consumer’s attention. Without that investment in marketing, we won’t get that attention.

Are you dedicating more resources to the in-store environment as well?

We have always invested [more] in-store relative to the industry. We’re at every grocery store in Canada seven days a week. That’s a huge advantage, so we leverage that by having big, visible events that our customers can leverage to build their own business.

A recent one ran in the fall of 2006.

When Xbox launched, we partnered with them to have a draw every hour for an Xbox. That was a huge event targeted at teens and it was a ‘power of one campaign’ – we partnered with Pepsi, we had numbers that were printed on the inside of the bag, and we worked with agency partners to create a powerful online [experience].

Obviously our snacks are big for sports viewing, so we have great partners in that space. We’ve been a partner with the Grey Cup and CFL for a number of years, as we have been for the NFL and Super Bowl. And then we’re very excited that we just signed a huge deal with the NHL starting in 2007, so we’re going to have two massive events to leverage that piece in-store.

Over half the purchases in our category are made in-store, so visibility and presence are key.

How do you get retailers on board?

[With these programs], there has to be a consumer element – there has to be a property that consumers love and recognize. There has to be a customer element – if the store manager can’t relate to the property then it’s a harder sell. And the third part of the triangle is our own sales force. We have a couple of thousand people out there, and they get behind events people believe in.

How do you gauge your success?

We measure our success in four different ways.

Are we selling more?

Are we making an honest return for

our shareholders?

Are we getting share with consumers? Because we can sell more, but if we’re losing share I don’t think anyone here would be dancing in the hallways.

And the fourth element is, are we delivering on the high expectations of our customers?

The Advantage Group Performance Monitor – it’s the industry benchmark in terms of Canadian retailer satisfaction when it comes to partners – is conducted [by Toronto-based The Advantage Group] every two years and reaches out to all retailers. This year, we ranked number two in the survey, but number one in terms of consumer marketing. So I talk about the golden triangle, the fact that when we think of marketing it’s mostly about the consumer, but if it doesn’t work for the customer – if it’s not practical or we can’t make them benefit from what we’re doing with the consumer – then we’re going to send our marketers back to the drawing board to make sure that there’s a customer angle as well.

Can you give an example of how you’ve covered off all three groups?

We have the Super Bowl event. So the consumer idea is the big game is coming up, you’re going to need Pepsi and Tostitos for your Super Bowl party – ‘buy any two of these products, and you’ll save [on your grocery bill].’ So how that comes alive in-store is we have display material that supports the big game. We have carpets that look like a football field, goal posts, player standees, and therefore, we’re allowing our customers to create a football field inside their store.

Then we close the loop with our salesforce by having a contest for the most creative display by area. We will send that salesperson and a guest to a big football game, which last year was the Pro Bowl in Hawaii. So the consumer element is, you need snacks and drinks for the big game; the customer element is, we’ll bring the event to your store in a creative way so that it’s an exciting place to shop; and then from a salesforce perspective, it’s creating that spirit that says: ‘Hey, if you do great displays, we’ll have something really special for you.’

With the big integrated efforts, how do you measure campaigns?

We look at brand sales and share, we look at spend effectiveness. There’s a measure we have here called CID – cost per incremental dollar sales. Then a third measure would be in-store effectiveness. I think we’re the largest user of ACNielsen market measurement services. There are stores that measure on the size of display for us every month. So having displays and how big they were is probably one of the biggest measures we look at.

What about brand advertising?

I’m a sales guy – I know it’s right to do equity advertising on big brands that are the flagships. I just don’t know that I can measure it. That’s when the art meets the science – you build your brand plan and your budgets, and you’re going to have equity advertising and event-specific advertising whether it’s innovation or promotional. We do more on the promotions front than your average

CPG company.

Because of the nature of the product?

Nobody needs chips. We realize that we have to earn the right to be in the consumer’s cart. So having the right product in the right location in the store at the right price is something that is disproportionately important to our team.

NOTE

One of Frito Lay’s signature Canadian marketing initiatives is the Fan Choice Award. It debuted in 2003 as a product placement and interactive TV initiative, and since became a buzzword. Guay explains that it came about as the company was trying to find a unique area of ownership in Canadian music at the same time CTV and CARAS were trying to skew the Juno Awards younger, in line with the core Doritos consumer. ‘So we collectively built a program that would allow consumers to participate in the show – vote for a winner – and have a ‘money can’t buy experience’ for the ultimate fan.’

And the goals were achieved. The audience has gotten younger, fan participation has quadrupled in four years and the winner in year four (Simple Plan) was the first artist not to have the number-one-selling album of the year. And it continues to grow. Frito Lay was the first brand to support the CTV two-screen program last year where consumers could play along with the show on the Internet.