As the story goes, it was 1853, at an upscale resort in Saratoga Springs New York. A wealthy and somewhat unpleasant customer sent his fried potatoes back to the kitchen, complaining that they were too soggy, and they didn’t have enough salt. George Crum, back in the kitchen, doesn’t seem to have been a very nice guy, himself. Crum thought he’d fix this guy, so he sliced some potatoes wafer-thin, fried them up and doused the hell out of them, with salt. Sending them out to the table and fully expecting the customer to choke on them, Crum was astonished to learn that the guy loved them. He ordered more, and George Crum decided to add “Saratoga Chips” to the menu. The potato chip was born.
Herman Lay was a brilliant marketer, even from a young age. Born on this day in 1909, Lay opened a Pepsi Cola stand on his front lawn at the age of 11. When the city ballpark across the street was charging ten cents for a Pepsi, Lay charged a nickel.
Lay was a lumberjack, a jewelry salesman, and a peanut salesman, before he went to work for the Atlanta based Barrett Potato Chip Company. He traveled the Southeast during the Great Depression in his Model A Ford, selling chips to grocery stores, gas stations and soda shops. When the company’s owner died, Lay raised $60,000 and bought the company’s plants in Atlanta and Memphis.
By this time, potato farmers had developed a low moisture “chipping potato”, because other types tended to shrink too much in processing. Other inventions like the mechanical potato peeler, the continuous fryer and sealed bags helped “chippers” of the 30s and 40s ship their products farther than ever before.
Lay began buying up small regional competitors at the same time that another company specializing in corn chips was doing the same. “Frito”, the Spanish word for “fried”, merged with Lay in 1961 to become – you got it – Frito-Lay. By 1965, the year Frito-Lay merged with Pepsi-Cola to become PepsiCo, Lay’s was the #1 potato chip brand in every state in America.
Procter & Gamble figured out how to put a potato chip in a can, using dehydrated potato flakes and calling them “Pringles”. Potato chip manufacturers lobbied Congress to prevent the new snacks from being called “potato chips” and Federal officials offered Pringles a compromise, allowing them to call them “chips made from dried potatoes.” Procter & Gamble said no thanks, instead calling their product potato crisps. Ironically, P&G would later sue to have Pringles declared NOT to be a potato chip, to avoid millions in British Commonwealth taxes levied on products “made from the potato, or from potato flour.”
The biggest threat that Frito-Lay would ever experience came from the Beer giant Anheuser-Busch, when they introduced their “Eagle” line of salty snacks in the 1970s. It made perfect sense at the time, a marketing and distribution giant expanding into such a complementary product category, what could go wrong? Frito-Lay profits dropped by 16% by 1991, and PepsiCo laid off 1,800 employees, but Eagle Snacks never turned a profit in 16 years. Anheuser-Busch put the company up for sale in 1995.
According to Forbes, Americans spent $5.64 billion on potato chips in 2016, more than the GDP of any of the 42 smallest countries, on earth.
Tom Peters wrote about Frito-Lay in his 1982 book “In Search of Excellence”. They’ll spend $150 to make a $30 delivery if that’s what they need to do, because their customer is counting on them, and they pride themselves on a 99.5% on-time delivery record. It might not make economic sense as a standalone transaction, but the company has a 60% share of the potato chip market, a massive 72.4% in the tortilla and tostada chips segment, and the highest profit margins in the industry. All that in “undifferentiated commodity” categories, in which their closest competitor has 7%.
Frito-Lay practices over-the-top customer service, in contradistinction to what so many companies put us through these days, in our everyday lives. There is a business lesson there, for those who would learn it.