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 didn’t have enough salt. George Crum, the cook, wasn’t the most pleasant of guys himself, and thought he’d fix this customer. He sliced some potatoes as thin as a dime, 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, Crum was astonished to learn that the customer 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 became a lumberjack, a jewelry salesman, and a peanut salesman, before going 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, Lay’s was the #1 potato chip brand sold in every state.
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 be called “chips made from dried potatoes.” Procter & Gamble said no thanks, instead branding 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 the company 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 the Snack Food Association’s 2012 state of the industry report, Americans spent $9 billion on potato chips in 2010, more than the gross domestic product of the bottom 57 countries, on earth.
Tom Peters wrote about Frito-Lay in his 1982 book “In Search of Excellence”. The company will spend $150 to make a $30 delivery if that’s what they need to do. Their customer is counting on them. While a transaction like that doesn’t make economic sense, the company prides itself on a 99½% on-time delivery record. Frito-Lay has the highest profit margins in the industry and a 60% market share in an “undifferentiated commodity”, in which their closest competitor has 7%.
The business model discussed in Tom Peters’ book involves over-the-top Customer Service, in contradistinction to what so many companies put us through in our everyday lives. There is a business lesson there, for those who would learn it.