Can Incremental Profits From Sales Expansion Meet New Financing Needs What Potato Chips Can Teach Entrepreneurs?

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What Potato Chips Can Teach Entrepreneurs?

America, and the developed world, is saturated with cheap, convenient, pre-packaged snack foods. These tasty treats are available in sweet, salty, chilled, or warmed styles and presentations. None is more popular, and ubiquitous, than the potato chip.

The potato chip in America was historically a very local mom and pop business until the 1930’s. The end product, the potato chip crisps; were very difficult to ship, handle and preserve without advanced packaging techniques. Prior to the invention of coated bagging components, chips were made in local kitchens and sold in a few local stores, typically out of barrels. As soon as the barrels were opened, and the shop owner scooped the sold product for the consumer, air entered the barrels and the potato chips became stale. Consumers of these chips were taught to heat the chips at home before serving to mitigate the lack of freshness.

This type of trade was adequate for a local service business model, but it did not allow for economies of scale or national distribution. In addition, each town and region developed a favorite type of chip that enjoyed local popularity only. The opportunity was ripe for an entrepreneur to consolidate and commercialize the snack business in a major way and revolutionize the category.

That entrepreneur was Herman Lay. Mr. Lay was a route salesman for the Barrett Food Company of Atlanta. He sold the Barrett brand of potato chips in an assigned territory in Nashville, TN during the 1930’s. He was a natural sales talent, developed and quickly grew his territory and soon hired route salesmen to work for him. The owners of Barrett noticed his success and offered to sell Herman Lay the whole business. He struggled to cobble together financing. This was at the height of the depression. Somehow, a combination of loans, savings and preferred stock was assembled and the $600,000 selling price was secured.

The new Company immediately changed the name to the H. W. Lay, Company. Mr. Lay recognized that mechanization was necessary to expand his distribution and lower costs. He invested every dollar of profit in self-contained potato processing machinery that took a whole potato and produced a finished chip. The crisps were then packaged in the new non-permeable bags that insured freshness for the product as they were shipped and sat on store shelves until purchased and consumed.

The onset of World War II proved most profitable for the salted snack industry. Chocolate and sugar were heavily rationed during the war and products that utilized these ingredients became rare and expensive until the war was complete. Salt, however, was never rationed and the availability of salty snacks made them the preferred choice of consumers seeking a quick treat during the war. In addition, these salty snacks were consumed in huge quantities by the troops.

Lays Potato Chips and snacks became ubiquitous on store shelves in the American south during and after the war. The Company bought up small, under-capitalized competitors and expanded aggressively. Eventually the H. W. Lay Company purchased the Frito Company of San Antonio, Texas. Frito had perfected the production of a corn chip which we eat in huge quantities to this day. The combined Frito Lay Company became the strongest national salted snack producer.

Frito Lay and a number of regional brands dominated the salted snack category through the post-war years. The simple potato chip was basically unchanged in appearance, flavor and consistency, except for adding new tastes such as garlic, green onion and bar-b-cue. The industry seemed to have settled into a maturing, slow growth category, with limited entrepreneurial opportunities for new offerings. However, the most entrepreneurial consumer product Company in the world, Cincinnati’s Procter & Gamble (P&G), is always seeking to cultivate and grow new product niches. They had their corporate eye on the snack industry and, in particular, the P&G management felt they had identified a chink in the armor of the potato chip producers.

That chink was in packaging. Potato chips had been sold since the late 1930’s in flexible, pliable bags. While this insured freshness, it made breakage an issue. Consumers taking part in focus groups had told P&G that they did not like the small, cracked, broken pieces of chips that settled in the bottom of the bags. Research and Development at P&G began to work on an answer to the problem.

P&G is famous for its creation of Brand Management. Brand Management enables the responsible team assigned to each specific product to treat the brand as a stand- alone business and profit center for the Company. The success of this management style is legendary and has been studied in Business Schools and adopted by many other businesses. The Brand Management system encourages each team to pursue aggressively new product adaptations and inventiveness.

P&G Research and Development for the Company’s food group worked on the potato chip project throughout the 1960’s. Their answer to the problem created a wonderful example of how an entrepreneurial firm, or individual, can profit immensely from a convergent product innovation. The innovation that became a billion dollar brand, and revolutionized snack food marketing, was the introduction of Pringles.

P&G obviously did not invent potato chips or salty snack foods. However, by adapting the classic potato chip in form, taste and presentation they created a novel, blockbuster brand that is sold to millions of consumer around the world every day.

Pringles are 42% potato. They are formed by mixing potato flakes with liquid slurry and then dried to form each chip into an almost perfectly identical curved oval crisp. The genius of Pringle’s lies in the cylindrical cardboard tube invented for P&G by Fredric Baur. The Pringle crisps are stacked inside the tube so there is virtually no breakage of the individual chips. The tube closure is a snap on plastic lid. Pringles was test marketed in 1968 and consumers were enthusiastic. The product has been constantly improved and over 40 flavors have been added to the original style. Many of these flavors are sold in specific countries or regions to suit prevailing taste preferences, such as jalapeno in Mexico and Cajun in Louisiana.

Entrepreneurs are driven to seek and create “divergent products”. The invention of disruptive “divergent products” such as the light bulb, the cotton gin or the internal combustion engine is the “Holy Grail” that these visionaries seek to perfect and leverage to fame and fortune. However, the most often realized and realistic road to success is to create a niche product improvement. Explore existing products and technologies and identify needs that are not being addressed by these products. The creation of novel “convergent products” that simply add incremental benefits and small performance enhancements can result in huge profit.

Procter & Gamble has built the largest consumer product Company in the world and one of the most admired innovation factories by seeking both “divergent” and “convergent” opportunities. Pringles is an example of a huge “convergent product” innovative success. The history of P&G is rife with examples of new “convergent product” successes. The “divergent product” innovations are fewer and harder to discover and bring to market. This is a great Company that looks for opportunity anywhere it can find it.

Entrepreneurs should take note of this process. Frito Lay is today owned by PepsiCo. The evolution of this great brand owes much to the simple drive and vision of H. W. Lay. He took a simple product that suffered a poor distribution model and turned the opportunity into immense wealth. P&G took the breakage problem inherent in bagged potato chips and through innovation in recipe and packaging created a huge worldwide success with the introduction of Pringles. P&G and H. W. Lay are examples of the elegance of simple ideas. Remember the old axiom: KISS = Keep it Simple Stupid! The best ideas are often the most obvious.

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