December 13, 2011 Project #14228

1. Draft Report Opportunity Assessment for Frito Lay Grab and Go Chip Innovation Prepared by: December 13, 2011 Project #14228

2. About Technomic: Convenience Store Foodservice Expertise • Technomic, Inc. • Technomic is the leading research and consulting firm serving the food industry. For more than 40 years we have been helping clients better understand potential foodservice opportunities. Our background includes significant experience in strategic and new opportunity work. Our expertise within the foodservice channel is particularly strong. Our Foodservice Planning Program, sponsored by more than 130 foodservice manufacturers allows us to stay close to the channel and remain on the cutting edge of trends and issues. Finally, Technomic is extremely proficient and skilled in conducting assignments of key strategic importance involving this methodological approach and focusing on the convenience store channel. • Timothy L. Powell, Director of C-Store Foodservice Programs • The Technomic team dedicated to this project is headed by Mr. Tim Powell, Director of Research & Consulting and Convenience Store Program Lead. For nearly a decade, his emphasis at the firm has been the convenience store foodservice channel, where he has helped a variety of food manufacturers with business strategies to effectively penetrate, expand and sustain success within the segment. He also spearheads the Convenience Store Foodservice Monitor, a quarterly publication, that provides expert analysis on issues critical to the channel. • He is the author of the successful 2008 Outlook and Opportunities in C-Store Foodservice, the 2010 Handheld Entrée Opportunity in C-Stores and in 2011 completed a first-of-its-kind study on C-Store and Supermarket Commissaries. • He is a regular contributor to Convenience Store News and he has been cited in NACS Magazine, CSP, Reuters, The Chicago Tribune, The Los Angeles Times as well as other local publications. He presents regularly as a channel expert at CSP FARE and AWMA conferences.

3. Introduction and Engagement Objectives • Given the strong growth of foodservice in convenience stores, PepsiCo would like a better understanding of the consumer and operator attitudes, usage, product demand, marketplace perception and opportunities for an innovative salty snack/chip bag that would incorporate a flap to include dips, primarily cheese, but other complementary items. This better understanding will determine how best PepsiCo should move forward with its potential concept and to provide insights into its potential improvements or modifications. Technomic has prepared this report on PepsiCo’s behalf. • The primary objectives of the project are to develop a significant base of knowledge inclusive of a 360 degree view including operator interest/demands, consumer interests/demands and successful development and marketing of foodservice-type snack offerings in the c-store foodservice channel. Other engagement objectives include:  • Quantify and understand the potential sales/volume and growth opportunity for a new Frito-Lay packaged product in the c-store channel. • Develop an understanding/baseline of c-store channel intelligence including operator interest and usage at both headquarters and field stores as well as understanding initial consumer interest of a new to market unique offering for immediate consumption especially developed for C-Stores. • Define the current opportunities and barriers to entry in offering the concept. • Provide specific operator examples of successful/unsuccessful launches of similar products in the channel. • Determine the likelihood of success of the concept and why. • Provide Technomic recommendation on how best PepsiCo should launch its chip package innovation in the c-store channel.

4. Methodology • Step One: Program Initiation Meeting • Technomic and PepsiCo project management discussed by conference call the specific details of the proposal, timelines, checkpoints and specific insights. • Step Two: Secondary Deep Dive and Review • Technomic reviewed all publicly available information (e.g., industry trade publications, general and business publications) as well as prior non-proprietary research, including its 2008 omnibus study on the c-store foodservice category . • Step Three: C-Store Unit-Level Interviews • Technomic interviewed 125 major c-store chain and mid-tier chain operators. The following stores were interviewed (sometimes multiple interviews depending on region and number of locations):

5. Methodology • Step Four: Headquarter Interviews with C-Store Chain Executives • Technomic interviewed foodservice executives at 15 major and mid-tier c-store store chains. • Step Six: Analysis, Report Development and Presentations • With the field work done, Technomic has developed this final report.

6. Report Layout • The remainder of this report is laid out as follows: • Key Findings • Recommendations • Unit-Level Operator Findings • C-Store Headquarter Findings

7. Key Findings, Implications and Opportunity Assessment

8. Concept Statement • The following description was read to unit operators prior to obtaining reactions and opinions. Headquarter executives were also read the following statement, but were also provided the Top Tear and Side Tear exhibits/slides by email to gain reaction. They are shown in the Headquarter section.

9. Key Findings and Implications: Unit Level Source: Unit Operator Survey

10. Key Findings and Implications: Unit Level Source: Unit Operator Survey

11. Key Findings and Implications: Convenience Store Headquarters

12. Key Findings and Implications: Convenience Store Headquarters

13. Assessment of Opportunity: Total Market • Technomic estimates that the total market for the tear and go product is $85-$95 million in c-store operator revenues, and $45-$55 million in operator costs. Note that this is the price ceiling and this would assume 100% penetration.

14. Scenario Analysis • The table below lists a more realistic scenario analysis for PepsiCo. Should PepsiCo penetrate 10% of stores with cheese dispensers, its annual shipment dollars would be $million. Sales to the operator would be $million. • These scenarios can be modified by PepsiCo and Technomic based on further assumptions.

15. Critical Success Factors • To have success in the c-store space there are several absolute requirements. The following are those factors that are necessary to achieving positive results:

16. Overall Conclusion The overall appeal of the chip innovation product is positive. Given PepsiCo’s market strength, resources and commitment, Technomic believes that it has an opportunity to participate successfully in this space. The recommendations on the following pages identify certain critical issues to address, as well as areas in which PepsiCo can differentiate effectively.

17. Recommendations

18. Recommendations • Technomic has developed recommendations based on the findings and conclusions developed for this study. The recommendations are organized into various categories: • Target Concepts • Product and Pricing • Go-to-Market

19. Target Concept Recommendations • The first step is targeting those c-store concepts that have cheese dispensers. Based on Technomic’s knowledge, the following concepts are suggested for targeting in the first phase. PepsiCo may have relationships with other c-store chains, and therefore, those should be targeted as well. • With PepsiCo’s resources, Technomic recommends going after the “big guys” as well as the regional players. *Includes Village Pantry (primary stores), Lil’ Cricket, Young’s, Scotchman, Everyday Shop, others.

20. Product and Price Recommendation • Operators and consumers liked the idea of side tear. However, the issue with the UPC code must be resolved so that if consumers remove the side, the UPC could potentially be misplaced or thrown out prior to checkout. While some operators said they could just “key it in” there were others that would not purchase the product if this issue were not resolved. • Begin with marketing the product as a cheese topper. The next phase of growth (or use in markets) should emphasize the ubiquitous use of salsa, chili, ranch, hot sauce or other condiments available by c-store operators. • Fritos and Tostitos are the best options to offer. C-store operators did not believe that Ruffles (or any potato chips for that matter) would hold up to liquid toppings, indicating they would get “soggy.” • The price of the product with cheese to the consumer is suitable at $1.99. As PepsiCo indicated in ongoing discussions, Technomic is in agreement that the price of the chips alone ($1.49) should be printed on each bag so that price is transparent to the consumer. • Therefore, the total suggested price for the toppings and the chips should begin at $1.99. • However, larger urban markets and regions will allow for price premiums. In this case, PepsiCo should suggest an increase of 10-15%, but at the operator’s discretion. • Note that PepsiCo may encounter operator margin issues, since the $1.99 price point does not meet their ideal margin of 50%-60%. • While operators were divided on case count, Technomic recommends a case of 12 for ease of storage.

21. Go-to-Market Recommendation • The majority of operators are in favor this product, referencing its novelty and customization for the consumer. Technomic recommends that PepsiCo also conduct consumer research of c-store consumers to help “sell” the story to operators. It is Technomic’s opinion that consumers would show equal, if not more, excitement. • PepsiCo must have a clear message that can capture a customer’s attention. Technomic believes that PepsiCo can go to market and appeal to large numbers of prospective c-stores by promoting leading-edge technology from a world class organization in a program built around simplicity, transparency and a real understanding of the retailer’s customer’s needs. • The foodservice industry is slowing digging itself out of one of the worst economic downturns in history that may linger until 2012. There are also uncertainties about food costs and long-term employment prospects, that will certainly impact c-store visits and purchases. Because of this, PepsiCo must weigh the impact that the economy may have on sales projections. • Technomicfurther believes that any rollout that is “controlled” and very targeted will have strong potential to succeed. Technomic believes the most favorable markets for launch are the South, Southeast and Midwest regions followed by the Northeast and West regions. Note that the Western US (particularly the Pacific Coast states) is not as developed from a c-store foodservice program perspective, nor are consumers as familiar with the segment as a foodservice option compared to the Midwest, Southeast and Northeast regions.

22. Go-to-Market Recommendation • Finally, the following chains indicated they either would like to “test” the product for free or simply purchase the product outright. These should be the initial “test” concepts: • Village Pantry – Chad Prast – Dir. Of Foodservice • Racetrac- Bob Derian – Dir. Of Food and Beverage Innovation • Maverik – Kim Westover – Dir. Of Foodservice • E-Z Mart – J. “Bubba” Kirkland – Sr. VP Merchandising • Stripes – Ben Hoffmeyer- Sr. Category Manager, Foodservice • Travel Centers of America – Kirk Mathews – Sr. Foodservice Category Manager • On the contrary, there were chains that believed for some reason or another that the product would not fit their “image” or that there were other reasons for deciding against the product. The companies listed below would require more “selling into” before purchasing the product. Furthermore, those with the “image” objection would be best to simply take of the prospect list: • Image issues: Quick Chek, Wawa, Sheetz, Nice N Easy • Lack of private label: Kum and Go • Cheaper alternatives – Valero (uses Gehl’s) • Cannot provide self-service – Rutter’s

23. Unit Operator Preliminary Findings

24. Key Implications Equipment in Store • Approximately 55% of c-stores in the US that offer “true” foodservice (both dispensed beverage and prepared foods) offer a cheese dispenser/warmer. Seventy-five percent (75%) carry at condiment station. “Which of the following do you have in your store?” • There are roughly 80,000 stores with foodservice – this means approximately 44,000 stores (best case) would have a cheese dispenser and 60,000 stores would have a condiment station. Source: Unit operator survey

25. Initial Thoughts of Concept • More than half of operators’ initial thoughts of the product were positive. Fifty-five percent (55%) indicated the idea, when read to them, was favorable. “What are your initial thoughts of this product based on the description?” Source: Unit operator survey

26. Key Implications Likes and Dislikes of the Concept • The most favorable attributes of the product are its ease of use, versatility with many condiments/sauces and anticipated consumer demand. The packaging was also favorable. While 34% found nothing they disliked, less than 10% were not favorable to the cost of the condiments used. “What do you like most about this product based on its description?” “What do you like least about this product based on its description?” • Determining the estimated product costs of the complementary toppings will be necessary as PepsiCo goes to market. This could be the initial objection. Source: Unit operator survey

27. Key Implications Likelihood of Patrons Buying Product • The majority of operators (85%) believe that their patrons would be likely to purchase this product. “What do you believe would be the likelihood that your patrons would by this item?” • This product may not be a “fit” with all c-stores, based on their brand and foodservice position, which may explain the roughly 10% who believe patrons would likely not buy it. Source: Unit Operator Survey

28. Key Implications Regional Likelihood of Purchasing • Most operators, regardless of US region, believe consumers would buy the Frito Lay product. “How likely do you believe your patrons would be to buy this product?” • The South and Midwest have the greatest share of c-store units, which is encouraging. • These two regions should be initial targets. Source: Unit Operator Survey

29. The Likelihood that C-Stores Would Buy the Product • Approximately 65% of operators indicate they would purchase the product. “Based on the product description you just read, how likely would yoube to purchase this product for use in your operation (assuming it meets your quality and price requirements)?” Source: Unit Operator Survey

30. The Likelihood that C-Stores Would Buy the Product – By Region • The likelihood of purchasing the chip product is highest in the Northeast, yet most regions report they would purchase the product. Again, many of the reasons behind the non-purchase is based on a better understanding of the product and the ability to test it. “Based on the product description you just read, how likely would yoube to purchase this product for use in your operation (assuming it meets your quality and price requirements)?” Source: Unit Operator Survey

31. Potential Sales per Week • The majority of operators believe they could sell approximately 25 units in a week. From a percentage standpoint, 31% believe they could sell 30 or more. “How many units do you think you would sell in an average week?” Median: 25 Base: Operators who were very/somewhat likely to purchase the product.Source: Unit operator survey

32. Potential Sales per Week – By Region • The Northeast report they believe they could sell 50 units (chips and cheese) in an average week (using medians). The median for all regions is 25, therefore, the West also overindexes at 28. The South and Midwest report selling on average, 21 and 20, respectively. “How many units do you think you would sell in an average week?” Overall Median: 25 Source: Unit operator survey

33. Key Implications Strong Dips/Sauces for Product • Melted cheese, salsa and chili are the top three dips/sauces that operators believe would be the best complements to the Top and Go product. “What dips/sauces do you believe would be good complements to the three offerings – Ruffles, Tostitos and Fritos?” • It is encouraging that the product seems not to be limited to a single sauce/dip. • Further, operators have many of these dips/sauces available to consumers already. Source: Unit Operator Survey Scale: 1 to 5: 5 = very strong complement, 1 = not a good complement at all.

34. Key Implications Other Potential Complements to Product • Other potential complements to the Top and Go product, according to operator open-ends, are jalapenos, French onion dips, onions, other cheese types and sour cream, among others. “What else do you believe would be a good complement to this product that we haven’t mentioned?” • These are good ideas for future complements or LTOs. Source: Unit Operator Survey

35. Key Implications Product Daypart Opportunities • Operators see the most opportunity for the product during lunch and snack occasions. “What meal occasions do you think consumers might purchase this product in your store?” • Lunch is the busiest daypart for operators. Source: Unit Operator Survey Scale: 1 to 5: 5 = very likely, 1 = not at all likely.

36. Key Implications Bundling Opportunities • More operators believe that consumers would buy the Top and Go product either as part of a combo meal or by itself. “How likely do you think consumers would be to purchase this product as part of a combo meal or by itself?” (Top 2 Box) • It appears that this items can be positioned both as a meal and a meal complement. This product may help operators crack the dinner daypart. Source: Unit Operator Survey Scale: 1 to 5: 1 = Extremely unlikely, 5 = Extremely likely

37. Key Implications Serving Size Preferences • Operators are relatively split on the serving sizes for the Top and Go item. The 3.75 ounce is favored by 46%, while 50% favor the 4.5 ounces. “In terms of product dimensions and serving size, would you prefer…” • It appears that serving size is not a major “sticking” point. Source: Unit Operator Survey

38. Key Implications Case Count Preferences • For the most part, operators are “fine” with a case count of 24 bags of the Top and Go product. However, 43% mentioned it was too big. Some of these comments were based on fewer units per case. Village Pantry, was one in particular. • “Depending on the product shelf life, he thought a 12-count case would be better.” – VPS • “I think a 24 case count would be fine – if we were to offer it” – EZ Mart “How appropriate would a master case with 24 units be for your operation?” • With operators roughly divided, it may make sense to offer two pack sizes. Source: Unit Operator Survey

39. Key Implications Resealable Package Preferences • While 63% of operators indicate that a resealable package would not change their initial opinion of the top and go, the 37% who thought otherwise were strongly in favor of a resealing bag, as in these opinions from headquarter interviews: • “I like the Top and Go package best because it would be easier to handle and eat and also because it would be resealable, which would help as customers walk through the store.” – Quick Chek • “I think it’s critical that it reseal. Customers driving away don’t want to spill the product on themselves.” – Racetrac “If this product were to come in a resealable bag, would it change your opinion of the idea?” • PepsiCo would not necessarily have to offer a resealablebag, but it would be an advantage. Source: Unit Operator Survey

40. Key Implications Pricing • The “ideal” pricing for the Top and Go product would be approximately $1.84. Operators believed that anything at $1.30 or below would be too “cheap” and anything priced at $2.59 or above would be too expensive to add to the store. “At what price per unit (chips plus toppings) to the consumer would this be?” (means) • The pricing of $1.99 for the chips and unit may be considered high by some operators. Source: Unit Operator Survey

41. Key Implications Pricing – By Region • The pricing per unit (which is the chip price plus the toppings) that is ideal across regions ranges from $1.67 on the lower end in the Midwest to $2.02 in the West. The Midwest also believes the price to the consumer is too high at $2.47 – the lowest of all regions. “At what price per unit (chips plus toppings) to the consumer would this be?” (means) • PepsiCo should price the regions accordingly. Perhaps make up for lower margins in the Midwest by pricing (or proposing a the pricing) higher in the more agreeable regions. Source: Unit Operator Survey

42. Key Implications Merchandising Tools • The most favorable merchandising tools for operators would be a 2-for-1 introductory offer for the Top and Go product. Other favorable promotional items would be a free drink with a purchase and a merchandising rack. “How important are the following merchandising tools in your consideration to purchase this product?” • Having an equipment component (e.g., cheese dispenser) would increase penetration, but it is not critical in the initial launch phase. Source: Unit Operator Survey

43. Sales Changes and Expectations • Nearly 40% of operators believe they could sell more of the Frito Lay product compared to similar snack products in an average month. Forty-seven percent (47%) report they could sell at leas the same. “Compared to the snack items you sell in this category, do you anticipate selling more, fewer or the same of this product in an average month?” Source: Unit Operator Survey

44. Key Implications Equipment Ownership Issues • There would not be any restrictions on offering the Frito Lay product based on ownership of the cheese equipment, 85% of operators report. “Assuming you were to add this product to your store, would there be any restrictions based on the ownership of the cheese equipment?” • This would not be a major inhibitor to adding the Frito Lay product. Source: Unit Operator Survey

45. Key Implications Previous “Similar” Program Success • Eighty-five percent (85%) of operators said they have launched a similar program to the one that Frito Lay proposes, and 90% indicated it was successful. The drivers of success were the demand for the product, a creative idea and convenience to the c-store consumer. “To your knowledge, has your c-store launched a similar product?” “Was it successful? Why or why not?” • These are all encouraging findings. Source: Unit Operator Survey *The highest percentage of all reasons

46. C-Store Headquarter Findings

47. Exhibits Emailed to Convenience Store Headquarter Executives: Top and Tear 1. Top and Go (Top Tear) Now you can make your chips even heartier! There are days that I’m hungry and a plain bag of chips isn’t enough to fill me up. I wish I could add something to my chips so they would hold me over. Introducing Top and Go - now you can top your favorite chip brands and create your own mini-meal. Top and Go is a new bag that can be transformed to a dish. Just peel off the front and add toppings like chili, cheese, ranch dressing, mustard or any other sauce to your chips to create that perfectly satisfying mini-meal. Then, just scoop out your topped chips. Or use a fork if you need to. The bag can even re-close so that you don’t have to worry about having it spill in your car. Top and Go – the perfect mini-meal solution to hold you over!

48. Exhibits Emailed to Convenience Store Headquarter Executives: Side Tear 2. Dish and Go (Side Tear) Now you can make your chips even heartier! There are days that I’m hungry and a plain bag of chips isn’t enough to fill me up. I wish I could add something to my chips so they would hold me over. Introducing Dish and Go - now you can top your favorite chip brands and create your own mini-meal. Dish and Go is a new bag that can be transformed to a dish. Just tear at the top corner and pull all the way down. Add toppings like chili, cheese, ranch dressing, mustard or any other sauce to create a perfectly satisfying mini-meal. Feel free to grab your favorite chip or use a fork if you have to. With its wide opening, it’s easy to work with. You can keep in between your legs in your car or sit between your cup holders to take on the go. . Dish and Go – the perfect mini-meal solution to hold you over!

49. Frito Lay’s brand recognition is its strongest attribute . • It will be important to address the perceived limitations of the product, such as cost and packaging concerns. Key Implications Opinion of Frito Lay Concepts • Headquarter operator respondents were given a graphic and read a description of The Top and Go/Dish and Go Snacks concepts. Branding and the concept/idea were the most appealing attributes based on the description, with Frito Lay providing instant credibility and brand recognition for consumers. Portability was also appealing. While the concept of the packaging was favorable, many respondents questioned the practicality of the package. Chain operators brought up concerns about resealing, heat absorption, and sturdiness. Additionally, some operators raised apprehensions about quality and cost. Source: Convenience Store Headquarter Interviews

50. Not surprisingly, operators expect samples and PepsiCo to support a trial run. • It will be important for PepsiCo to understand its potential targets and how these products will align with their current operations. Key Implications Purchase Intent Despite strong belief that the product would appeal to consumers, foodservice executives were not fully sold on the product. As presumed, many would want to “test” the product and either offer it as a product test in a few stores or offer it initially as an LTO. Those who said they would not purchase it said so due to operational or image barriers. Pricing is also a concern. Source: Convenience Store Headquarter Interviews