FRITO-LAY UNDER SNACK ATTACK

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The Justice Department got interested in Frito-Lay while monitoring the firm's acquisition of the Eagle Snacks factories. The department cleared the Eagle deal in April, but its inquiry raised concerns that spurred the new investigation. Nonetheless, Sean Orr, senior vice president and chief financial officer of Frito-Lay, told Time last week that the company had learned of the probe only through news reports. "We have a very strong market position, and they have a right to investigate us or anybody like us anytime they want," Orr said. "We'll be as cooperative as we can."

Fortress Frito-Lay began to assume its present state in 1991 when Roger Enrico, now CEO of parent PepsiCo, was put in charge of the division. The company's market share had fallen to 38% from 42%, but profits were solid because Frito-Lay kept raising prices. Raising prices while losing share is a recipe for disaster in an era in which value is a driving force in consumer behavior. Worse, when Frito-Lay compared its snacks with those made by Eagle, it concluded that its rival's were better.

Enrico launched a major overhaul, including more than 1,000 layoffs, that slashed half a billion dollars from operating expenses. He used the savings to improve existing products, lower prices and aggressively roll out new items. Recently the company has been adding low-fat varieties that are hits. Aiding that strategy has been a 13,000-strong delivery force armed with hand-held computers that can track buying trends by the day and act accordingly.

Frito-Lay is now a virtually unassailable stronghold that provided a more than bite-size 31% of PepsiCo's $3.5 billion in operating profits last year. Frito-Lay's 1995 profits hit $1.13 billion, up from $617 million in 1991. The company has added some 9,000 jobs since it reorganized, bringing its payroll to 35,000. Sales have been rising 10% to 11% a year, while other big food companies, such as Campbell Soup and Nabisco, have eked out gains of no more than 3%.

News of the Justice investigation puzzled legal experts, who noted that Washington hasn't challenged industry shelf-space practices in more than a decade. Apparently Frito-Lay has become something of a victim of its own clout. "They've driven all their competitors out of business by being too successful," says William Leach, who follows the food industry for the investment firm Donaldson, Lufkin Jenrette. "There's nothing unethical. They're just better at product development, marketing and execution. But there is no law against doing well." That, of course, is something the government is now trying to decide.

--Reported by Viveca Novak/Washington and Stacy Perman and Jane Van Tassel/New York