Pillsbury, Campbell Heat Up Battle of Mexican Labels : Food industry: New owners of Old El Paso and Pace, respectively, launch major competitive marketing efforts.

The Pillsbury Doughboy is about to show off his new sombrero.

Minneapolis-based Pillsbury Co. added Old El Paso Mexican foods--the top-selling brand in the fast-growing category--in May when corporate parent Grand Metropolitan Plc completed its $2.6-billion purchase of Pet Inc.

Pillsbury has some work to do, however, because Old El Paso lost some of its momentum during its final year of Pet ownership. Though it is the No. 1 seller of all Mexican packaged-food products, last year it was the only major producer to sell less of the category’s hottest products--salsa and other Mexican sauces.

That helped Campbell Soup Co.’s Pace Foods, Old El Paso’s main competitor, lengthen its lead in sauces. To regain momentum, Pillsbury plans a new, extensive advertising campaign for Old El Paso.

“Pace has done a good job,” Pillsbury Chief Executive Paul Walsh acknowledged. “They’ve had a consistent message, a consistent campaign and consistent spending. We intend to put those three things together for Old El Paso.”

Pillsbury also wants to introduce new products and expand overseas distribution of Old El Paso, primarily in the United Kingdom.

Analysts said the moves will be needed if Old El Paso is to keep up with Pace, which Campbell bought in late January for $1.12 billion.

“We expect the category to really heat up,” said Tony Vento, an Edward D. Jones & Co. analyst. “You now have two big players who have jumped in with big marketing budgets.”

Mexican foods have become increasingly popular, with sales of Mexican sauces in the Unites States jumping past ketchup sales. Sauce sales totaled $600 million in the United States last year, versus $428 million in ketchup sales, according to Information Resources Inc. (In physical volume, ketchup continues to outsell salsa.)

David Weiss, president of New York-based market research firm Packaged Facts, estimates Mexican food sales are growing about 10% to 15% a year. That’s down from about 20% a few years ago, he said, but still double the growth of most food categories.

“It’s part of the move to spicier and more exotic foods,” Weiss said. “We’re also eating less meat, less fat. Those foods are more bland, so you need something to bring up the taste.”

Weiss also cited the increasing Hispanic population, especially in California, plus the growth of Mexican restaurants. Traditionally, people first try Mexican foods in restaurants and then buy packaged foods to try at home.

Packaged Facts estimates that Mexican packaged-foods sales will approach $3.5 billion by 1999, up about 46% from $2.4 billion last year. Sales of Mexican sauces, the largest line in the category with $940 million in sales last year, could reach $1.6 billion by 1999, a 70% rise.

Weiss said the growth will be spurred in part by efforts of Old El Paso, Pace and others to fill in geographic gaps across the country.

In the closely watched market for salsa and other sauces, for example, Old El Paso has been the strongest in the Northeast, Pace in the Southwest and Hormel Food Corp.’s Chi-Chi’s in the Midwest.

Campbell declined to talk about its plans for Pace, but many analysts expect the company to push into its competitors’ strongholds.

“Pace has almost no distribution in the Northeast, and that’s probably the first place Old El Paso will feel the heat,” said Timothy Ramey, a C.J. Lawrence Deutsche Bank analyst.

Pillsbury already has switched Old El Paso’s advertising to Leo Burnett Co. of Chicago and intends to put more money behind the brand. It plans to run ads in mid-summer telling how to serve Old El Paso products, before launching a broad new campaign in earnest this fall. It wouldn’t say how much it plans to spend.

Old El Paso will need the boost. In the 52 weeks ending Feb. 26, its sales of Mexican sauces fell 3.3% to about $116.0 million, giving it a 16.4% market share, according to Information Resources Inc.

In the same period, Pace sauce sales increased 11% to $193.6 million, for a 27.5% share. Sales of Pepsico Inc.’s Frito-Lay sales rose 49.6% to $112.4 million, while Hormel’s sauce sales were up 5.9% to $59.3 million.

Walsh said he thinks Old El Paso has an advantage over Pace in that it offers everything from salsa and taco seasoning to refried beans and Mexican rice. That gave rise to its reputation as the “Wall of Yellow,” a reference to its brightly colored labels lined up on store shelves.

“As people move through the cycles of trial--Mexican sauces, Mexican restaurants, Mexican food--it’s logical they will also want a full line of Mexican products from one brand,” Walsh said. “And we want to make Old El Paso the brand of choice.”

Walsh said he doesn’t expect a salsa war, at least for a while. “The category for Mexican sauces is growing quite fast, so I don’t think we need to be into a share war yet,” he said. “I think we both can benefit from the rising tide.”

Walsh also is looking to expand Old El Paso’s international sales. The brand has little competition abroad and has been expanding rapidly from a small base.

He thinks Pillsbury’s efforts will be helped by the increasing number of Mexican restaurants in Europe and the growing popularity of tequila and Mexican beer.

“When I was in Paris recently, there was a Mexican restaurant opening just off the Champs Elysee,” he said. “That’s the start of a trend.” Asia also is a possibility, he added, although probably further in the future.

“We think [Old El Paso] has tremendous potential overseas,” Walsh said. “It may take time, but it will happen.”