|
Forbes Magazine PepsiCo
President and Chief Financial Officer Indra K. Nooyi sees red over the issue of
bad eating habits. You can't blame Lay's potato chips and Pepsi, she insists,
for turning someone into a "fat slob." Blame eating habits and
sedentary lives. "The problem is the couch, not the can," she says.
"That's the problem. All right?" You can understand why Nooyi, 47, is a little emotional. PepsiCo
itself has gotten fat by peddling many of the world's best-known nibbles and
drinks--Gatorade and Pepsi-- and that sonorous trio of Frito-Lay snacks--Cheetos,
Doritos and Tostitos. Feeding the public's hunger for junk food earned the
Purchase, New York-headquartered company an estimated $3.5 billion on revenue of
$25 billion for 2002. It's a great success story for investors. Nutritionists see a failure. According to the World Health
Organization, 300 million adults worldwide are overweight--33% more than in
1995. Who's to blame? Tort lawyer Samuel Hirsch's answer: companies that sell
food. A class action he filed against McDonald's on behalf of overweight
kids is pending in U.S. District Court--and is scaring the bejesus out of the
food industry. "Whatever anyone thinks of the lawsuits against fast-food
companies, they are a wake-up call to everyone," says Marion Nestle,
professor of nutrition and food studies at New York University and author of
Food Politics, a critical look at the food industry. The battle between the junk food purveyors and the food scolds is
going to get uglier. The next skirmish is over the labeling of naughty fats on
food packages. At the moment the U.S. Food & Drug Administration demands a
figure for saturated fats, found naturally in animal products. Soon it may order
a disclosure as well about so-called trans unsaturated fatty acids, made from
partially hydrogenated oils used to prepare a lot of junk food and said to be
even worse culprits in artery-clogging. PepsiCo isn't about to stop selling stuff people want to munch.
"Nobody asked you to drink Pepsi ... (or) eat Lay's potato chips morning to
night," snaps Nooyi, who is known for her feisty candor, as well as
strategic brilliance--and may one day be in line for the top job. Chief Executive Steve S. Reinemund, 54, makes a more measured, but
no less insistent, defense. "Look at our product," he says, throwing
down a couple of packages of chips. "If you look at the back of this bag,
there is no question what you're getting." For a 1-ounce bag of Lay's
Classic: 3 grams of saturated fat, 180 milligrams of sodium, 150 calories.
"You don't get that (disclosure) on a burger." Not yet, anyway. Yet Reinemund and Nooyi aren't ignoring the signs, either. An empire
built on fat, salt and sugar, PepsiCo, the world's fourth-largest food and
beverage company behind Nestlé, Kraft and Unilever, is going to protect its
flank by offering healthful foods, too. Some of these snacks will be lower in
fat and sodium and higher in good stuff, like calcium. There is, after all, a
growing--if small--demand for good foods, so why not supply them? More
important, the diversification will get Pepsi out ahead of health advocates and
opportunistic lawyers who are eager to blame food vendors for the unwanted fat
of the world. Pepsi is making these moves without apology--and without pulling any
of its traditional foods, like its flagship (and sugar-loaded) Pepsi-Cola, even
if the soda has been plagued in recent years by slow growth. And it would be
suicide to stop producing Frito-Lay snacks, which account for 54% of sales and
56% of operating income. Frito-Lay has a premier position in junk food,
controlling 59% of the salty-snack category in the U.S. and securing No. 1
market shares in six of the top ten snack food markets around the world.
Frito-Lay sold $5 billion worth of chips, crisps and other salty snacks outside
the U.S. in 2001.
Consumers are deeply conflicted about what they put in their mouths.
They know they should be sitting down to family meals with fresh vegetables and
whole grains, but instead they consume what comes out of vending machines and
fast-food restaurants. And they are suckers for things like PepsiCo's
"chewy, wholesome" granola bars. If these were labeled "sugary
dessert," they wouldn't sell. To appease the angry health gods, PepsiCo is this month launching
new versions of Doritos, Cheetos and Tostitos without trans fatty acids in the
U.S. The urgency is such that the company hasn't bothered to test-market the
products. What's the rush? The Los Angeles unified school district, 750
institutions, has already announced it won't sell soft drinks anymore. More
districts are expected to follow, perhaps banning fatty snacks as well. That
would be disastrous for PepsiCo, which, even though it gets less than 1% of its
sales from schools, relies on the exposure to help create young fans who will
become lifelong munchers. At the same time, the company is emphasizing water, Gatorade and
Tropicana juices as it looks for ways to play up more healthful beverages. What
about soda? Gary Rodkin, in charge of PepsiCo beverages and foods for North
America, sees opportunity in pushing caffeine-free drinks. Sierra Mist, a new
caffeine-free lemon-lime soda that competes with Coca-Cola's Sprite and Cadbury
Schweppes' 7up, doesn't exactly make soda into a nutritional beverage, but it
blunts one long-standing criticism of Mountain Dew and cola drinks: that they
use caffeine as a hook. At PepsiCo all this change isn't going down as easily as a swig of
Gatorade. "We've gone through a pretty dramatic transformation," says
Reinemund. He's referring partly to such grand moves as the $13.4 billion Quaker
acquisition, engineered by Roger Enrico, the company's hugely popular chief
executive who picked Reinemund to succeed him in 2001. And partly to the winds
of change that are rushing through Purchase and Plano, Texas, home to Frito-Lay.
"This is where our success will be defined," says Nooyi. "Are we
only good at making big moves, or can we also get a big company to inch forward
in a tough environment? That's the challenge we face." Until recently, breakout innovation was not a snap at this
105-year-old enterprise. Founded by Caleb Bradham, a North Carolina pharmacist,
to peddle a cure for dyspepsia, PepsiCo was a one-brand pony for decades.
Gradually, beginning in the 1960s, it bought and merged its way to new drinks
and snacks, from Frito-Lay and Mountain Dew to Rold Gold and Gatorade. Homegrown
new products that weren't extensions of already-popular brands failed almost as
often as they succeeded. Storm, a caffeinated lemon-lime soda PepsiCo concocted
in 1997, never made it beyond test markets; Aquafina, a bottled water it
launched in the U.S. that same year, is a hit. Internationally, the company has
seen success with Pepsi Limón and Pepsi Twist, two concoctions that feature
lemon flavoring, in markets like Mexico and Saudi Arabia. Some of the flops, notably, were early ventures into more healthful
noshing. "When we made all our pretzels fat-free in 1993, we lost a segment
of our population," recalls Reinemund, who headed up the effort during his
seven-year tenure at Frito-Lay. "The consumers who eat pretzels with beer
walked away from us. We had to bring back full-fat pretzels." PepsiCo's
fat-free line of chips made with olestra, called Wow, has been anything but.
Many consumers are grossed out by a label warning about its potential unintended
laxative effects. More low-fat products are coming. The snack division is cooking up
so-called Vegetable Rice Puffs, small ribbon-shaped chips made with rice and
tomatoes. A serving contains 3 grams of total fat and 250 milligrams of sodium,
which fits Frito-Lay's dubious definition of a more healthful snack; a Cheetos
serving runs to 10 grams and 290 milligrams, respectively. Rocco Papalia, senior vice-president of technology for Frito-Lay,
tracks dietary trends, like the backlash against trans fats, that may change the
way people eat snacks. It's a mistake to get too far ahead of the parade.
"There's a lot of confusion out there. We're trying to plant some
foundations so we don't say, ‘Well, that was wrong,' when the next study comes
along," he says. "There's a fine line between waiting until the jury
is in and sitting on our hands." Papalia is looking at the feasibility of creating protein snacks
made with dairy proteins, soy proteins and nutmeats. "If we can smuggle a
couple of servings into a chip, we can add more of the macro nutrients people
should be eating," he says. Dairy chips? Soy crackers? Perhaps even weirder concoctions from the
beverage division, which is more tight-lipped because of heated competition in
the category from Coca-Cola. "Pepsi is looking at and will be testing
beverages we've never heard of. Think dairy. Think grain. Think fiber,"
says John Sicher, editor of Beverage Digest. To each his own. Reinemund, a lean former Marine and sometime
marathon runner, is no junk-food addict, but says that his wife, Gail, who is a
big fan of Fritos, would never be caught dead eating a reduced-fat version of
the snack if it were available. Nooyi, who says she rarely exercises, eats three
small bags of Lay's potato chips a day. Still, she has become a big cheerleader
for the healthier line of snacks. "It will take a while to grow the
good-for-you part of the business because the American consumer doesn't want to
be told by PepsiCo what to eat," she says. "This is a democracy."
PepsiCo is not broadcasting the fact that its new line is free of
trans fats. But it has recruited Kenneth Cooper, a 71-year-old Dallas, Texas
physician and one of the fathers of the aerobics movement, as pitchman. On the
back of the package you will soon find his sententious statements about
exercise. Sample: "Fitness is a journey, not a destination." It could be that mounting the physical fitness soapbox--or conceding
any ground to nutritionists--is a mistake for a company like PepsiCo. "Why
go to all that trouble to make the consumer feel guilty?" asks Thomas Pirko,
who heads Bevmark, a Santa Barbara, California-based consultancy to the beverage
industry. "Better to go with the flow and just provide better
products." nyu prof Nestle scoffs at the entire effort: "Until the
issue of calories is addressed, everything else is a Band-Aid." "People say one thing, and they do something else,"
Reinemund observes. "If you just made products [based on] what people say
[they want], you'd go out of business--because that's not what they eat."
Which is why he will continue to make foods drenched in salt, fat and sugar, and
to experiment with new lines like 52nd Street Bakery (decadent doughnuts) and a
nacholike microwaveable treat, flecked with dried meat and cheese. Is PepsiCo immoral for exploiting the world's love-hate relationship
with good nutrition? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||