Pepsi's new challenge


  • Business
  • Saturday, 18 Jan 2003

BY MELANIE WELLS

PEPSICO president and chief financial officer Indra K. Nooyi is riled. Outside her third-floor office, snow is piling up around the company's famed sculpture garden in Purchase, New York.  

Nooyi, 47, though, is oblivious to the weather. She's thinking about America's love-hate relationship with food – junk food, that is. Lay's potato chips and Doritos, she insists, aren't responsible for turning people into “fat slobs.” Their uncontrollable habits – and their increasingly sedentary lives – do. “The problem is the couch, not the can,” she says. “That's the problem. All right?”  

Who's to blame? Tort lawyer Samuel Hirsch's answer: companies that sell food. A suit on behalf of a New Yorker who claimed that fast-food companies contributed to his obesity, heart disease and diabetes is “dormant,” according to Hirsch. But a class action against McDonald's on behalf of overweight kids is pending in US district court – and is scaring the food industry.  

Even more desperate now is that the Food and Drug Administration is expected, as early as this year, to require food makers to add artery-choking trans fat – found in dairy, meats, cookies and fried foods – to labels spelling out nutrition facts.  

PepsiCo isn't about to cave. Not to a meddlesome federal agency, not to health food cranks. “Nobody asked you to drink Pepsi ... (or) eat Lay's potato chips morning to night,” snaps Nooyi, who is known for her feisty candour, 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 defence. “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, 180mg of sodium, 150 calories. “You don't get that on a burger.” Not yet, anyway.  

But Reinemund and Nooyi aren't ignoring the signs, either. An empire built on fat and sugar, PepsiCo is massively repositioning itself without apologies – and without pulling any of its top-selling, traditional brands, now known as “fun for you” foods. The company won't give up on old lines, like its flagship (and sugar-loaded) Pepsi-Cola brand, even if it has been plagued in recent years by slow growth.  

And it would be suicide to stop producing Frito-Lay snacks, which account for 54 per cent of sales and 56 per cent of operating income. Frito-Lay has a stranglehold on the junk-food business, controlling 60 per cent of the salty snack category.  

Now come the healthier spin-offs. This month PepsiCo is launching new, more “nutritious” versions of traditional flagship brands Doritos, Cheetos and Tostitos without trans fatty acids, linked to elevated levels of bad cholesterol and a higher risk of heart disease. (This isn't like putting a man on Mars; it simply requires cooking snacks in corn oil instead of hydrogenated oils.)  

What's the rush?  

The Los Angeles unified school district, 750 institutions, has already announced they won't sell soft drinks anymore. More are expected to follow, perhaps banning fatty snacks as well. That would be disastrous for PepsiCo that, even though it gets just 1 per cent of its sales in North America from schools, relies on the exposure to help create young fans that will become lifelong munchers.  

At the same time, the company is emphasising water, Gatorade and Tropicana juices as it looks for ways to play up more healthful beverages. What about soda? “Maybe caffeine-free products could be growth opportunities,” muses Gary Rodkin, chief executive of PepsiCo beverages and foods North America.  

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 US$13.4 billion Quaker acquisition, that were engineered by Roger Enrico, the company's hugely popular and successful chief executive who picked Reinemund to succeed him in 2001.  

Early ventures into good- or better-for-you stuff have flopped. “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 7-year tenure at Frito-Lay.  

“The consumers that ate pretzels with beer walked away from us. We had to bring back full-fat pretzels.”  

The snack division is cooking up so-called Vegetable Rice Puffs, small ribbon-shaped chips made with rice and tomatoes. The chips contain 3 grams of total fat and fewer than 250 mgs of sodium. 

But where do you draw the line between giving into the latest craze and getting out in front of a tectonic shift in eating habits? Rocco Papalia, senior vice-president of technology for Frito-Lay, tracks dietary trends, like the backlash against trans fats, that may impact the way people eat snacks. The problem is deciding when to react to a trend – or not.  

Currently, Papalia is keeping close watch on people who are trying the high-protein, low complex-carbohydrate diet popularised by Dr Robert C. Atkins.  

In case the trend catches on, 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 type of carbohydrates people should be eating,” he says.  

As for drinks: “Pepsi is looking at and will be testing beverages we've never heard of. Think dairy. Think grain. Think fibre,” says John Sicher, editor of Beverage Digest.  

A line of natural Lay's and Cheetos made without artificial ingredients and organic Tostitos, due out this year, is being offered in addition to Whole Foods and other “organic” food stores that usually eschew mainstream brands.  

“Non-traditional channels have become more important, especially as traffic in supermarkets and traditional convenience stores have declined,” says Kenneth Harris, a packaged-goods consultant with Cannondale Associates in Evanston, Illinois.  

You bet it is – providing consumers actually go for it. Reinemund readily concedes 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. (Reinemund, a lean former Marine, is not a junk-food addict – he's a marathon runner.)  

Nooyi, who says she rarely exercises, prefers regular Lay's potato chips; she eats three small bags 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 trans fat-free. But it has recruited Kenneth Cooper, a 71-year-old Dallas physician and long-forgotten father of the aerobics movement as pitchman.  

Some industry watchers think mounting the physical fitness soapbox is a mistake. “Why go to all that trouble to make the consumer feel guilty?” asks Tom Pirko, who heads a Santa Barbara, California-based consultancy to the beverage industry. “Better to go with the flow and just provide better products.” NYU professor Nestle scoffs at the entire effort as hypocritical. “Trans fat is a no brainer: We've known about it for 30 years,” she says. “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 (really) eat.” Which is why he will continue to make foods drenched in salt, fat and sugar, and to experiment with new lines like 52nd St. Bakery (decadent donuts) and a nacho-like microwavable treat, flecked with dried meat and cheese.  

Is PepsiCo immoral for exploiting that paradox? No more so than Anheuser-Busch or Black Diamond, a leading maker of rock-climbing equipment. In an age of greater information and informed consent, do we really want anyone telling us how to conduct our lives – protecting us from ourselves? You can see where that ends up –with some kids from McDonald's refusing to sell you that order of large fries because your waist is too big. - Forbes 

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