The PepsiCo challenge: Growth through nutrition?
<p>The company is moving forward on new initiatives, but still wrestles with the issue of profiting from sugary beverages.</p>
Let’s be honest. Most people consume soft drinks and chips because they taste good, not because they're healthy.
Many studies cite the ubiquity of snack foods as a key driver in the obesity epidemic, which is responsible for as much as 20 percent of America’s health care costs, but the research remains inconclusive. Even so, the social and environmental implications of manufacturing and marketing low-nutrition foods in an era of expanding waistlines and shrinking natural resources are not lost on PepsiCo, the largest food-and-beverage company in the U.S. and the second-most popular beverage brand in the world.
Wrestling with the conundrum of transforming a business model that profits from sales of sugary snacks and carbonated beverages, PepsiCo — with the guidance of visionary CEO Indra Nooyi — is tapping into an opportunity to capitalize on growing consumer demand for healthier food.
PepsiCo’s goal is to reach $30 billion in nutritional products by 2020, up from $10 billion in 2010, by developing new products and reformulating existing ones to reduce salt, fat and sugar. Given that PepsiCo products are consumed nearly 1 billion times each day in nearly every country around the world, any advances in nutrition and sustainability can have a significant impact on public health.
But challenges remain for the consumer products multinational that aspires to be known as “the good company.” Will consumer demand for nutritional foods — and investors’ limited patience for transformational strategies — expand at the same rate as PepsiCo’s “good for you” offerings? Meanwhile, what is PepsiCo doing to mitigate the consequences of turning so much of our natural capital into “fun for you” foods? I recently spoke with Jeff Dahncke, senior director of communications, to learn more.
Health and wellness is not new territory for PepsiCo, which acquired Tropicana in 1998 and Quaker Oats in 2001, several billion-dollar brands in the healthier foods category.
“In the past 15 years, PepsiCo has lowered the average number of calories per serving in beverages by nearly 20 percent,” explained Dahncke. “Today, half of PepsiCo's beverage sales in North America come from low-calorie beverages, active hydration beverages and healthy juices.”
In 2003, PepsiCo became the first major U.S. food company to eliminate trans fats from snack food products. And in 2006, PepsiCo took a leap forward when corporate strategist Nooyi took the helm and introduced Performance with Purpose, the idea that the sustainable success of the company can be aligned to what is good for society.
One plank of Performance with Purpose is to expand PepsiCo’s product portfolio to meet increasing consumer demand for more nutritious options. Representing approximately 20 percent of PepsiCo’s sales, the company’s global nutrition portfolio includes the category leader in key areas such as juice (Tropicana), oatmeal (Quaker) and sports nutrition (Gatorade). Other brands in PepsiCo’s portfolio in the U.S. include Naked Juice, Muller yogurt, Sabra hummus and Stacy’s pita chips.
So far, PepsiCo’s numbers over the past five years show that taking a healthier direction can also be profitable. From 2007 to 2011, PepsiCo outperformed the S&P 500, achieved double-digit compound annual growth, and returned more than $30 billion to shareholders.
PepsiCo regards its investment in a strong global R&D organization as part of its growth strategy and a way to bolster competitive advantage.
“Our new Fruit and Vegetable Innovation Center in Hamburg serves as a global center of excellence for PepsiCo and is accelerating our fruit and vegetable R&D efforts to help create a future pipeline of innovation for our nutrition brands,” explained Dahncke.
The beverage giant also opened an R&D center in Shanghai late last year to serve its Asia presence.
Dahncke pointed to Tropicana’s Trop50 as an example of an innovative healthier product that has allowed PepsiCo to satisfy an unmet consumer need.
“Trop50 is for people who want the goodness of juice but with 50 percent less sugar and fewer calories,” he explained. “It has been a highly successful brand since being launched in 2009.”
Dahncke noted that the company did not change the core product, Tropicana Pure Premium, which will continue to made with 100 percent orange juice and no added water or sugar.
The success of new products with 60 percent less sugar shows the company can offer healthier options without sacrificing taste, said Dahncke.
“In reality, most consumers seeking healthier offerings don’t want to sacrifice taste, convenience or value," he said. "So it’s important we get the total equation right.”
Promoting healthier habits
PepsiCo may be finding some innovative ways to develop healthier products, but fixing our obesity problem is a two-way street. To help consumers make healthier decisions, PepsiCo is participating in several U.S. campaigns, Clear On Calories initiative and Healthy Weight Commitment Foundation, which aims to reduce obesity, especially among children, by 2015.
"This initiative has dramatically reduced calories in beverages shipped to schools," said Dahncke. "And we now display calorie counts on the fronts of many of our packages, something we are working to expand around the world.”
At the base of the pyramid, where malnutrition poses a tremendous health challenge, PepsiCo wants to offer consumers in the developing world more nutritious protein-based snacks and beverages. Project Asha, for example, concentrates on low-income communities in India to provide iron nourishment through snacks that are equivalent to five bundles of spinach apiece.
In “triple bottom line” terms, PepsiCo’s product advances in the social domain are commendable, but what about the environmental impact?
As one of the largest companies in the world, Dahncke concedes that the company uses a lot of resources to run the business, but it's important that the company does something.
“To remain competitive — and to maintain our presence in resource-restricted areas — it is important for us to continually reduce our costs and to do everything we can to reduce our impact on the environment.”
That's why PepsiCo uses solar energy, all electric or hybrid trucks as well as LEED certify buildings when possible. The company is also aggressively pursuing recycling programs, achieving a 15.5 percent reduction in 2010 on the amount of waste sent to landfills and another 11 percent in 2011.
“By the time scientists agree on climate change it may be too late to make a difference, but we do know that reducing our carbon footprint will save us money," he said.
PepsiCo continues to think about new ways to package and deliver products that will reduce operating costs and environmental impact. It has reduced packaging weight by more than 300 million pounds since 2007.
PepsiCo is also investing heavily in R&D initiatives to make bottles and caps with less plastic but the same durability. To reduce emissions and fuel costs in transportation, for example, PepsiCo has figured out how to use small pre-forms and blow out bottles in production, instead of purchasing bottles from other companies and ship to production facilities.
Consumers must shift, too
Of course, sustainability cannot really be achieved without improving health and nutrition. Societal transformation is going to require consumers to shift along with consumer products multinationals. In other words, for PepsiCo to make healthier products, we are going to have to buy them.
But don’t expect PepsiCo’s health kick to get in the way of you and your Fritos anytime soon. The company has every intention of continuing its long tradition of making snack-food favorites alongside its more nutritious alternatives.
“PepsiCo has a heritage of being able to transform and perform at the same time,” said Dahncke. “We believe wholeheartedly in a diversified portfolio and offering a broad range of great-tasting food and beverage products that meet the needs of our consumers today, tomorrow and well into the future.”