ARCHIVE :: DECEMBER 2002 :: BIG BUSINESS

Trimming
The Fat

Attacked by 'Snack Police,'
PepsiCo Tries to Make
Junk Food Healthier

By BETSY MCKAY
Staff Reporters of The Wall Street Journal

PepsiCo is trying to cut down on junk food

With health officials and the public increasingly anxious about the dangers of obesity and poor nutrition, PepsiCo CEO Steven Reinemund is pushing to make at least 50% of the company’s food and beverage offerings “nutritious”—cutting fat and adding ingredients such as broccoli to chips.

At the same time, Mr. Reinemund, who climbed to his post pushing pizza and potato chips, is taking the remarkable step of telling consumers that they shouldn’t eat or drink too much of his company’s biggest sellers. “Fun foods”—Pepsi-speak for products such as Pepsi-Cola and Fritos—are a “treat, or indulgence,” Mr. Reinemund says on a videotaped message to school cafeteria managers this year. “Overindulgence in any of our products is not something we encourage or recommend.”

The company recently announced plans to take some unhealthy oils out of some snack brands. PepsiCo scientists, meanwhile, are scrambling to develop what the company calls “better for you” and “good for you” products, including Baked Lay’s potato crisps with flecks of broccoli, baked Doritos and Lay’s potato chips with 25% less fat. Mr. Reinemund also has enlisted some high-profile help—Kenneth Cooper, father of the aerobics movement, and Dean Ornish, the low-fat guru—to advise the company’s researchers. The goal, says Dr. Cooper, is to make PepsiCo, which derived about three-quarters of its $26.9 billion in sales last year from snacks and soda, the “most health-oriented corporation in America.”

No, Thanks

 The trouble is, consumers don’t necessarily want “healthy” snacks. PepsiCo itself stumbled badly in 1998 when its Frito-Lay subsidiary introduced Wow!, a fat-free chip made with olestra that became best known for sometimes causing abdominal cramps. Other supposedly good-for-you brands have flopped too, such as low-fat ice cream and McDonald’s McLean Deluxe low-fat hamburger.

But food-and-beverage manufacturers are under fire from what they call the snack police—angry educators and nutritionists who are calling for “sin taxes” on chips and soft drinks. A surgeon general’s warning last year that obesity had reached epidemic proportions has only emboldened these junk-food critics.

Some activists are plotting strategies for bringing lawsuits against food industries the way the antitobacco lobby did. In July, a 272-pound New York man sued four fast-food chains, alleging that their food contributed to his obesity and illness. The restaurant industry dismissed the lawsuit as “senseless, baseless, and ridiculous.” (See related article: Fast Food Slows Down)

Snack makers are concerned, too. Last month, officials in Los Angeles, the nation’s second-largest school district, agreed to ban soft-drink sales during school hours. A ban on “junk food,” including candy and some snack foods, is next on the agenda.

But by striking back, PepsiCo is tampering with its biggest driver of growth. Frito-Lay alone accounted for just over two-thirds of PepsiCo’s profit last year of $2.66 billion. The question is whether PepsiCo can overhaul its snacks and drinks to mollify critics of junk food while keeping consumers and investors happy.

Mr. Reinemund says the trend is clear: More consumers are concerned about nutrition, and “we need to be prepared to deal with it.” Already, low-fat snacks such as baked potato chips and pretzels account for 20% to 25% of Frito-Lay’s sales. What’s more, sales volume of such products is up about 20% so far this year.

“You can’t forget indulgent products” such as Pepsi-Cola and Lay’s chips, which will always be part of PepsiCo’s lineup, Mr. Reinemund says. But “the consumer wants a balance of indulgence, as well as ‘better for you.’ And if we over-react in either direction, we won’t get the balanced growth that we want.”

Mr. Reinemund, a dedicated snacker himself (a small bag or two of Lay’s or Baked Lay’s potato chips daily, as well as Rold Gold pretzel rods and Doritos, washed down with Diet Pepsi), knows it’s a tough balance to strike. In the 1990s, he oversaw the successful introduction of baked, low-fat versions of three of Frito-Lay’s core brands: Tostitos, Lay’s and Ruffles.

PepsiCo’s purchase in 1998 of Tropicana gave the company new insights into healthier products and how to make them even better for you, such as adding calcium to orange juice. And with the purchase last year of Quaker Oats, PepsiCo gained new expertise in making snacks out of oats and rice.

But a recent daylong meeting at Dr. Cooper’s Dallas campus with PepsiCo marketers and scientists showed just how hard it will be to make products more “nutritious.”

A 66-page analysis compiled by Dr. Cooper and 10 members of his staff divided 61 PepsiCo products into three categories. “Class One” was made up of 18 products that Dr. Cooper felt required “minimal, if any, modifications,” and that he would feel comfortable endorsing. They included Tropicana orange juice and Quaker Oats oatmeal. Frito’s Rold Gold Honey Wheat Braided Pretzel twists, Baked Lay’s, Ruffles and Tostitos made the list because they are low in fat. But the doctor warned that a consumer would “still need to watch the serving size, calories and sodium content.”

“Class Two” consisted of 19 products that would need “some modifications” for Dr. Cooper’s endorsement. Quaker Rice Cakes could use more fiber. Diet Pepsi could be a “stepping stone” for people trying to switch from regular soda to water or tea. “Class Three,” the remaining 24 products, couldn’t be endorsed. Pepsi-Cola, Mountain Dew and other regular sodas had too much sugar. The core Frito-Lay brands—Lay’s, Fritos, Ruffles, Doritos, Tostitos and Cheetos—were all too high in fat.

Oil Change

 One suggestion, pushed by Dr. Ornish, was taken up immediately: to get rid of trans fatty acids found in the oils used to make Doritos, Tostitos and other Frito-Lay brands, even the low-fat Baked Lay’s. The artery-clogging fats are used by makers of french fries, cookies and snacks to add shelf life and flavor to their products. Trans fats, once seen as healthy, are now deemed worse by doctors and nutritionists because they increase LDL, or bad, cholesterol, but not the HDL, or good, cholesterol that fights LDL.

While Frito-Lay is rushing to take out fat, it’s less taken with Dr. Cooper’s suggestion to reduce sodium in some products. The company has tested versions of no-salt Lay’s, pretzels and Baked Tostitos, but “consumer demand hasn’t materialized,” says Rocco Papalia, Frito-Lay’s  research and development chief. Salt sprinkled on a chip helps with “flavor delivery,” he notes, and because it’s one of the first elements to hit the tongue, it tastes like there’s more of it than there really is.

So far, Dr. Ornish says, he’s encouraged by PepsiCo’s speed in implementing his recommendations. It’s important to remember, he adds, that “big corporations don’t turn on a dime. All signs are that Pepsi is following up.”