source: http://www.economist.com/business-finance/displaystory.cfm?story_id=15772138
The giant drinks-and-snacks firm attempts to wean itself off sugar, salt and fat
COCA-COLA once famously defined its market as “throat share”, meaning its stake in the entire liquid intake of all humanity. Not to be outdone, Indra Nooyi, the boss of Coke’s arch-rival, PepsiCo, wants her firm to be “seen as one of the defining companies of the first half of the 21st century”, a “model of how to conduct business in the modern world.” More specifically, she argues that Pepsi, which makes crisps (potato chips) and other fatty, salty snacks as well as sugary drinks, should be part of the solution, not the cause, of “one of the world’s biggest public-health challenges, a challenge fundamentally linked to our industry: obesity.”
To that end, on March 22nd she unveiled a series of targets to improve the healthiness of Pepsi’s wares. By 2015 the firm aims to reduce the salt in some of its biggest brands by 25%; by 2020, it hopes to reduce the amount of added sugar in its drinks by 25% and the amount of saturated fat in certain snacks by 15%. Pepsi also recently announced that it would be removing all its sugary drinks from schools around the world by 2012.
Although Ms Nooyi talks about the need to “cherish” employees, and once wrote to the parents of her senior managers thanking them for bringing up such wonderful offspring, she rejects the notion that these goals are soft-headed or decorative. She argues that they are necessary to prevent food companies from going the way of tobacco firms, which are perennially held responsible by governments for the health problems associated with their products, and penalised accordingly. As it is, several countries in Europe and various localities in America have banned trans fats, a particularly unhealthy ingredient in much junk food. A bill introduced earlier this month in New York’s state assembly proposes banning salt in restaurants. Michelle Obama, America’s first lady, has launched a campaign against obesity among children.
In the 1990s virtually all of Pepsi’s products were bad for you—or “fun for you”, as the firm likes to put it. Under Ms Nooyi, who became boss in 2006, it has stepped up its diversification into products it calls “better for you” and “good for you”, including fruit juices, nuts and porridge (oatmeal, to Americans). Ms Nooyi does not see this as a case of trading profits for virtue. Instead, she insists both are possible—an idea expressed in the firm’s syrupy motto: “Performance with purpose.”
There is no shortage of sceptics, both about the sincerity of Pepsi’s social mission and, more recently, its performance, which was decidedly flat in 2009. Indeed, this week, at the firm’s first meeting with investment analysts since 2006, in New York’s Yankee Stadium, Ms Nooyi admitted to a series of disappointments, before promising that lessons had been learned and that “we won’t make the same mistakes.” As well as being hurt by the economic downturn, Pepsi suffered from a flawed financial hedging strategy that left it paying too much for commodities. And it has suffered from some recent marketing disasters, including a campaign for Tropicana fruit juice that is widely regarded as one of the worst brand makeovers since Coca-Cola launched New Coke.
Yet investors seem to be taking seriously Ms Nooyi’s claim that Pepsi’s future is bright. It helps that the firm has raised its dividend and announced a big share buyback. Investors also seem to be reappraising Pepsi’s decision last year to acquire the two independent firms that bottle its drinks. The deal had received a tepid reception, not least because Coca-Cola had insisted that keeping syrup-making and bottling separate made sense. Now, however, Coca-Cola has decided to follow Pepsi’s lead by acquiring its main bottler—a move Ms Nooyi describes as “vindication”.
The hope is that integrating the bottling company into Pepsi will bring greater control over an increasingly diverse drinks portfolio, and promote cross-marketing between the food and drink divisions (not something that Coca-Cola’s acquisition will help with much, as it does not own a large snack operation). Pepsi, which jointly markets several different brands, dubs the clout this gives it with retailers and customers “Power of One”. The bottling acquisition should boost this tactic by ending the need to negotiate a division of the spoils on every big deal. When Wal-Mart calls asking for a joint promotion of, say, Pepsi and Doritos, as it did for the Super Bowl in February, Pepsi can “respond in 24 hours, instead of six weeks.”
Ms Nooyi wants to take this idea further, with a strategy she snappily dubs “Power of Power of One”. By that she means partnerships with other firms to cut the cost of procurement, or research and development. Pepsi has already signed a supplies and ad-purchasing deal with Anheuser-Busch, a big brewer.
In the long run, much will depend on the success of Pepsi’s strategy to convince the public and regulators that it is on the side of reducing obesity, not creating it. This strategy will have several prongs, including reducing the amount of obviously unhealthy ingredients in its existing products, adding new healthier products to its portfolio, promoting healthier lifestyles and trying to point the finger of blame away from how many calories people consume to how few calories they burn. “Why aren’t we going after computer and cable-TV companies for creating a sedentary lifestyle?” asks Ms Nooyi.
Pepsi’s growing portfolio of “good for you” products now accounts for around $10 billion in revenues (nearly a fifth of the total). Ms Nooyi expects that figure to grow to $30 billion within ten years. The firm has been hiring an army of experts on health to work in its research and development business, to give credibility to its claim that it is applying science to creating products that are better for its customers. Mahmood Khan, a British-born doctor recruited to run Pepsi’s R&D at the start of 2008, says he has been “pleasantly surprised by how rapidly this new health agenda has been embraced.”
Pepsi already claims to be making significant progress in making its “fun-for-you products better for you” by voluntarily removing trans fats long before it was required to do so, and reducing the amount of sugar, fat and salt. There is now less salt in a packet of crisps, claims Dr Khan, than in a slice of white bread.
Quaker, which makes porridge, cereal, cereal bars and rice crackers, is Pepsi’s leading healthy brand. Pepsi hopes to use its expertise in product design and packaging to make these goods more enticing, especially to children at breakfast time. It is already testing oatmeal drinks and biscuits, as well as new flavours of porridge. Quaker Oats packaging will also get a more contemporary look, although the black-hatted Quaker mascot will survive. “Our goal”, says Ms Nooyi, in typically forthright style, “is to rewrite the rules of breakfast.”
There is no doubting the seriousness of Ms Nooyi’s drive to increase Pepsi’s sales of healthy products. But it will not be easy to push them without undermining sales of its other, less wholesome wares or appearing to nanny its customers. Moreover, politicians and public-health campaigners may not regard selling more healthy products, while continuing to profit handsomely from unhealthy ones, as the best way to tackle obesity.
1) Coca cola and Pepsi, which one do you prefer? Can you taste the differences?
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