Stocks & Markets June 7, 2010, 12:06AM EST

Food Giants Revise Recipes to Please Uncle Sam

Of the sectors facing the Obama Administration's regulatory eye, food packagers seem likeliest to avoid broad demands that might sap profits

Story Tools

(Corrects pronoun identifying analyst in 20th paragraph)

From utility companies and Wall Street firms to health insurers and oil producers, Washington is putting big business under intense scrutiny. With obesity a serious public health problem in the U.S., large food companies such as PepsiCo (PEP) and Campbell Soup (CPB) are feeling the pressure, too.

However, while analysts in other industries warn that new federal regulations could squeeze profits or change business models, those who cover the food packaging industry are far less worried.

The reason: The industry is trying hard to avoid an open fight with the Obama Administration. Companies and industry groups are applauding First Lady Michelle Obama's efforts to fight obesity and they're cutting sodium and calorie levels in food before the government demands any changes.

Public health advocates have been turning up the heat on the food industry over the last several months. Thanks to the shift of power in Washington toward Democrats, the food business is facing "a heavier layer of regulation," says Stifel Nicolaus (SF) analyst Christopher Growe.

The Institute of Medicine—part of the federal National Academy of Sciences—issued a report in April that called on the Food & Drug Administration to require food packagers to gradually reduce the sodium content in food. "The patchwork of voluntary approaches that have been implemented over the years have not worked," the report concluded, noting that the average American consumes 50 percent more sodium each day than is recommended.

Michelle Obama's fight again obesity, particularly among children, culminated in a May 11 report that recommends, among other things, making healthier food available: "To address the obesity crisis, we must expand and accelerate efforts to reformulate products, particularly those aimed at kids, so they have less fat, salt, and sugar, and more of the nutrients children need."

no villains or pitched battles

However, in a significant victory for food packagers, the report did not call for greater direct regulation of food ingredients—at least not yet. FDA spokeswoman Siobhan DeLancey says the agency is still reviewing the Institute of Medicine's report on sodium. "The FDA is not currently writing regulations to limit the amount of sodium in food," she said in an e-mail, noting that no "final decisions" have been made.

Both the Administration and the food industry seem eager to work together. "The food companies avoid being the villain and the administration avoids turning it into a political battle that would only stagnate," says Credit Suisse (CS) equity analyst Robert Moskow.

Food companies are taking a variety of steps to "stave off further regulatory action on the part of the government," Growe says.

Big individual food companies are introducing new products, reformulating existing products, and changing labels. Campbell Soup says it will offer several new low-sodium soups this summer, bringing its total of low-salt offerings above 200.

Since there is no artificial substitute for salt, it takes significant research spending to lower sodium without hurting taste, Campbell Soup spokeswoman Juli Mandel Sloves says. While making products more nutritious, she says, "we want to offer the same taste people have loved for decades."

healthier options not entirely new

PepsiCo said in March that it would cut by 25 percent the sodium per serving in key brands such as Frito-Lay by 2015, and by 2020 cut saturated fat by 15 percent and reduce added sugar by 25 percent.