Strategy & Competition

Pepsi Brings In the Health Police


In February 2007, when Derek Yach, a former executive director of the World Health Organization and an expert on nutrition, took a new job with PepsiCo (PEP), his mother worried that he'd lost his mind. "You are aware they sell soda and chips, and these things cause you to get unhealthy and fat?" she asked him. Yach's former colleagues in public health circles murmured similar concerns.

Yes, he said, he knew what Pepsi made. But he wanted to help guide the $43 billion snack food multinational toward a more balanced product menu. The company describes its current portfolio of "healthy" fare as a $10 billion business—a figure CEO Indra Nooyi says she wants to see jump to $30 billion over the next decade.

The question is, will Yach, now senior vice-president for global health policy, really have the influence his boss has promised? If he does, will Pepsi's strategy prove profitable? Can its growing team of health advocates— who in times past might have seen Pepsi as the enemy—come up with an apple treat that tastes as good as a deep-fried Lay's potato chip?

Over the past two years, Pepsi has hired a dozen physicians and PhDs, many of whom built their reputations at the Mayo Clinic, WHO, and like-minded institutions. Some researched diabetes and heart disease, the sort of ailments that can result in part from eating too much of what Pepsi sells.

Yach and his comrades aren't subversives. The goal, says Mehmood Kahn, Pepsi's first-ever chief scientific officer, is to create healthy options while making the bad stuff less bad. "It's O.K. to have a slice of birthday cake on your birthday," says Kahn, formerly a practicing physician specializing in nutrition who did a stint at the Mayo Clinic. "Would you eat it every day of the week? That's a different question." At Pepsi, he and the other scientists "can say we can actually make an impact on what is available for consumers."

FLIGHT FROM JUNK FOOD

Khan hunts for benign ingredients that can go into multiple products. Last year, technological improvements to an all-natural zero-calorie sweetener derived from a plant called stevia allowed Pepsi to devise several fast-growing brands, including Trop50, a variation on its Tropicana orange juice that has half the calories of the breakfast standby. Introduced in March, Trop50 has become a $100 million brand. Two Trop50 line extensions are hitting the shelves: Pomegranate Blueberry and Pineapple Mango.

Chief Executive Nooyi says she has no choice but to move in healthier directions. For more than 15 years, consumers have gradually defected from the carbonated soft drinks that once comprised 90% of Pepsi's beverage business. Many switched to bottled water. Meanwhile, the cloud of criticism shadowing Pepsi's largest business, oil- and salt-laden Frito Lay snacks, grew steadily. The company acquired Quaker Oats and other wholesome brands but until recently didn't emphasize research. Nooyi, who took over in 2006, is changing that. She has increased the R&D budget 38% over three years, to $388 million in 2008.

"Society, people, and lifestyles have changed," Nooyi says. "The R&D needs for this new world are also different." Her goal of expanding healthy products to $30 billion in sales would require annual growth in those lines of more than 10%, twice the company's overall historical average.

Coming off a tough 2009, during which once high-flying brands such as Gatorade slipped, Pepsi hasn't convinced Wall Street that Nooyi's plans will pay off. The company trades at a significant discount to its rival, Coca-Cola (KO). While securities analysts say that healthier foods look like a good long-term market, for now, the slowdown in the company's far larger traditional snack-and-soda portfolio cannot be ignored. "The consumer can move to baked chips, or pretzels, or Sun Chips, but they're not yet giving up their chips for an apple or carrot stick," says Bill Pecoriello, CEO of Consumer Edge Research, an independent stock-research firm in Stamford, Conn.

Pepsi built its empire on the manufacture and distribution of instantly recognizable products. It could get a bag of Lay's or a can of Mountain Dew to customers practically anywhere in the world. So far, healthier options have produced only modest hits, including TrueNorth nut snacks and SoBe Lifewater. "We're not building Pepsi again," Nooyi says. She aims to sell a wider variety of products to meet all kinds of consumer demands.

Pepsi's health push includes a controversial plan to sell new products to undernourished people in India and other developing countries. This isn't charity, notes Nooyi, herself a native of India. The goal is to make money. As one of its exploratory ventures, Pepsi is supporting a nonprofit operation in Nigeria that distributes a protein-rich peanut-based paste. Khan says that once the company has figured out what's needed most, Pepsi will shift to for-profit production of nutritionally beneficial processed foods.

One potential hazard of marketing in the developing world is that Pepsi could be accused of trading on misfortune and not serving the overall dietary needs of the poor—a criticism that has haunted sellers of infant formula. Kelly D. Brownell, director of the Yale University Rudd Center for Food Policy & Obesity, says Pepsi's developing- nations initiative deserves scrutiny. But Brownell, an industry critic, praises Pepsi for improvements in its mainstream products, such as removing bad fats from its chips. "They're the most progressive player in the industry," he says.

Nanette_byrnes
Byrnes is a senior writer for BusinessWeek.

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