Markets & Finance

Food Makers Get on a Health Kick


PepsiCo, Kraft, and others are making strides in reducing trans fats and producing healthier foods to meet consumer demand

From Standard & Poor's Equity ResearchNew York City's decision to ban restaurants from using artificial trans fats is the latest salvo in the war against unhealthy eating (see BusinessWeek.com, 12/6/06, "Why McDonald's Isn't Free of Trans Fat"). Many food companies have spent the past several years offering products with less sugar, sodium, or fat to health-conscious consumers. Now big food manufacturers such as Kraft Foods (KFT; 2 STARS, sell) are rolling out healthier versions of well-known products. PepsiCo (PEP; ranked 5 STARS, strong buy) and others are acquiring smaller companies that make products deemed to be healthy. And more organic and natural foods are being produced to satisfy the demands of consumers and retailers.

The push toward healthier food comes as obesity-related illnesses, such as diabetes and heart disease, are on the rise. Evidence shows that consumption of trans fat causes levels of LDL, or bad cholesterol, to rise, and levels of HDL, or good cholesterol, to decline, according to the American Heart Assn. When this happens, the arteries become clogged and the risk of having a heart attack or stroke increases. Diabetes, a disease that's exacerbated by being overweight, at least doubles that risk, according to the National Diabetes Information Clearinghouse.

To lure consumers, companies are rolling out foods that promise to both taste good and be healthier. Campbell Soup (CPB; ranked 3 STARS, hold) this fall rolled out reduced-sodium soups with sea salt, which is naturally lower in sodium than table salt. The new versions offer the same flavor but with 25% less sodium.

Stores Get Involved

PepsiCo's new Flat Earth fruit and vegetable crisps have the equivalent of a serving of fruit or vegetables in each ounce. Already, the company's Frito-Lay unit has baked versions of snacks, including Cheetos and Ruffles potato chips. PepsiCo and Kraft also offer 100-calorie versions of snacks such as Chips Ahoy! and Doritos. Oreo cookie maker Kraft, PepsiCo, and other big food companies have drastically cut or eliminated trans fats from many of their foods.

PepsiCo has made a string of purchases of small health food companies this year, including Stacy's Pita Chip Co., a maker of baked snacks; Izze Beverage Co., which produces sparkling fruit juices for consumers seeking an alternative to soda; and premium juice maker Naked Juice Co. The company is also producing its own line of high-protein drinks and other foods that don't carry the Pepsi name to be sold in stores such as Whole Foods Market (WFMI; ranked 3 STARS, hold).

Meanwhile, as consumers are becoming more aware of what they're putting in their bodies, Wal-Mart Stores (WMT; ranked 4 STARS, buy) and supermarket chains such as Kroger (KR; ranked 4 STARS, buy) are copying the lead of Whole Foods Market in trying to sell a greater variety of "better for you" products and even putting pressure on food producers to offer more organic and natural foods. Smaller companies, such as Hain Celestial Group (HAIN; ranked 4 STARS, buy), that sell primarily organic and healthy foods should see stronger demand for their products, in Standard & Poor's view.

"Negative Calories"

More companies are also promising a specific benefit to the consumer in their foods. In January, 2007, Coca-Cola (KO; ranked 4 STARS, buy) and partner Nestle will launch Enviga, a green-tea drink containing caffeine and calcium—ingredients the companies say are proven to increase metabolism. Consumers can burn as many as 100 calories a day by drinking three 12-oz. cans of Enviga, making the beverage a "negative calorie" food, according to the companies.

PepsiCo's new Tava contains chromium, a mineral that also increases metabolism. Groupe Danone (DA; not ranked by S&P Equity Research) is finding success with Activa, a yogurt containing the probiotic bifidus. Sales of this so-called "functional food," which promises to regulate the digestive system, jumped 36% in 2005 and should, Danone says, reach €1 billion in 2006, which would make it the company's leading brand.

DeFoe is a financial writer for Standard Poor's Equity Research.

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