PepsiCo Struggles to Conquer 'Healthy'
Dec. 12, 2016PURCHASE, N.Y. -- As more evidence that people say one thing and do another, PepsiCo said it wants to produce more healthful snacks, but its revenue growth is mostly from salty, fatty chips.
The company dilemma was highlighted in an article in the Wall Street Journal that said PepsiCo is being pulled in two different directions.
Despite an expanding stable of “good for you’’ brands such as Quaker oatmeal, Naked juice and Sabra hummus, PepsiCo Inc. fell behind the goal it made in 2010 to triple revenue from nutritious products to $30 billion this decade. Its new 2025 goal, announced in October, is that sales growth of its nutritious products “will outpace’’ the rest of its portfolio, the article said.
PepsiCo fell behind self-set targets of reducing the average amount of fat and sodium in key global brands by 2020. Sugars added in manufacturing have actually increased, instead of decreased as planned, in PepsiCo’s products.
Sales of less-healthy snack brands such as Doritos chips and Cheetos puffs, have led PepsiCo’s sales and volumes and its profit margins have expanded in 15 consecutive quarters. Its stock price set a record high in July.
Click through for other points from the Journal report ...
Natural and organic growing fast
Natural and organic foods and beverages have grown 23% to $41 billion the past two years in the United States but still are a small slice of the country’s $425 billion in overall sales, according to retail tracker Spins.
It is a lot easier for a food behemoth like PepsiCo to generate revenue by tweaking just the Lay’s brand of potato chips, the world’s top-selling food brand, than to start from scratch with quinoa or spinach.
Boosting Lay’s global share of savory snacks by just a 10th of a percentage point translates into roughly $135 million of additional retail sales, based on Euromonitor International data. Almost two dozen PepsiCo brands earn at least $1 billion in annual retail sales.
Snacks unit generates 52% of PepsiCo profits
Global retail sales of Lay’s, Doritos and Cheetos—the world’s three largest savory snack brands—have averaged annual growth rates of more than 5% the past five years, according to Euromonitor International. The company’s Frito-Lay North America snacks unit, which also sells major chip brands such as Ruffles and Tostitos, generated 52% of PepsiCo’s operating profit last year, up from 43% in 2010.
Try, try again
Not that PepsiCo hasn’t tried. CEO Indra Nooyi, above, has long been advocating for healthier snacks, and putting resources toward the challenge. She ramped up R&D (research and development) spending and dispatched executives to Iceland to research seaweed, India to study Ayurvedic medicine and Africa and the Amazon to learn about ancient grains, berries and plants. She recruited Mehmood Khan to be PepsiCo’s chief scientific officer. The former Mayo Clinic endocrinologist and R&D chief at Takeda Pharmaceuticals, was hired to employ basic science to solve some of food’s thorniest problems—including sugar, salt and fat.
Nooyi even has been keeping her eye on crickets as a source of protein in snacks. "Bug-related stuff is big" as customers seek cheap sources of protein, she said at the October Net/Net event at the New York Stock Exchange.
PepsiCo closely studies what consumers will want to snack on in the future so that it can be the provider of those snacks.
"[Experts] said the hottest thing is eating crickets," Nooyi said. "I am not talking about the game cricket, I am talking about crickets. In chips. And I am a vegetarian, I am not eating any cricket chips. But they said if you want a high protein source, there is a series of products being launched with crickets."
Taste is the greatest hurdle
A series of starts and stops have proven one main thing: Taste matters most, and consumers won’t compromise on taste for something that’s more nutritious.
Add to that the production plants and processes in place, and it’s a huge challenge to launch new products that are more “a distraction” than a profit generator.
Still, the company has made some progress reducing sodium and is rolling out chips that are baked instead of fried in 25 more markets in the next year or two.
CFO predicts Pepsi will win
Chief Financial Officer Hugh Johnston remains confident that PepsiCo’s products will “come out on top’’ as retailers winnow the nutritious brands to focus on top sellers. He said PepsiCo will win because it is investing heavily in innovation and can scale up more easily through its highly developed agricultural procurement. Johnson also takes the position that profit margins of healthier offerings ultimately will be in line with the overall business.
The goal isn’t to turn PepsiCo into a health-food company, he said, but to provide consumers with choice. “When consumers want to indulge, we have indulgent products,” he said. “When consumers want to eat healthy, we have healthy products.’’