Performance with purpose

While dairy-centred rivals such as Danone or Nestlé can argue that they have always had nutrition and health at the heart of their business, snack food and soft drink maker PepsiCo has no such luxury. But this has not stopped it from successfully reinventing itself – for the umpteenth time – as a supplier of products to make you feel good in both mind and body.
Elsevier Food International, Vol. 11, Number 1, February 2008
Chris Jones

Although the soft drink after which the company is named was first introduced in 1898 – a decade after arch-rival Coca-Cola – the modern-day PepsiCo did not see the light of day until 1965, when the carbonated soft drink firm was merged with snack maker Frito-Lay. The management of the two companies saw clear synergies in bringing together strong brands in the snack food sector that had taken off so dramatically in the post-war US, as consumers benefited from steadily increasing disposable incomes and rapid technological and marketing advances that flooded the market with a greater choice of products than ever before.

New product development has been focused on extending the range of the PepsiCo core brands such as Tropicana.

The first 20 or 30 years of the company’s development saw it follow the well-worn path taken by many – indeed most – other consumer packaged goods companies. Through acquisition and new product development, what started off in 1965 as a group with a handful of brands – Pepsi Cola, Mountain Dew, Diet Pepsi, Lays, Ruffles and Cheetos were the core products in its portfolio at that time – became a giant corporation with fingers in pies as diverse as road haulage (NAVL, acquired in 1968), fast food restaurants (KFC, Pizza Hut and Taco Bell, bought between 1977 and 1986) and sporting goods (Wilson, bought in 1970). But PepsiCo’s path to diversification finally reached the same destination as most other companies – transport and sporting goods were left by the wayside in a first restructuring in 1984, while the restaurant business was spun off into a separate unit in 1997 to allow PepsiCo to concentrate on its ‘blockbuster’ snack food and beverage businesses.
However, this did not mean an end to acquisitions – far from it. Throughout the 1980s and 1990s, the company steadily built up its international and domestic snacks and beverages businesses, including the purchase of such strong national brands as Walkers in the UK, Gamesa in Mexico and Wedel in Poland. At the same time, the company started diversifying into new product sectors through heavy investment in research and development that saw the creation of brands such as Pepsi Max, the sugar-free cola brand, in 1993 and bottled water brand Aquafina in 1997. The late 1990s and beyond saw the more measured – and logical – development of the company’s programme of acquisitions with the purchase of Tropicana in 1998 and Quaker in 2000, moving the group into new but related areas of business, namely soft drinks and breakfast cereals.
Modern-day PepsiCo is now firmly focused on its five billion-dollar brands – Pepsi, Tropicana, Frito-Lay, Quaker, and Gatorade – and much of its new product development has focused on extending the range of products within these core brand portfolios. Indeed, for the first half of the 2000s, PepsiCo’s growth came almost exclusively through new product development, rather than acquisitions, as the company reacted aggressively to probably the biggest challenge it has faced in its 40-year existence.

Fighting the flab
That challenge was the major assault on foods perceived as being high in sugar and/or fat that began in the mid 1990s amid alarming reports about the rising levels of obesity, especially among children. Few companies were spared the wrath of policy makers, health experts or consumer groups, but PepsiCo, whose entire product portfolio was stuffed full of potentially ‘dangerous’

PepsiCo CEO Indra Nooyi has set a goal of deriving 50 per cent of US revenues from Smart Spot eligible products by 2010.

sugars and fats, was singled out for more criticism than most.
Undaunted by the potential backlash against its popular brands, the US group took advantage of products such as sweeteners to produce sugar-free variants of most of its products (something, ironically, it had always been conscious of, since Diet Pepsi was launched in the 1960s).
Moreover, the company built on the large body of research about the healthy qualities of ingredients such as Omega-3 fatty acids and statins, which help reduce cholesterol, to update its snacks.
However, for PepsiCo the important thing was not simply to be more responsible in the products it made but also be seen to be more responsible, and as a result health and nutrition has become a key part of the corporation’s advertising and marketing. The PepsiCo Health and Wellness Philosophy was first published in 2002, and set out the snack-maker’s commitment to making products that, it claimed, would not only not damage the health of its customers but would also, as time went by, positively contribute to improving their health.
“The PepsiCo family of companies cares about the health of the people who enjoy our products,” the philosophy reads. “As a company that provides hundreds of convenient food and beverage products that rejuvenate millions of consumers around the world every day, we are committed to offering the widest possible spectrum of great tasting food and beverage choices. We also recognise that consumers have an increasing need and desire for foods and beverages that make it easier and more enjoyable for them to lead healthy lives. We believe that we are ideally positioned to meet that need, and we intend to lead the way.”

Health and nutrition has become a key part of PepsiCo's product development.

The key issue for PepsiCo is to stress its capacity to meet consumers’ every nutritional need. Why should they rush off to eat a piece of fruit or drink a glass of mineral water when they could get just as much healthy goodness from, say, a glass of Tropicana or a SoBe smoothie? More than that, these PepsiCo brands would not only offer the same level of healthiness – with a large dose of indulgence, of course – but they would also provide consumers with additional health benefits. Thus Tropicana’s product range was expanded to include drinks such as Tropicana Healthy Heart with Omega-3s, not simply quenching thirst and offering a vitamin-C boost like a real orange but helping reduce the drinker’s cholesterol levels to boot.
“Our commitment is that 50 per cent of our new products will be comprised of essentially healthy ingredients or offer improved health benefits,” says the company’s current Health and Wellness Philosophy, which also sets out the commitment to “improving the healthfulness of our products without sacrificing either taste or convenience” and to tackling the root of growing obesity levels by “offering healthy product choices in schools, by developing healthy products that appeal to kids and by promoting programmes that encourage kids to lead active lives”.
For some, however, it does not go far enough to avoid promoting fattening or unhealthy products to children. PepsiCo was one of several major US food companies singled out for criticism by leading US politician Edward J. Markey in 2007 for failing to commit to the same standards as cereal maker Kellogg. The company announced in June that it would improve the nutritional content of products it sells to children and tighten the marketing of such products – prompting calls from Markey for similar moves from other major food groups. In PepsiCo’s case, Markey’s criticism was a little harsh, since the company is already “the only food and beverage company to have signed voluntary agreements regarding beverages in schools and snacks in schools” as well promising only to advertise its healthier, so-called Smart Spot, products to children under 12.
But while sceptical consumer groups and health professionals are still to be convinced about the company’s – and the food industry as a whole’s – commitment to producing better-quality foods made with healthier ingredients and not targeted at vulnerable groups such as the young or the poor, the company itself is in no doubt about the need to continue its drive towards more ‘wellness products’.
 “We have a fundamental belief that humans need to be nourished in multiple dimensions - ranging from simple treats to healthier eats,” said PepsiCo CEO Indra Nooyi in the company’s 2006 annual report. “We’ve improved the nutritional profiles of our global, flagship brands by changing to healthier oils, reducing sugar and sodium content, and by expanding the range of products we offer. Smart Spot eligible products represented over two-thirds of our growth in North America in 2006. These products meet authoritative nutrition statements set by the National Academy of Sciences and the US Food and Drug Administration or provide other functional benefits. And we’ve set a goal of deriving 50 per cent of all our US revenues with Smart Spot eligible products by 2010.”
PepsiCo’s approach is, of course, driven not so much by altruism and concern for the health of the world’s consumers as by the phenomenal success of its healthy products, which allow consumers to feel that they are doing themselves good (whether in fact they are or not) without necessarily compromising on taste, price and indulgence, the three key motivators when it comes to food choices. Just how successful this strategy has been is clear from the company’s results. Sales in 2006 were up eight per cent to US$35 billion, mainly on the back of a strong performance from the Frito-Lay snacks business in North America, which increased sales by five per cent to US$10.8 billion thanks to a number of healthy versions of its brands, including baked Tostitos and 100-calorie versions of the Cheetos and Doritos lines. For 2007, the company is expecting to build on its health credentials following the launch of fruit and vegetable snack brand Flat Earth in February.

Going it alone
Perhaps not surprisingly given its size and global reach, PepsiCo is regularly linked to other big-name food companies as possible takeover or merger partners, but the company seems set on ploughing its own furrow. French food group Danone has been linked with PepsiCo several times in recent years – a rumoured bid by the US group in 2005 sparked consternation in the French media at the prospect of the ‘national treasure’ passing into foreign ownership. However, this has not stopped the same rumours resurfacing at regular intervals, most recently in July 2007 when a French radio station reported that “never has Pepsi’s appetite for Danone been so strong,” seeing it as a means of overtaking arch-rival Coca-Cola. In the end, it was Kraft that bought Danone’s biscuit business – after the bottled water arm, perhaps the part that fitted best with PepsiCo’s existing portfolio – perhaps finally putting an end to the rumours.
Which is not to say that analysts expect PepsiCo to continue to go it alone. The company has also been linked with Europe’s most profitable food manufacturer Nestlé, a rumour dismissed by Nooyi as unfounded. “Our strategy is unchanged,” she told analysts in July when the rumours surfaced: the company would continue to look for small, bolt-on acquisitions and would grow organically, just as it had done for the last five years or more. A tie-up with Nestlé would certainly seem to offer some synergies – most obviously in the breakfast cereals and bottled water segments – but would be unlikely to pass through the competition authorities hands without being significantly watered down – all supposing, of course, that the notoriously conservative Swiss company was willing to sell, which it is not.
Nooyi’s statement that PepsiCo will continue to look for companies and brands to add to its existing portfolio was, however, borne out by the acquisition in October 2007 of Brazilian snack group Lucky and of sauces and dips maker Sabra in December. Rumours are also circulating linking PepsiCo’s Quaker business to a possible tie-up with Kraft Foods Post cereals brand in the US – a move that would make strong business sense but would also run the gauntlet of the national competition authorities.
But it is new product development that is likely to be the main focus for PepsiCo in 2008 and beyond. Naturally, the company remains firmly tight-lipped about its research and development, but it is a safe bet that the emphasis will continue to be on healthier products, in particular in the snacks sector which performed so well for the company in 2006 and 2007, which have typified the group’s current philosophy of creating “performance with purpose”.