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The food giants go on a diet

The rise in obesity worries has forced many major food and beverage companies to make some healthy changes.
/ Source: BusinessWeek Online

Only in America? On Oct. 19, NBC premiered "The Biggest Loser," its latest entry into the reality-TV genre. In this show, however, the losers can be big winners. It features 12 overweight contestants competing to see who can shed the most pounds, chronicling their efforts over weeks. The winner gets a fabulous cash prize of $250,000. This and other reality shows in the past year (remember the one in which participants underwent surgery to remove fat?) show just how widespread public interest and concern over obesity have become.

Caught in the middle are U.S. food and beverage outfits. The obvious question for investors: Is there a prize for businesses that join in the fight against obesity? And, metaphorically speaking, will customers vote fast-food chains and other purveyors of fat-laden food off the show?

Hunger for change
Many companies clearly are vulnerable. Nutritionists and other experts say in addition to reduced physical activity, the factors that have led to the obesity epidemic include readily available sodas and snacks, growth in the number of fast-food outlets, super-sizing of food portions, and an increase in the number of high-calorie, high-fat grocery products. "There is a real change in people's underlying values when it comes to health, and food companies have no choice but to respond," says Americus Reed II, professor at Wharton School of Business. Indeed, obesity ultimately threatens the companies' own customer base.

Shifts in consumer buying are coming at the expense of flagship products. After decades of unabated growth, for instance, per-capita consumption of carbonated soft drinks declined for the fifth year in a row, to 53.8 gallons, in 2003, according to Beverage Marketing Corp. The percentage of restaurant orders for hamburgers at lunchtime peaked at 26.4 percent in 1997, since dropping to 23.3 percent in 2004, despite getting a slight boost this year from the Atkins and low-carb diet trends, says NPD Food World. Orders for french fries also peaked in 1997, at 27.2 percent. NPD says they're now ordered only 23 percent of the time. And cookie sales have declined since 1999, according to Mintel, a global market-research firm.

Smart companies are trying to view these shifts as an opportunity: "Healthier consumers are going to be good for us," said Coca-Cola CEO E. Neville Isdell in June at a food-business summit in Rome. "They will grow older, healthier, wealthier and, hopefully, therefore able to buy more from us."

Weighty issues
Coca-Cola, Pepsico, and Kraft Foods, the largest U.S. food company, all have promised in recent weeks to provide better nutrition labels on their products. On Sept. 30, General Mills said Cheerios and the other breakfast cereals it sells will henceforth be made with healthy, high-fiber whole grains. On Oct. 8, McDonald's introduced a new McVeggie Burger in Manhattan. The meatless, soy-based patty claims to be cholesterol-free and contains just eight grams of fat and 370 calories, vs. the Big Mac's 600 calories. Then there's Wendy's, which has begun broadcasting a commercial showing a boy chowing down on miniature orange slices, rather than French fries.

Concern over obesity has been rising rapidly at least since 2001, when the problem was labeled an epidemic by the World Health Organization. The same year, the U.S. Surgeon General issued an alarming report noting that 61 percent of American adults and 13 percent of children and adolescents were overweight or obese. Hundreds more studies have been commissioned, and the reports get more worrisome as they come out. The latest is "Preventing Childhood Obesity," issued on Sept. 30 by the Institute of Medicine, which was assigned by Congress to come up with a plan to decrease juvenile obesity.

Among the report's alarming conclusions: Since the 1970s, the percentage of obese kids has more than doubled among preschoolers and those in the 12- to 19-year-old segment. In children between the ages of 6 and 11 it has tripled. Approximately 9 million children over 6 are now obese, which has led to serious health problems such as diabetes and heart disease. Obesity-related annual hospital costs for children and youth more than tripled over two decades, rising from $35 million in 1979 to $127 million in 1999. And the national health-care spending related to obese and overweight adults could hit $129 billion this year.