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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

Lard-and-clear message
Some companies are already making broad changes in their product offerings. In March, 2003, McDonald's started targeting young moms with its premium salads, also offering milk and fresh Apple slices as options in its Happy Meals for kids. So far, says Cathy Kapica, McDonald's global director of nutrition, the chain has sold 200 million salads and anticipates selling 35 million pounds of apples this year. Sales of 1 percent-fat milk sold in attractive Milk Jugs bottles have more than doubled since their introduction last year. McDonald's has also said it would eliminate its supersize menu options.

These changes helped nourish a turnaround at McDonald's, where sales are rising again after a four-year decline. Same-store sales increased 5.8 percent, and revenue rose 9.3 percent, to $4.9 billion, in the third quarter, which ended Sept. 30. The new products also gave profits a boost — earnings were up 42 percent, to $778 million, in the quarter. Said CFO Matthew Paull in a conference call after announcing the results: "There is no doubt that McDonald's is far more relevant today."

Pepsico has also been quick to recognize the shifts in consumer tastes, removing artery-clogging transfats from Cheetos, Tostitos, and Doritos snack. Sales jumped 26 percent almost immediately. Spokesman Mark Dollins says Pepsi has vowed to improve the nutrition profile of its products. Over the last three years, he notes, "better for you" products have accounted for 50 percent of new-product revenue. Pepsi also is getting ready to roll out a new line of snacks based on vegetables and fruit.

Flat fizz
Pepsi's financial returns reflect the strategy's success. Third-quarter profits jumped 35 percent, to $1.36 billion, while revenue climbed 6.3 percent, to $7.26 billion. It attributes much of the gain to its new products, as well as strong sales that are getting a boost from the health trend, such as Aquafina, the top-selling bottled water in the United States., and Gatorade, the nation's best-selling sports drink.

Adapting to shifting consumer tastes can be risky. On May 24, Coca-Cola introduced C2, a cola with half the carbohydrates, calories, and sugar of regular coke at a grand gala in Los Angeles featuring appearances by Paula Abdul and Ryan Seacrest of "American Idol" fame. But the response from consumers was a collective yawn. Sales of C2 peaked in July, and have since fallen 60 percent in U.S. supermarkets, according to researcher Information Resources.

Developing healthier products can take time. In 2002, McDonald's promised to cut trans fatty acids from its french fries by half within six months. It has been two years, and the pledge still hasn't been fulfilled. Chief U.S. Operations Officer Ralph Alvarez said in a release: "While speedy implementation is an admirable goal, we are most focused on the satisfaction of our customers." If tweaking a product can be that difficult, overhauling an entire business is a mammoth undertaking.

Faded wonder
Nonetheless, pressure for change will continue to grow as consumers become more aware of the dangers of obesity. Many school districts are banning junk food from vending machines and cafeteria menus. And concerned Congress members have introduced several bills aimed at improving food labels and promoting nutrition and exercise plans for children. Congress is also starting to fund community-based nutrition-education programs.

Food companies are increasingly being targeted by lawsuits. So, far they haven't gotten anywhere, but the companies know that could easily change. "Saying diet is your personal responsibility doesn't work anymore, and the lawsuits have sent food companies scrambling," says Marion Nestle, professor in the Nutrition, Food Studies & Public Health Dept. at New York University.

Companies that don't change can quickly get in trouble. Consider Interstate Bakeries, which filed for bankruptcy Sept. 22. It had been pinning its future on the successes of the past, turning out Wonder Bread and Twinkies even as consumer demand shifted to healthier fare. When losing weight becomes the basis for reality TV, it's a trend a lot of people are going to be responding to.