US health trend fails to dent PepsiCo snacks

PepsiCo's product range, strongly based around fizzy drinks and savoury snacks, could well be seen as the portfolio from hell in today's increasingly health-conscious climate. But company sales rose by 8 per cent to $29 billion during 2004, with North American savoury snack subsidiary Frito-Lay still contributing to almost half the total operating profit.

The Frito-Lay business increased sales by about five per cent to $9.56 billion, although there were also good performances from PepsiCo's non-carbonated drinks range, including the Tropicana fruit juice brand, and the group's international division which increased sales by almost 14 per cent to $9.8 billion.

Yet it is the onward march of Frito-Lay in the face of America's obesity crisis which stands out. The company says its three per cent rise in volume during 2004 was driven by major brands Lay's, Cheetos and Tostitos as well as a new format known as the 'multi-sack', which contains 24 single-serve snack packs.

Trends towards 'healthier foods' are obviously a challenge for Frito-Lay, but the size of the problem may have been exaggerated with 99 per cent of US households still buying savoury snacks and the average American eating more than nine kilograms of snacks a year; maintaining the country's position as the world's biggest snacks market, worth more than $37 billion.

PepsiCo has also reacted to public and governmental concerns about obesity by using its significant financial clout to adapt its product range. The company removed artery-clogging trans fats from Doritos, Tostitos and Cheetos in 2003 and these joined other non trans-fat brands Lay's, Ruffles, Fritos and Rold Gold Pretzels.

More recently, PepsiCo pledged that 50 per cent of new products will use "essentially healthy ingredients or offer improved health benefits"​, and this January the firm announced it would use the green Smart Spot symbol on more than five billion food and drink servings across Canada in 2005. It began using the symbol in the US last July.

Smart Spot criteria place limits on the amounts of fat (saturated and trans fats), cholesterol, sodium and added sugar that can be contained in a product bearing the symbol as well as drawing attention to products with specific health benefits and those fortified with known wholesome ingredients.

By taking the offensive, PepsiCo has managed to satisfy consumers' continuing addiction to snacking yet also helped them to feel better about doing it. The popularity of PepsiCo's brands and the financial flexibility it has to adapt means the company is better insulated against healthy eating trends than producers lower down the market, and particularly those operating solely in the cheaper private label sector.

Whisperings of an 'obesity tax' on salty snacks were heard in US government circles throughout 2004 and this clearly poses a more concrete financial threat to producers, yet details on how such a charge would work in practice are still sketchy.

So far PepsiCo's strategy has worked and the firm reported a one per cent rise in its share of North America's salty snack market for 2004.

The company's Quaker business, dedicated to cereals and wholesome snacks, gives PepsiCo even more potential to move forward in the current healthy eating trend. Sector rival Kellogg has already announced sales rises on the back of investment in more wholesome snacks, such as new versions of Pop-Tarts and fruit snacks.

PepsiCo's Quaker Foods North America, the smallest of its businesses, increased sales by a modest four per cent to $1.5 billion during 2004.

Solid results across PepsiCo's portfolio also helped to shrug off its weakened carbonated drinks sector, including trademark Pepsi-Cola where volumes fell by around 0.5 per cent, and displays the diversity in operations that has helped PepsiCo to progress while long-standing rival Coca-Cola struggles to regain its footing on the soft drinks market.