You have to provide the wants of the consumer.
Actions speak louder than words — or at least that’s what Pepsi’s latest endeavor to expand into the health food department seems to suggest. People say they want healthier foods, but Pepsi has found that people prefer taste over nutritional information.
Pepsi CEO Indra Nooyi wants to make the company a “health juggernaut,” but to keep up with the consumer wants, the company has increased the sugar content of its products.
The Wall Street Journal discovered that PepsiCo has fallen “behind the goal it made in 2010 to triple revenue from nutritious products to $30 billion this decade.” The company had a few successful launches, but products such as True North nuts to Müller Quaker yogurt have failed.
But since it has added more sugar to their products, “PepsiCo’s sales and volumes are on the rise and its profit margins have expanded” thanks to less healthy snacks offerings.. As much as any company may want to deny taste is paramount to health implications, facts do not lie:
These are hard truths for big food companies. Taste is the biggest factor in a snack purchase, according to 66% of baby boomers and 53% of millennials in a March survey by consultancy Alix Partners. When people get together, “they have snacks like potato chips and pretzels. They don’t all sit around and snack on granola bars,’’ says Norman Deschamps at market researcher Packaged Facts.
Natural and organic foods and beverages are growing fast—23% to $41 billion the past two years in the U.S.—but are still a small slice of the country’s $425 billion in overall sales, according to retail tracker Spins. Such products are often costlier to develop and harder to scale up. There were up to 50,000 products in a typical grocery store by 2013, up from 15,000 in 1991, but a quarter of them sold less than one unit a month, according to Accenture, a global consultancy.
Other companies have experienced the same situation as PepsiCo. Nestlé decided to try more health foods, which pushed it to “miss its revenue growth target for a fourth straight year.” Weak yogurt sales have plagued General Mills while Campbell Soup’s sales have gone down due to its “execution problems at its fresh-food division after a poor carrot harvest and protein drinks recall.”
PepsiCo’s chief scientific officer Mehmood Khan said that the company is “not trying,” but “doing” and “succeeding.” The numbers say otherwise:
Global retail sales of Lay’s, Doritos and Cheetos—the world’s three largest savory snack brands—have averaged annual growth rates of 5%-plus the past five years, according to Euromonitor International. The company’s Frito-Lay North America snacks unit, which also sells major chip brands like Ruffles and Tostitos, generated 52% of PepsiCo’s operating profit last year, up from 43% in 2010.
Nooyi added more funds to research and development (R&D) to research seaweed in Iceland and Ayurvedic medicine in India and Africa. She even spent money to research ancient grains, berries, and plants in the Amazon. More money went to Dr. Khan to find out how the company can avoid sugar, salt, and fat.
These actions proved wasteful as “[S]ales growth at the Frito-Lay North America unit slowed, and Pepsi lost market share to rival Coke.”
In 2011, the company used pictures of Lay’s, Doritos, Pepsi, and Mountain Dew on the cover of its annual report while “Nooyi stopped talking so much about healthy products as she increased marketing for the big core brands.”
The R&D sales and marketing executives told The Wall Street Journal that diving into the health business can provide many growing pains:
For starters, taste trumps everything. Sproutzels, a pretzel made from nutrient-rich sprouted whole grains, seemed like a good idea. The company tested it in Costco stores about 2½ years ago but Costco dropped it after sales underwhelmed. A former PepsiCo manager who worked on the project described the taste as grassy, grainy and gritty. PepsiCo says Sam’s Club currently stocks the product.
“I don’t know too many consumers who compromise on taste for something that’s more nutritious,’’ says Gregory Yep, PepsiCo’s senior vice president of long-term research before leaving the company last December.
PepsiCo’s plants, meanwhile, are geared to churn out mass-volume products delivered directly to store shelves. One round-the-clock Frito-Lay plant in Irving, Texas, takes in 20 tons of potatoes every couple of hours; chips can be produced and sent out to stores in the same day. Quaker’s nonstop mill in Cedar Rapids, Iowa, the largest of its kind in the world, is serviced by 20 railcars carrying 100,000 bushels of raw oats a day.
Any new, low-volume products can slow sales and thin profit margins. Normally, for a new product from a small company, $50 million in sales is a huge success. For a company the size of PepsiCo, with more than $60 billion in revenue, “it’s a distraction,’’ says Jeremy Cage, who was senior vice president of global snacks before leaving PepsiCo in 2012.
Depleted sales forced PepsiCo to put aspartame back into its Diet Pepsi this year. Because controversy surrounds the artificial sweetener, the company decided to use sucralose instead. But the taste changed and people abandoned the drink:
But its reformulation effort—launched last August—had made the market share losses worse, not better. U.S. retail sales of Diet Pepsi fell 10.6% in volume terms in the first quarter of 2016; its soda market share fell 0.4 percentage points to 4.1% in the period, according to industry tracker Beverage Digest. Sales of Coca-Cola Co.’s Diet Coke declined 5.7% over the same period. Diet Coke has a 7.4% soda-market share.
On social media, consumers called the new mixture “unpalatable” and “yuck”.
PepsiCo found some success cutting sodium in its products:
PepsiCo has made more headway with sodium, cutting it by 12% per serving since 2006 after developing “designer salt’’ crystals shaped to deliver the same taste at lower concentrations. The company was among the first to remove trans fats from its snacks more than a decade ago, but it has cut saturated fat by 3% since 2006, versus its earlier goal of 15% by 2020. The company plans to roll out chips that are baked instead of fried in 25 more markets over the next 18 months.
Overall, the consumer runs the market. Economics are pretty simple: supply and demand. A company wants to make money so it needs to listen to consumers. PepsiCo executives can desire healthy options from here to the moon, but if its consumers do not want it then why bother?