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Profiling PepsiCo's (NYSE: PEP ) full-year 2009 results, I mentioned that CEO Indra Nooyi is steering R&D resources toward healthier products. For a company that helps pack grocery store shelves with soda and potato chips, that's a move worthy of examination.
First off, let's establish that Nooyi's strategy taps into what is essentially a long-running, macro-driven trend. Both U.S. and international consumers are eating healthier, even during the current recession. And no one's making that up: Numerous studies all describe a similar consumer shift.
Furthermore, I expect the healthier-eating trend to both deepen and broaden, driven by such forces as graying baby boomers who crave an active retirement; rising health-care costs that nudge adults of every age toward "preventative" lifestyles; and a greater focus on positive everyday choices, as major life issues such as employment and 401(k) balances remain beyond consumers' control.
So how exactly is PepsiCo positioning itself to profit?
Headlining the product innovation is the company's flagship sports drink and U.S. market-share leader, Gatorade, which is the No. 2 brand for athletes behind Nike (NYSE: NKE ) . Here, PepsiCo is in the process of removing high fructose corn syrup (HFCS) from both the traditional Gatorade and the newer G2 lines. The move could help grab market share from Coca-Cola's (NYSE: KO ) competing -- and recently stronger -- Powerade brand. (Note that Coca-Cola has already gone HFCS-free with its Powerade Zero line.)
Rounding out the still-beverages category for PepsiCo, Trop 50 -- a new line of Tropicana juices that boasts half the calories and sugar -- is pushing $100 million in sales in the last year, while the SoBe label's zero-calorie offerings recently helped drive up SoBe Lifewater brand volume by 50%.
Meanwhile, the Frito-Lay segment plans to roll out Lay's Kettle with natural flavors, and to boost the whole grain and fiber content, respectively, of its Tostitos and Sun Chips brands. Management noted that in general it's focusing on snacks that feature less sodium and healthier oils.
All told, PepsiCo derives about $10 billion in sales (less than a quarter of total sales) from what it calls its "good-for-you-products." However, Nooyi has said that she wants to grow that to $30 billion in the next 10 years. She appears committed. In just one example, PepsiCo recently opened a new research lab near Yale's campus, with the exclusive goal of raising the nutritional profile of its products.
While I believe that PepsiCo has correctly keyed into evolving consumer trends, I have to wonder if consumers will consistently buy into health enhancements from brands that often are, at heart, the traditional face of the salty, sweet, and fatty.
But will PepsiCo be able to out-innovate the competition? If its healthier fare really catches on, we'll soon have a faceoff between PepsiCo's products and the natural and organic store brands offered by such grocers as SUPERVALU and Safeway (NYSE: SWY ) . And given that Wal-Mart Stores (NYSE: WMT ) has already muscled into the likes of organic produce and all-natural dairy goods, could it be long before the retailer's Great Value brand is churning out bags of whole-grain pretzels and low-salt chips?
Finally, on a companywide level, slumping domestic sales of carbonated beverages might significantly offset future growth provided by the health platform. Ultimately, PepsiCo's corporate and brand images could get stuck in the middle, somewhere between the wholesomeness of Whole Foods Market (Nasdaq: WFMI ) and the "sinfulness" of booze-maker Diageo (NYSE: DEO ) .
And the muddled middle, dear reader, can be a tough place from which to grow.