Say Goodbye to Salty Profits

Shifting consumer tastes. The threat of government regulation. Crimped household budgets. Packaged-foods and beverage companies such as PepsiCo (NYSE: PEP  ) are combating these and other headwinds with a major push into healthier -- or just less-bad-for-you -- versions of classic products.

Many of PepsiCo's product innovations -- including changes to fiber, sugar, and calorie content -- appear fairly straightforward. Less of this, more of that, and voila! (OK, maybe not that simple ....)

Other changes, however, are seemingly the stuff of Silicon Valley science. That's certainly the case with the company's most recently announced project, a high-tech salt that can deliver a comparable flavor experience while reducing overall sodium intake.

In a recent Wall Street Journal article, a PepsiCo scientist explained that most of the salt on a potato chip is swallowed without having any effect on how the chip actually tastes. PepsiCo hopes to improve the nutritional profile of its Lay's Classic potato chips by re-engineering the size and shape of salt crystals. The ultimate goal is a tasty, salty chip that offers the benefit of 25% less sodium.

Across its product portfolio, PepsiCo is targeting a similar average sodium reduction per serving by 2015. While its plans may be the most ambitious among its peers, PepsiCo doesn't stand alone. Kraft (NYSE: KFT  ) , ConAgra (NYSE: CAG  ) , and Campbell Soup (NYSE: CPB  ) are all hacking away at sodium levels.

Companies aren't making such changes simply to please consumers. Take the case of New York City, for instance, which announced earlier in the year that it is coordinating a national campaign to slash the salt content of restaurant and packaged foods by one-fourth across five years. Despite what's sure to be intense industry lobbying, I suspect that government regulation, even if watered down, will ultimately prevail. Notably, companies such as Campbell have stated their support for the NYC proposal in spirit, while indicating that the specific targets are unrealistically aggressive.

Along with salt, sugar represents another battleground -- although not in the way you might think. Here, companies including Kraft, ConAgra, and PepsiCo are bowing to consumers who perceive cane sugar as a more natural alternative to the much-maligned and nearly ubiquitous high fructose corn syrup (HFCS). The only problem in replacing HFCS with sugar is that the latter is more costly, which hardly helps sweeten the corporate bottom line. Incidentally, it's also no boon to corn-product manufacturers such as Archer-Daniels-Midland (NYSE: ADM  ) .

Unlike fast-food companies such as Yum! Brands (NYSE: YUM  ) and McDonald's (NYSE: MCD  ) , which test the idea of a health platform from time to time, I believe that developments described above represent a structural change within the packaged-foods industry.

For now, investors should expect margin compression as companies alter ingredients and plow additional resources into R&D. But in the long run (and in theory), healthier consumers can better afford to snack, munch, and microwave for an extra decade or two, before they trade in the potato chips and soda for alfalfa sprouts and Ensure.  

And while you chew on that thought, I believe there's a bag of corn chips calling my name.

Related Foolishness:

PepsiCo is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call position on it. Motley Fool Options has recommended a bull call spread position on Yum! Brands. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.


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