Nooyis business focus suggests fundamental shift in strategy

Nooyi's business focus suggests fundamental shift in strategy

PepsiCo's pronouncements on plans for a health drive comes at an opportune time, with Michelle Obama this week launching her own campaign to tackle obesity. However, Indra Nooyi's comments on the business case for the company's strategy demonstrate a long-term commitment to portfolio change - rather than a short-term fix designed to combat NGO and campaigner criticism. Ben Cooper reports.

Even if this had this not been the week it announced its full-year results, the likelihood would be that PepsiCo would be feeling the heat of the media spotlight.

The launch earlier this week of a major campaign to tackle childhood obesity fronted by Michelle Obama means plenty of work for the media teams at soft drinks companies and snack foods manufacturers. A producer of both is likely to have had an especially busy time of it.

In fact, while PepsiCo technically has a greater exposure over nutritional issues than its rival, Coca-Cola Co., it has generally managed this area astutely, though it may be that Coke tends to attract more negative publicity simply by dint of its brand profile.

However, the announcement by PepsiCo that it plans to make product development in the better-for-you categories, in both food and drinks, a strategic priority appears particularly well timed.

It not only coincides with Mrs Obama’s campaign but also with the announcement made jointly by Coke, PepsiCo, Dr Pepper Snapple Group and others this week that they would voluntarily be putting calorie information on the front of beverage labels by the end of 2012 - and comes at a time when the debate in the US over advertising and labelling of food and drink aimed at children is running high.

So PepsiCo’s move not only represents an important strategic development for the company, but a concerted focus on better-for-you products also offers the company the chance to improve its public image at this time of heightened scrutiny.

Interestingly, PepsiCo CEO Indra Nooyi has focused on the business benefit. At the end of January, Nooyi said PepsiCo, which posted a 16% increase in full-year profits this week to $5.95bn on flat sales of $43.23bn, planned to triple its $10bn sales of better-for-you food and drinks with the introduction of several new products.

She reiterated this point this week at the analysts’ briefing, saying that the success of its Quaker and Tropicana brands had created an “unbelievable” brand platform for the strategy, and this, coupled with enhanced R&D capabilities, would allow PepsiCo to grow the healthier products business range from its $10bn base.  “I feel we have a great platform to expand the nutrition business and I feel very good about our prospects here,” Nooyi said.

Philip Gorham, analyst at Morningstar, believes the move will play well with investors. "If the company can launch a few successful products, I think investors will look at Pepsi and believe that the firm has a place in healthy food and drinks categories," he tells just-food. "However, it remains to be seen what Pepsi's pricing power will be in those categories. Some categories are very price competitive, but in others, branded products can charge a premium."

In addition to introducing new products, healthy reformulation will also feature in the strategy for example by replacing ingredients with healthier options such as heart-healthy oils and reducing salt levels.

“Our strategy is to rapidly expand our ‘good-for-you’ portfolio. PepsiCo currently has around a $10bn core of good-for-you products, anchored by Tropicana, Lebedyanski, Quaker, and the new dairy joint venture we entered into with Alamarai," Nooyi said. “We will augment the organic growth of these platforms through an increasing stream of science-based innovation. Some of these new products we plan for will come from targeted acquisitions and from joint ventures. But the larger number will be generated from the R&D that we have been ramping up over the past couple of years and which we will continue to expand.”

The strategy is a fairly long-term one.  A PepsiCo spokesperson confirmed to just-food this week that the company was looking for that trebling of better-for-you product sales to be realised in around ten years.

There is probably a very good reason why Nooyi is presenting this as a business decision rather than something related to the company’s corporate responsibility agenda. At this time, there are a lot of statements being made by industry advocates and companies wishing to present themselves as supportive of the First Lady’s initiative. PepsiCo clearly wants this to be seen as something more fundamental.

In particular, the company has drawn attention to the research and development investment being made in this area. Last month, it unveiled plans to open an R&D facility in New Haven in the US, dedicated to better-for-you products.

“We’ve hired a whole staff of research and development people, including a chief scientific officer, we’re investing in research and development, we’re looking at ways to make our ‘good for you’ products healthier and we’re also looking at developing healthier new products,” the PepsiCo spokesperson said.

But while the company may be at pains for this not to be seen as gesture, it undoubtedly will do no harm for its public profile.

Identifying this as an area of growth potential is hardly revelatory but the timing of this move could be doubly shrewd for PepsiCo. Market researchers have suggested that growth in healthier foods had been hampered by the recession, while sales of less healthy foods, notably salty snacks, had held up well.

Indeed, this is borne out by PepsiCo’s own results. The company credited a strong performance from its snacks operations, along with international growth, as the main reasons behind its solid full-year results. "With the exception of Frito-Lay, volume fell in each of Pepsi's North American segments, including a 5% volume decline in beverages," Gorham points out. "Snacks, on the other hand, still look quite strong."

As consumer markets begin to pick up, any deceleration in the growth of better-for-you products there might have been could well be made up fairly quickly, resulting in particularly favourable market conditions for just the kinds of products PepsiCo has in the pipeline.

That said, it is the more important long-term trend that Gorham believes PepsiCo is looking to, and it is that which makes the new strategy compelling. "Over the long-haul, Pepsi's high-sugar content drinks and salty snacks are going to decline in popularity," Gorham says. "Therefore, by positioning the firm in these categories, I think management can secure the long-term prosperity of the firm."

So while the full-year results bear out that the snacks operations have bolstered the performance during the downturn, PepsiCo clearly believes that as consumer tastes change its snacks business will have to evolve to remain such a reliable mainstay for the company.