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Catching the Diet Craze

Food industry giants-under fire for allegedly causing obesity-are fighting back by shifting gears and feeding consumer demand.

When it comes to relying on the dietary discipline of the American people, pardon food-industry chiefs if they haven’t exactly been bellying up to the table. They remember well the low-fat-product craze of the ’90s: It sizzled, then fizzled. They watched Procter & Gamble pour hundreds of millions of dollars into olestra, the can’t-miss fat substitute. It got a reputation for causing people indigestion and now is being manufactured as a hazardous-waste cleaner. They saw McDonald’s bring out test after test of new formulas for soy burgers: McLean Deluxe, R.I.P.

But this time, a growing number of CEOs of food, beverage and restaurant companies believe the nation’s gastronomic zeitgeist really might be different. A populace burdened by unprecedented levels of obesity and derivative ailments like diabetes finally shows signs of seeking real relief in more nutritious foods and beverages, more healthful restaurant fare and more productive dieting regimens. Food science and technology are capable of providing better answers to their demands. And offering their own form of encouragement are a phalanx of plaintiffs’ lawyers who are painting Big Food as a reincarnation of Big Tobacco.

So, many CEOs now are scrambling to realign their companies around better-for-you products and marketing. “This is one of the big opportunities to grow the business because it’s increasingly obvious on a number of fronts that it’s good business to do it,” says PepsiCo CEO Steve Reinemund, who now seeks to mold at least half of the company’s products in a “better-for-you” ethos. “Consumers’ interests are changing for healthful, good-tasting, convenient products that we know how to do. And the public attention on a broader scale is definitely on the food industry to adapt to those needs.”

Lloyd Hill believes that the self-preservation instinct of baby boomers finally makes it timely for his company, Applebee’s International, to roll out a menu it has been developing for more than two years with Weight Watchers. “As we age and confront our mortality, boomers are realizing we can control some things to maintain our vitality and energy level,” says the 59-year-old CEO. “Our company is making a reasonable and scaled bet that if you offer people nutritious, healthy food and-here’s the key-it tastes great, they’ll want it. If no one buys these things, then we’re on to another strategy.”

Even CEOs whose companies have been pioneers in the industry’s move toward healthfulness have been jolt-ed into new tactics by the marketplace’s shift in their direction. This fall, for example, Hain Celestial Group reacted to the growing low-carb diet craze by introducing a corporate brand called Carb Fit that it is co-branding with most of its existing product lines.

“I really can’t sit here and say today that this is something that will be around for the next 20 years or even 10 years,” says Irwin Simon, founder and CEO of Hain Celestial, the largest company that sells only better-for-you fare. “But as the CEO of a public company, my job is to make sure that we are either the trend-setter or we’re on top of trends and that we’re extremely reactive.”

Timing a tricky food market
Indeed, it’s far from clear whether American consumers might not be even fatter in five years than they are right now, or whether they’ll ever really eat to live instead of live to eat. But industry CEOs are responding to the market of the moment. Sales at McDonald’s finally began to tick up this year after the fast-food icon filled out its salad menu and began promoting leafy fare instead of Big Macs. Sales of Splenda recently rocketed past those of NutraSweet and Equal, as Johnson & Johnson’s upstart artificial sweetener reaped the benefits of a broad recommendation by the late low-carb-dieting guru, Dr. Robert Atkins. Sales growth for “natural” and organic products continues to vastly outpace the rest of the food industry.

Meanwhile, Kraft CEO Betsy Holden conceded this past fall that the company’s Oreos and other well-known products were starting to lose some of their 40-percent share of the U.S. cookie market to “healthy” brands. And Unilever was blindsided over the summer by a sudden, double-digit decline in U.S. sales of Slim-Fast, as the diet-products line-which had soared by meeting the low-fat market-proved slow to react to the low-carb craze.

The 55-year-old Reinemund has adjusted to the industry’s new tectonics about as deftly, in the view of Wall Street analysts and others, as any Big Food CEO so far. PepsiCo already had acquired the Tropicana orange-juice company in 1998 and, within a year after becoming CEO, in 2001 Reinemund acquired Quaker Oats and its dominant sports-drink line, Gatorade. This year, the company’s Frito-Lay unit eliminated trans fats-which scientists have fingered as particularly harmful-from its salty products. And Reinemund oversaw the introduction of new, more healthful, organic versions of Doritos, Cheetos and other Frito-Lay stalwarts under the Natural moniker.

This is all risky business for a company that still enjoys the vast majority of its profits from the sale of fattening sugar water and chips and whose biggest corporate advantage over arch-rival Coca-Cola has been profits from Frito-Lay. Frito-Lay stumbled badly in this direction in 1998 with its much-touted WOW! line of chips based on olestra. Reinemund also admits that Frito-Lay’s introduction of baked snacks several years ago, which he led, was premature and strapped the company with too much manufacturing capacity for product lines that only recently have begun to meet his initial sales expectations.

“Not taking a balanced approach can be a bad business decision,” says Reinemund. “For a broad, multinational company playing in the spectrum that we do, we need to have a portfolio of products that fit multiple consumer needs on a lot of fronts.”

But Reinemund is moving determinedly in the direction of healthfulness, and already the market seems to be affirming that thrust: Sales of Frito-Lay’s better-for-you snacks grew at a 30-percent clip during the third quarter, and the Natural line already has reached more than $100 million in sales. Moreover, he says, a better-for-you strategy plays well with the troops. “When we can go home and talk about the kinds of things we’re doing that contribute to better health, it’s something our associates feel good about,” says Reinemund, a fitness buff. Just to keep himself on track, the CEO meets every Friday afternoon, on the phone or in person, with Dr. Kenneth Cooper, father of the aerobics movement, who has become a key advisor to PepsiCo.

Personal experiences are playing a big role in how CEOs are navigating the new marketplace. Jeff Endervelt, for instance, has been on a low-carb, high-protein diet for most of the last two years. So he says it was a “natural” move for him to lead the submarine-sandwich chain he bought in 2002, Blimpie International, into that fast-growing segment this year. The New York-based company began test-marketing a Carb-Counter menu of sandwiches served on a newly formulated, low-carbohydrate bread.

“We wanted to explain to the public more that Blimpie was healthy, and we probably weren’t getting the message across,” Endervelt says. “As I looked at how the market was playing out, I realized this low-carb thing would take off rapidly. Studies were coming out, and the Atkins approach was getting more and more validation.” Now, Endervelt is counting on the low-carb menu “to give us an expanded marketplace.”

Similarly, a couple of years ago Hill was hearing from his wife and another C-level executive, each of whom was following the Weight Watchers plan, that Applebee’s menus were low on healthy choices. Hill contacted Weight Watchers International, “and from the start the issues I dealt with were strategic: Will this differentiate our restaurants? Is this the right brand to do it with?” Deciding the answers were “yes” and “yes,” Hill appointed a project team that hammered out a test menu and marketing approach with Weight Watchers over the course of 14 months. Assuming the test goes well, Applebee’s will be turning over about 15 percent of the menu at each of its more than 1,550 restaurants to Weight Watchers-approved items over the next year or two. The timing seems poised to work out perfectly.

But timing is just one of the pitfalls that can victimize CEOs as they tread into this new territory. Both Campbell Soup and Kellogg tripped badly a few years ago on corporate initiatives that were too narrowly targeted on developing specific “functional foods” or “nutriceuticals” instead of strategically recasting their entire product portfolios. And while Unilever recently decided that it needed to diversify the Slim-Fast brand beyond shakes and bars, Chairman Niall FitzGerald appears to have been caught flat-footed by the low-carb phenomenon. In fact, the marketing of Slim-Fast’s most recent additions to the U.S. market-a series of pasta dishes-seems oblivious to consumer concerns about carbs.

Repositioning market mainstays
CEOs of diversified food companies such as Unilever and PepsiCo have the toughest set of factors to balance, and it’s difficult for them not to be whipsawed. H.J. Heinz CEO William Johnson, for example, this year launched several new initiatives designed to better position ketchup, a mainstay product of the Pittsburgh-based giant, in the context of the new healthfulness. In February, Heinz will begin selling One Carb ketchup, which reduces the normal carbohydrate content of ketchup by 75 percent. And Heinz was considering an attempt to get federal endorsement of a so-called “qualified” health claim for the efficacy of lycopene-a nutrient that is natural in high concentrations in tomatoes-in the prevention of prostate cancer.

Yet at the same time, consumer worries about carbohydrates have eaten into french-fry sales, imperiling sales of Heinz’s Ore-Ida potatoes. The presence of trans fats in the oils that most restaurants use to prepare fries is another big issue likely to stick around, according to David Moran, president of Heinz’s U.S. consumer-products unit.

Industry CEOs also realize that they’ll never be able to satisfy all the critics on this issue. So far, courts have thrown out suits that tried to pin the blame for obese kids on McDonald’s. But the food industry remains in the bull’s-eye of accomplished litigators such as John Banzhaf, the George Washington University professor who helped wring multibillion-dollar verdicts from cigarette manufacturers.

CEOs of food, beverage and restaurant companies may soon be held responsible for getting Americans to exercise more as well as eat better. “We need to educate our communities and schools more about the benefits of physical education,” says Hill, so Applebee’s is tackling the task of how to do that. McDonald’s recently introduced what amounts to an adult Happy Meal, including a salad, a bottle of water-and a pedometer, to remind consumers to do more walking.

But there are limits. “We can’t do everything,” says Ken Barun, McDonald’s corporate vice president in charge of “healthy lifestyles.” “We can’t tackle the whole world in an education process about the benefits of exercise.”

For CEOs who have been peddling healthful products all along, there is some barely concealed glee that their mainstream counterparts have had to move their way. Hain’s Simon believes that the transition will be difficult. “Can Frito be organic on one side of the store and regular on the other side?” he says. “Brand equity says you might not be able to have a product like that going both ways.”

Hain’s pure positioning, Simon insists, makes it easier for him to take advantage of the trend he first observed a decade ago, when he began piecing a number of small healthy-food brands into Hain Celestial. “I always felt that healthy eating and obesity were problems that were going to face the nation and that one way or another consumers would begin to seek more healthful products,” he says. “What’s happening now helps me realize at least one thing: I’m not crazy.”

About Dale Buss

Dale Buss
Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other top-flight business publications. He lives in Michigan.