PepsiCo and Coca-Cola look to natural sweeteners

Reduced-fat french fries. Diet drinks made with natural sweeteners. Fruits and vegetables served with kid's meals. The purveyors of salt, sugar and fat are trying to clean up their images.

As consumers have grown more aware of exactly what is in the products they buy, food and beverage groups are stepping up efforts to shed their unhealthy reputations to capture or retain customers looking for alternatives to the fare they have traditionally peddled.

"We are seeing a fundamental shift in consumer habits and behaviours," Indra Nooyi, PepsiCo chief executive, told investors last week. She was talking about "an accelerated decline in diet drinks" as consumers wary of aspartame and other artificial sugar substitutes are demanding naturally sweetened drinks.

That push is also behind Coca-Cola's move to replace Sprite in the UK and France with a lower-calorie version sweetened with sugar and stevia - a plant-derived sweetener - and the June launch of similarly formulated "Coca-Cola Life" in Argentina.

Coke also recently patented a stevia product that analysts say may be used in zero-calorie drinks, while Pepsi is working on its own natural sweetener.

Sales of sugary drinks have been falling for years, with fizzy drinks now making up about 40 per cent of the US beverage market, compared with more than 50 per cent a decade ago, Ms Nooyi said. But now diet drinks are struggling too.

Sales of Diet Coke fell 3 per cent last year, compared with Coke's 1 per cent decline, while Diet Pepsi's 6.2 per cent drop was nearly double the 3.4 per cent decrease for Pepsi, according to Beverage Digest.

Diet Coke and similar food and drinks "are under a bit of pressure as people are questioning ingredients [and] ingredient safety," said Steve Cahillane, who heads Coca-Cola's North American and Latin American business.

The focus on healthier options is spreading throughout the food sector. In snacks, companies such as General Mills and Danone are playing catch-up to upstart Chobani, which has ignited a craze for Greek yoghurt.

Dan Wald of Boston Consulting Group said the packaged foods industry alone has a $150bn annual US sales opportunity in healthier food, which will grow 4 per cent annually.

Fast-food chains are not immune either. Amid continued criticism of its role in the US obesity epidemic, McDonald's last month said it would only advertise milk, juice and water with Happy Meals. It would also offer fruit, salads and vegetables as alternatives to fries in value meals. The move followed Burger King's introduction of reduced-fat, reduced-calorie fries.

The restaurants are in part responding to losing higher-income customers to chains such as Chipotle, the fast-growing burrito chain with more than 900 stores, which serve food that is perceived as healthier. Chipotle's shares are up more than 75 per cent this year, compared with 6.8 per cent for McDonald's.

"It's really about building their brand perception around healthy and quality ingredients because . . . that's what gets people into the restaurants," said Dylan Bolden, of BCG.

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However, some of the products in the industry's early push were not really healthy at all, according to Bob Goldin, of food industry consultancy Technomic, with lower fat but high levels of sugar or sodium to give them taste.

Today, however, it is no longer enough to create "less fat" or "low salt" versions of products.

"Recently we've seen faster growth in new innovations . . . [with] positive nutritional benefits rather than manufacturers making existing things less bad," said Mr Wald, citing Chobani and Roll Global's Wonderful pistachios. They have succeeded by chipping away at the compromise between taste, convenience and health, he said.

For PepsiCo's Ms Nooyi, there is no question that the industry is grappling with serious change. She struck an urgent tone at a conference in New York earlier this year, stressing the need for a solution that brings customers back.

"We actually believe that if you let this go too long, in another three or five years the consumer will walk away from [soda]," she said.

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