Food Giants Revise Recipes to Please Uncle Sam

(Corrects pronoun identifying analyst in 20th paragraph)

From utility companies and Wall Street firms to health insurers and oil producers, Washington is putting big business under intense scrutiny. With obesity a serious public health problem in the U.S., large food companies such as PepsiCo (PEP) and Campbell Soup (CPB) are feeling the pressure, too.

However, while analysts in other industries warn that new federal regulations could squeeze profits or change business models, those who cover the food packaging industry are far less worried.

The reason: The industry is trying hard to avoid an open fight with the Obama Administration. Companies and industry groups are applauding First Lady Michelle Obama's efforts to fight obesity and they're cutting sodium and calorie levels in food before the government demands any changes.

Public health advocates have been turning up the heat on the food industry over the last several months. Thanks to the shift of power in Washington toward Democrats, the food business is facing "a heavier layer of regulation," says Stifel Nicolaus (SF) analyst Christopher Growe.

The Institute of Medicine—part of the federal National Academy of Sciences—issued a report in April that called on the Food & Drug Administration to require food packagers to gradually reduce the sodium content in food. "The patchwork of voluntary approaches that have been implemented over the years have not worked," the report concluded, noting that the average American consumes 50 percent more sodium each day than is recommended.

Michelle Obama's fight again obesity, particularly among children, culminated in a May 11 report that recommends, among other things, making healthier food available: "To address the obesity crisis, we must expand and accelerate efforts to reformulate products, particularly those aimed at kids, so they have less fat, salt, and sugar, and more of the nutrients children need."

no villains or pitched battles

However, in a significant victory for food packagers, the report did not call for greater direct regulation of food ingredients—at least not yet. FDA spokeswoman Siobhan DeLancey says the agency is still reviewing the Institute of Medicine's report on sodium. "The FDA is not currently writing regulations to limit the amount of sodium in food," she said in an e-mail, noting that no "final decisions" have been made.

Both the Administration and the food industry seem eager to work together. "The food companies avoid being the villain and the administration avoids turning it into a political battle that would only stagnate," says Credit Suisse (CS) equity analyst Robert Moskow.

Food companies are taking a variety of steps to "stave off further regulatory action on the part of the government," Growe says.

Big individual food companies are introducing new products, reformulating existing products, and changing labels. Campbell Soup says it will offer several new low-sodium soups this summer, bringing its total of low-salt offerings above 200.

Since there is no artificial substitute for salt, it takes significant research spending to lower sodium without hurting taste, Campbell Soup spokeswoman Juli Mandel Sloves says. While making products more nutritious, she says, "we want to offer the same taste people have loved for decades."

healthier options not entirely new

PepsiCo said in March that it would cut by 25 percent the sodium per serving in key brands such as Frito-Lay by 2015, and by 2020 cut saturated fat by 15 percent and reduce added sugar by 25 percent.

Food packaging companies point out that they have been introducing healthier options for decades. The first low-sodium Campbell Soups were introduced in the late 1960s and early '70s, the company says. The Grocery Manufacturers Assn. says the industry has improved the nutrition of more than 10,000 products in recent years.

Yet there is no doubt that the emphasis on healthy options has increased since a Democrat took over the White House last year. On May 17, the Healthy Weight Commitment Foundation—representing 16 food manufacturers that account for 20 to 25 percent of the total calories consumed by Americans — announced a promise to cut the calories in its products through new products, new recipes, and smaller portions. Food packaging giants such as ConAgra (CAG), General Mills (GIS), Kellogg (K), Kraft (KFT), PepsiCo, Coca-Cola (KO) and Campbell Soup are part of the group.

The companies in the Healthy Weight Commitment Foundation pledge to cut 1 trillion calories per year from their products by 2012 and to reach reductions of 1.5 trillion calories per year by 2015.

The difference could be significant in terms of Americans' overall calorie consumption. The foundation's executive director, Lisa Gable, says the average American, either through too much eating or not enough exercise, has an extra 100 calories left over at the end of each day; for all 309 million Americans, this works out to over 11 trillion extra calories per year.

Packaged Food Index's Healthy returns

The emphasis is on self-regulation, Growe says, with the industry offering to let third-party organizations monitor whether or not it sticks to its promises.

Along with analysts Growe and Moskow, Morningstar (MORN) analyst Erin Swanson sees little impact from all this activity on industry profit or sales projections. The serenity contrasts with the mood in other industries, where analysts are scrambling to keep up with the impact of such government initiatives as the approved health-care reform law, pending bills on climate change and financial regulation, and heightened scrutiny of energy companies following the Gulf of Mexico oil spill.

Like analysts, stock market investors show few signs of worry that food companies are threatened by regulation. The Standard & Poor's 500-stock index's Packaged Food index, which includes ConAgra, General Mills, and 12 other companies, is up 5.3 percent this year, while the broader S &P 500 is down 4.5 percent. On June 2, Campbell Soup shares hit their highest level since November 2008.

It's not that food giants face no risks, Swanson says. Companies that introduce new, healthier products must beware "pushback from consumers," she says. "You don't want someone to say: 'This tastes like a low-fat product or a low-calorie product.'" Yet consumers have increasingly demanded healthier options for years.

Food companies were making healthier products anyway, Moskow says, because "they recognized that consumers were seeking processed food that has better health and wellness credentials."

Campbell Soup says sales of its tomato soup are up 6 percent in the past 12 months, despite a new recipe that last August reduced the classic product's sodium by 32 percent.

less risk if companies act at once

Healthier food can be more expensive, but not always. Moskow notes, for example, that switching from high-fructose corn syrup to sugar can cost more while cutting sodium usually doesn't.

The fact that almost all major food companies are simultaneously making cuts in sodium or calories might limit the impact on profits. "No individual one of them has a competitive advantage over the other," Moskow says.

Food companies aren't entirely in the clear. The emphasis of Michelle Obama and others on fresh, local food has the potential to hurt sales of convenient packaged food. "I'm skeptical of whether [Obama's obesity initiative] will really influence consumer behavior but I think it's a trend worth watching," Moskow says.

Also, strict food regulations may not be "imminent" but could come eventually, Growe says.

The White House's recent report on obesity noted that 31.7 percent of children are overweight or obese and said obesity causes an estimated 112,000 deaths per year. One in three children born in 2000 is expected to develop diabetes.

If self-regulation and other efforts don't manage to make Americans healthier, government could force food companies to do much more by regulating ingredients, taxing junk food, or taking further measures. With industry profitability still on the mend, food producers would prefer not to have Uncle Sam crowd his way into the kitchen.

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