PepsiCo CEO: 'If all consumers exercised...obesity wouldn't exist'

Interview by JP Mangalindan, reporter


(Fortune) -- Having a vegetarian run a company known for shilling sugary soda and salty snacks might not seem like the most obvious match. But under Indra Nooyi's leadership, PepsiCo's growth has skyrocketed -- from the acquisition of Tropicana in 1998 and the Quaker Oats merger in 2000, to the much more recent purchase of Pepsi Americas and Pepsi Bottling, for $7.7 billion last year.

Currently, the largest food and beverage company in America receives $10 billion of its annual revenue, or 18% of its overall revenue, from what Nooyi likes to call "good-for-you" (read: healthier than average) products like Dole, Quaker Oats and Tazo teas. The goal? Up that figure to $30 billion by 2020.

To that end, she hired a chief scientific officer and several members of the World Health Organization to figure out how to take sugar and fat out of PepsiCo (PEP, Fortune 500) products and also to develop new food processes. For example, the scientists invented a micro-crystallized salt that could reduce sodium in Lays chips by as much as 25%.

Fortune spoke with Nooyi about PepsiCo's gameplan and how she balances consumer satisfaction with the bottom line.

You've said that Pepsi should be part of the solution, not the cause, of obesity. How are you and PepsiCo planning to go about that?

If all consumers exercised, did what they had to do, the problem of obesity wouldn't exist. But because society has changed so much, I think we can also be part of the solution by transforming our portfolio.

If I look at our portfolio, I think you can classify them into three groups: "fun-for-you foods" like Pepsi, Doritos, Lays, and Mountain Dew, "better-for-you" products like Diet Pepsi, PepsiMax, Baked Lays, Sobi Life Water, Propel, all of these products, and "good-for-you" products like Quaker, Tropicana, Naked Juice, Gatorade.

There's a place for balance in everyone's portfolio. Our overall goal is to increase the number of great tasting, "better-for-you" products and "good-for-you" products, while making sure our "fun-for-you" products still have a place in consumers' lives.

We are putting a lot of R&D dollars behind developing more "good-for-you" products that taste great and we're also investing in new sweeteners and salt-reduction technologies to make our "fun-for-you" products better for you. So we've made the investments and we've made it work within the portfolio.

When the company removed trans fats from chips, that cost PepsiCo, but the company never asked customers to pay the difference. From a business standpoint, how do you stand to benefit from making your food products healthier?

Yes it did cost us money when we removed trans fats in 2003, but it was the right thing to do by consumers. At the same time, we sat back and said to ourselves that we cannot ask the consumers to pay more for a product that's better for you than a product that's not so good for you. That was not the right message at all.

The wonderful thing about having a portfolio is that you can make a bet on trans fats and let some other part of the portfolio carry the weight while we're making this change.

How did other areas of the portfolio 'carry the weight'?

We increased our focus on productivity. The more productive we are in the middle of the P&L [profit and loss], the more we can reinvest in our business and still deliver a transformation of the portfolio and our financial metrics.

The second thing we've done is to look for ways to extend the scale of our company. In the past, it was how do we leverage the power of our company to get scale? When we did the deal with Anheuser Busch (BUD), in a way, it extended the scale of the company so we could get even more productivity to reinvest back to serve the consumer even better.

So our whole focus has been how can we reduce the cost of non-consumer-facing costs to reinvest it back into consumer-facing benefits.

One of your goals is to increase the $10 billion in revenues received from "good-for-you" products to $30 billion over the next decade. That's pretty ambitious.

We've drawn a whole roadmap for the next 10 years, and I think it's definitely doable.

There's been a lot of organic growth based on the businesses we have already. Also, we'll offer fruit and vegetable offered in different forms, whole grains or any other sort of super grains.

In terms of dairy, we've got a joint venture with Almarai, which is a Saudi-based dairy company and one of the most efficient dairy companies in the world. It's a matter of expanding from a dairy initiative to parts of the world that needs branded dairy manufacturers. And then there's the joint venture with Sabra or Pips.

We're also moving Gatorade from being a sports drink company to a sports nutrition company. So, there's going to be a tremendous amount of innovation to take care of the athlete as a whole in terms of whatever they eat or drink.

But that's just in the U.S. There are many countries in the world where this can expand to. And we'll do acquisitions. So wherever there is an interesting company to buy, we'll buy and build on it.

You've compared PepsiCo's development in the emerging markets to the development of telecommunications. Could you elaborate?

I used to be in a telecommunications role at Motorola (MOT, Fortune 500), and I remember how things went from electricity to cable to fiber to wireless and the expectation was that you would go through that logical development, and then the emerging markets came and said, "Hey, we don't even have space to put down." We can't dig trenches.

Incidentally, why go through this evolution of cable to fiber? Countries like India said they'll go straight to wireless. They leapfrogged the logical progression, whereas many of the developed countries are still stuck in the progression because of the access they have on the ground.

So as we look at our own international development, there's no reason to believe that we need to go in and do traditional carbonated soft drinks and traditional salty snacks, then migrate to "good-for-you products" and "better-for-you" products.

Now, we launch "better-for-you" products simultaneously along with "good-for-you" products. As long as you're willing to build out a distribution footprint, you won't have to go through the logical progression and growth that we went through.

If we go back to the U.S., up until about 1990, the market was largely carbonated soft drinks and slowly started expanding into non-carbonated beverages. Over time, beverages got more and more good for you. It was slow progress, but it doesn't have to be that way elsewhere.

Where do you see consumer food products as a whole going over the next 10 years? Do you imagine even more momentum building towards ultimately healthier foods?

I think in the future - and when I say the "future," I mean the next 3, 5, 7 years - we're going to see a lot more food and beverages that start getting into lifestyle management. How do you have the perfect breakfast on the go that is the coming together of grains and dairy? You're going to see a lot more convergence of categories. You'll see a lot more from around the world transferred around the world.

How so?

Take traditional Chinese medicine. The longevity in parts of China is very, very high because there's a lot of traditional Chinese medicine that is based on herbs that really help lifestyle management, that really help body mass index down, that really help the longevity of the person. The question is how do we lift some of the knowledge that they teach around the world and then move it to other parts of the world?

Now, I'm not talking about "pixie dust." I'm talking about real science-based stuff. Think of it as developed by nature and improved by science. The great benefit of a large global company like ours is that you can actually look and see what's around the world and pick the best of it that's efficacious and science-based, that's approved by regulatory authorities and then bring it to specific countries.

The next frontier will be transferring global knowledge in a very targeted way, making food and beverage even more exciting as a lifestyle management product and then marrying that with tip-top nutrition education and making a healthy living through exercise and portion control an aspirational thing.

PepsiCo is extremely invested in this mission because of you. Where does your concern come from?

I believe that companies like ours who are large -- with market cap of over $100 billion -- we are like little republics. We are larger than many little countries in the world, and we are a public company. We operate on the laws of limited liability, and we owe every society in which we offer a duty of care. We owe them care for the environment in which they operate in.

I'm not suggesting we do that at the expense of performance, and that's why we articulate it as "performance with purpose." How do we deliver performance while not forgetting the fact that we owe society the duty of care? So it's this very delicate balance of managing for the short term and the long term that I think should define the best corporations for the future. That's how I want to manage PepsiCo. To top of page