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Companies aim to meet demand for health foods

NY TIMES NEWS SERVICE, NEW YORK
Sunday, Jul 20, 2003, Page 12

Been to Germany lately? Every third child under age 12 and every fifth teenager there is overweight. How about Greece, land of the much-ballyhooed Mediterranean diet? More than 70 percent of adult men and women in that nation are above their ideal size. The Middle East? About 60 percent of the women in Egypt are overweight.

The problem of excess consumption has spread to every corner of the globe, except for pockets of Africa. The US, in other words, no longer enjoys a competitive advantage when it comes to corpulence.

Americans -- 61 percent of whom are overweight -- may take comfort in the fact that they are not the only ones packing on the pounds. But multinational food companies could soon find themselves carrying the increasing weight of the world upon their corporate shoulders.

For food companies, the stakes could be large. Last year, US companies exported 11.8 billion euros (US$13.22 billion at current exchange rates) of agricultural products to the EU, everything from cranberries and candy bars to cereals and sodas. It's not at all certain that corporations can satisfy shareholder hunger for growth and still fulfill demands by regulators to sell smaller portions and healthier foods.

Unhealthy exports

The message to consume less is hardly a capitalist notion. Food companies grow by selling to more people, or convincing existing customers to eat more. They don't have a lot of potential for expansion left in the US, said Marion Nestle, chairwoman of the nutrition and food studies department at New York University and author of Food Politics: How the Food Industry Influences Nutrition and Health (University of California Press, 2002). Because of that, she said, American companies have been exporting the salty, sugary foods they are known for and undermining the generally healthier eating habits of other countries.

Unlike the US, Europe has a tradition of regulating problems away. Chances are small that the Bush administration will threaten food companies with more regulations. In fact, the Food and Drug Administration recently made it easier for companies to make health and nutrition claims on food. The EU, on the other hand, proposed a directive last week that would make it much tougher for companies to make such claims.

David Byrne, the health commissioner for the EU, seemed to catch the food industry by surprise on Wednesday when he proposed the regulations, which would prevent companies from marketing a food as having a health or nutrition benefit if it was also high in salt, sugar or fat. Byrne has not yet completed the profile of what foods would be affected, so executives say it is too early to panic. The rules, if passed by the European Parliament, would go into effect in 2005.

Still, if Byrne has his way, the makers of most processed foods, from snacks to soups, may be barred from saying the products are nutritious.

WHO involvement

In March, the World Health Organization (WHO) issued a report that connected improper diet, along with a decline in physical activity, to a devastating rise in chronic diseases like heart conditions, diabetes, osteoporosis and cancer. By 2020, chronic diseases will account for nearly three-fourths of all deaths worldwide, the report said. This fall, the WHO will release a draft of recommendations to its 191 member states on how to address the problem, and it is expected to consider important issues for business, like nutritional labeling and marketing to children.

A result is that food companies, long thought to be recession-proof, are facing scrutiny by investors who are factoring in the risk of litigation and regulation in valuing them, according to a recent research report by the UBS Investment Bank.

"There is a slow, but clear, evolution of how regulators are looking at these issues," said Arnaud Langlois, vice president for equity research at J.P. Morgan Chase in London. The impact on food companies, he said, is not all negative.

"It doesn't change our view of the sector," Langlois said. "To meet consumer demand for healthier products, companies will have to reposition and upgrade their product portfolio. We believe that consumers are prepared to pay a premium for health coupled with taste."

Positioning perk

How companies react will depend in part on how well positioned they are in the market to offer healthier choices. Companies with the most to lose are those that mainly sell foods or drinks that are high in fat, sugar or salt -- like Cadbury Schweppes of Britain and Hershey Foods and McDonald's of the US -- according to a report by J.P. Morgan Chase. The report argued that companies that are more diverse in their food lines, like Nestle of Switzerland, would find it easier to adjust.

Even foods that are considered healthy, like cereals, could be negatively affected by the European regulations. Under the proposed EU directive, products cannot be labeled as healthy, even if they contain fortified vitamins and minerals, if the products have a high amount of sugar.

If put into effect, that change would have an impact on a company like Kellogg, based in Battle Creek, Mich. Some of its cereals would meet the proposed guidelines; others, especially those popular to children, would not. Aileen Thompson, European director of Kellogg Management Services in London, said the company would not comment on the impact of the proposed rules.

Others companies, like Nestle; Kraft Foods of Northfield, Illinois; Unilever, the British-Dutch conglomerate; and Groupe Danone of France, are already repositioning themselves and their research and development departments to offer foods that contain healthier oils and use less salt and sugar.

But it takes time to develop the new products, and companies cannot afford to satisfy regulators but fail consumers. "That's death," said Francois-Xavier Perroud, vice president for communications at Nestle.

Some companies are already reacting to the threat of lawsuits and more regulations. In early July, Kraft said it would stop promoting its products in schools and make smaller portions. It made the announcement after it was the target of a lawsuit in May by a San Francisco lawyer who wanted to block Kraft from selling Oreos to children because the cookies contain trans fats, which exist in hydrogenated oil. He soon dropped the suit, reportedly because he felt that the publicity from the action had raised awareness about trans fats.

Last September, McDonald's, based in Oak Brook, Illinois, announced that it would seek a healthier alternative to the oil with trans fats that it uses to cook French fries.

Some are skeptical that companies will make real changes. Nestle, the nutrition professor, noted that the fast food chain said last year that it would change the kind of oil it uses, but that it still has not done so. McDonald's has said that it is carrying out tests to develop the approach that will work best.
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