pepsco case

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W11097

PEPSICO’S TURNING POINT: ESTABLISHING A ROLE IN A SUSTAINABLE SOCIETY1

Professor Mike Valente wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2011, Richard Ivey School of Business Foundation Version: 2011-12-08

Growing criticism has begun to haunt major players in the food and beverage industry as an increasing number of newspaper articles, academic studies and blog postings warn of the close connection between the Western diet and trends in obesity, diabetes, heart disease, cancer and ecological devastation. Although some of the many claims put forward by activists may be exaggerated, it is common knowledge that products of the large food and beverage corporations do not, in the very best case, represent an antidote to remedy these issues. Indra Nooyi, CEO of PepsiCo, one of the largest food and beverage companies in the world, has recognized that “society, people, and lifestyles have changed” and that PepsiCo has no choice but to move in healthier directions.2 Indeed, PepsiCo has made some impressive moves in reducing the negative health and ecological impacts of some of its products but these steps have been arguably piecemeal up until now, largely a reaction to shifts in market demand rather than any genuinely systematic attempt to play a role in curbing these trends. There is no denying that PepsiCo, Coca-Cola, Nestlé and other food and beverage companies have shaped consumer tastes and behaviours over the last few decades. One has to wonder whether it would be in PepsiCo’s best interests to use this same power to shift some consumer tastes to a healthier set of options that ultimately catered to society’s interests. PEPSICO Headquartered in Purchase, New York, PepsiCo is a world leader in convenient snacks, foods and beverages, with more than 285,000 employees across five major billion-dollar brands – Pepsi-Cola, Frito- Lay, Tropicana, Quaker and Gatorade – found in nearly 200 countries around the globe3. In 2009,

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of PepsiCo or any of its employees. 2 Nanette Byrnes, “Pepsi Brings in the Health Police,” Bloomberg Businessweek, January 14, 2010, http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm?chan=innovation_branding_brand+profiles, accessed September 10, 2010. 3 Products under each of these brand umbrellas can be found at www.pepsico.com/Brands.

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PepsiCo’s estimated worldwide retail sales amounted to US$108 billion4, US$43.2 billion of which represented total net revenue of PepsiCo Inc. and its subsidiaries.5,6 . Indra Nooyi has been the chief executive officer of PepsiCo since 2006. PepsiCo’s success is clearly the result of the company having built its empire on the manufacture and distribution of instantly recognizable products. According to one observer, PepsiCo “could get a bag of Lay’s or a can of Mountain Dew to customers practically anywhere in the world.”

7 The company’s ability to market the product also represents a core competence, while

product development is emerging as a new source of competitive advantage. THE FOOD AND BEVERAGE INDUSTRY The food and beverage industry is best characterized as the industry that “specializes in the conceptualization, the making of, and delivery of foods.”

8 In the past half-century, the industry has

blossomed from a collection of mom-and-pop operations to a trillion-dollar powerhouse led by huge international corporations.

9 Familiar names such as Coca-Cola, Starbucks and McDonald’s dominate the

industry and could be found in all corners of the globe. The upstream end of the industry is dominated by agribusiness where companies are involved in the production of livestock and raw agricultural commodities such as corn, wheat, soybeans and rice. Monsanto, DuPont, Tyson, Smithfield, and Archer- Daniel-Midland (ADM) represent some of the major players in this space. The next major step in the chain is the processing of food where companies such as Kraft Foods, General Mills, Coca-Cola, Hershey Foods and Kellogg process raw material foods into forms that could be more easily distributed and sold to consumers. Processed food comes in a variety of forms but could be divided into food, beverages and confectionary. To process food, crops such as corn undergo intensive processes such as wet milling whereby corn starch is broken down into the seed kernel’s component parts.

10 Food

companies can remove those nutrients and vitamins that attract bacteria and fortify food with less attractive ingredients that allow companies to expand their market reach beyond their localized environment, increasing revenue exponentially. Processed food also allows companies to manipulate the ingredients of its products to take advantage of both the pricing variability of raw materials and the latest nutritional trends.

11 According to estimates, approximately half of all the food that U.S. and Canadian citizens eat is

processed.12 These processed foods include breakfast cereals, breads, flour, tofu, cheese, chicken pot pies, Lean Cuisine prepared meals and thousands of other products.

13 The final segment of the industry is

distribution where companies such as Safeway, McDonald’s and Starbucks are involved in placing finished or near-finished food products into the hands of consumers. This segment is divided into grocers, quick- service restaurants, and casual and upscale restaurants.

14

4 All funds in U.S. dollars unless specified otherwise. 5 Worldwide retail sales include all PepsiCo products, including those sold by their partners and franchised bottlers. 6 Financial highlights can be found at http://www.pepsico.com/annual09/financialHigh_highlights.html 7 Nanette Byrnes, “Pepsi Brings in the Health Police,” Bloomberg Businessweek, January 14, 2010, http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm?chan=innovation_branding_brand+profiles, accessed September 10, 2010. 8 http://www.foodesbeverage.blogspot.com/, accessed April 7th, 2011; http://en.wikipedia.org/wiki/Food_and_Beverage, accessed September 10, 2010. 9 Ibid. 10 Michael Pollan, Omnivore’s Dilemma, Penguin Group, New York, 2006. 11 Michael Pollan, In Defense of Food, Penguin Group, New York, 2008. 12 Will Allen, “The Real Cost of Cheap Food.” AlterNet, June 6, 2008, http://www.alternet.org/environment/86986/, accessed September 20, 2008. 13 Ibid. 14 Ibid.

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Industry Growth Constraints Unlike other industries, the food and beverage industry faces a rather unique constraint; food consumption is ultimately tapped. Whereas the consumer electronics industry could sell multiple variations of its products to the same consumer, individuals could consume only so much food. In effect, taking into consideration population levels, the food industry should, in theory, follow a 1 per cent growth rate per year.

15 In other words, caloric consumption is not highly elastic to income levels. Regardless of a person’s

income, consuming a steady rate of approximately 1,800-2,000 calories per day is in the best health interests of women, as is consuming 2,400-2,550 calories per day for men.

16 Food and beverage companies

are therefore left with two options: convince consumers to eat more or increase profit margins by adding value to existing foods so that consumers want to pay more. The food industry currently produces 3,900 calories per capita each day,

17 roughly twice the energy needs of the Western population. Where is this

food going? At least four reasons explain why consumers have grown to eat more. First, the demand and supply has increased for supersized portions and bulk packaging of processed foods. Second, because mammals are particularly attracted to food rich in salt, sugar and saturated fats, the increased prevalence of these ingredients in food has led to an increase in consumption. Third, nutrient density has decreased over time, both as a result of soil biodiversity loss and the removal of nutrients and minerals in processed food. This loss of nutrients forces consumers to consume higher amounts of calories to make up for the shortfall. Finally, companies add value to their products through food fortification, by adding fiber, omega-3 fatty acids and other nutrients to commodity products as a means of differentiating the product in the minds of consumers, thus resulting in higher price points. Paraphrasing a General Mills vice president, Michael Pollan said:

Selling unprocessed or minimally processed whole foods will always be a fool’s game, since the price of agricultural commodities tends to fall over time, whether they’re organic or not. It will always be hard to distinguish one company’s corn or chickens or apples from any other company’s. It makes much more sense to turn the corn into a brand-name cereal, the chicken into a TV dinner, and the apples into a component in a low moisture, naturally sweetened apple piece infused with a red-wine extract.18

Companies therefore earn more profits by processing and adding value to fruits and vegetables such as PepsiCo’s Tropolis, “a smooth blend of real squeezable fruit, packed with nutrition”19 available in plastic containers that allow for long shelf lives and convenient consumption. Onslaught of Criticism The industry is facing an increasing number of criticisms by many consumers, non-governmental organizations, activists, environmentalists, nutritionists and human rights groups who claim that the

15 Wikipedia, “World Population,” http://en.wikipedia.org/wiki/World_population, accessed March 3, 2011. 16 Ready2Beat, “Suggested Calorie Intake per Day,” http://ready2beat.com/technology/health/suggested-calorie-intake-day, accessed March 3, 2011. 17 Michael Pollan, In Defense of Food, Penguin Group, New York, 2008. 18 Michael Pollan, Omnivore’s Dilemma: A Natural History of Four Meals, Gail Cengage Learning, Large Print Press, New York, 2006: p.161. 19 PepsiCo. Tropicana Introduces Tropicana Tropolis(TM) to Squeeze More Fruit into Kids' Daily Diets http://www.pepsico.com/PressRelease/Tropicana-Introduces-Tropicana-TropolisTM-to-Squeeze-More-Fruit-into-Kids-Daily- 12162010.html, accessed April 10, 2011.

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industry’s practices are partly responsible for some of the more fundamental social and ecological issues evident in society today. A large part of this criticism originates from the fact that many of the social and ecological negative externalities are not incorporated into the actual cost of bringing the food to the consumer.

20 These unaccounted-for costs could be summarized into ecological effects and social and

health effects. Ecological Costs In the 1950s, the first load of ammonium nitrate fertilizer was used on a farm, catalyzing a quiet revolution because it meant that humanity could draw on a seemingly endless supply of fossil fuels to make nitrogen rather than rely on energy from the sun.

21 The influx of nitrogen into the food system has resulted in

dramatic ecological effects, including reduced drinking water, increased greenhouse gas emissions from soil, changes in plant composition, polluted water tables, river contamination and oceanic dead zones.

22

Food and beverage companies are both mass users of nitrogen-rich fertilizers and mass purchasers of nitrogen-rich ingredients and products, thereby implicating them as contributors to some of the major ecological effects we’re seeing today in society. Social and Health Costs With the help of government subsidies and the concentration of major agriculture companies, such as Monsanto, Tyson Foods and Archer-Daniel-Midland, food and beverage companies have been able to substantially reduce the costs of processed foods by limiting the ingredients to two primary crops – corn and soy. By using the derivatives of corn and soy, food scientists could avoid the limitations of perishable food and make their own version of butter (margarine), fruit juice (fruit drink) and whipped cream (Cool Whip). A search through the processed food aisles of grocery stores will likely reveal products that have corn and soy derivatives, including, among others, high-fructose corn syrup, citric and lactic acid, glucose, fructose, maltodextrin, ethanol, sorbitol, xanthan gum, sucrose, and ethyl acetate. Some estimate that close to 90 per cent of products in the grocery store contain either a corn or a soy derivative or both.

23 For

example, the following commonly consumed products contain corn or soy or both: ketchup, batteries, Twinkies, peanut butter, salad dressing, Motrin painkiller, soft drinks, burgers and Aunt Jemima syrup.

24

One might argue that the inclusion of corn and soy derivatives is merely the natural evolution of food production. Others, however, argue that important social costs are associated with shifting away from “real food” to a system of “manufactured food” made from low-cost, poor-nutrient ingredients that lead to consumers consuming more of the same food to ingest the required nutrients.

20 Will Allen, “The Real Cost of Cheap Food,” AlterNet, June 6, 2008, http://www.alternet.org/environment/86986/, accessed September 20, 2008. 21 “What had been a local, sun-driven cycle of fertility, in which the legumes fed the corn which fed the livestock which in turn (through manure) fed the corn was now broken. Now [the farmer] could plant corn every year and on as much of his acreage as he chose, since he had no need for the legumes or the animal manure. He could buy fertility in a bag, fertility that had originally been produced billions of years ago halfway around the world.” Michael Pollan, Omnivore’s Dilemma: A Natural History of Four Meals, Gail Cengage Learning, Large Print Press, New York, 2006: p. 77-78. 22 Mark E. Fenn et al., “Ecological Effects of Nitrogen Deposition in the Western United States,” Highbeam Business, http://business.highbeam.com/411908/article-1G1-100605210/ecological-effects-nitrogen-deposition-western-united, accessed March 3, 2011. 23 Ibid. 24 Robert Kenner, director, Food, Inc., [documentary film], Magnolia Pictures, New York, 2008.

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Although the wet milling process has afforded food companies with enormous flexibility when designing food, a growing number of corresponding health concerns have emerged because processed food requires systemic chemicals, hormones, antibiotics, pesticides, toxins and additives.

25 The Environmental

Protection Agency warned of highly toxic dioxins in food and confirmed that these “dioxins cause cancer and other negative health effects even at extremely low levels of exposure” while stating that “most Americans are being exposed to unsafe levels of chemicals through foods that they eat.”

26 To save on

costs, milk companies in China watered down milk that would be used in milk chocolate for Cadbury. Because the diluted milk resulted in protein levels that were below regulatory standards, companies fortified the milk with melamine, unaware or ignorant of the potential health consequences. In 2008, 50,000 Chinese babies fell ill and four were killed by milk tainted with the industrial chemical.

27

Currently, more than 1 billion adults are overweight — and at least 300 million of them are clinically obese. An estimated 22 million children under five years of age are estimated to be overweight worldwide. Since 1980, the number of overweight children in the United States has doubled, while the prevalence of obese children aged 6 to 11 years has more than doubled since the 1960s. This trend extends to U.S. teenagers, whose obesity prevalence has increased, from 5 per cent of boys aged 12 to 17 in 1970 to 13 per cent in 1988 and from 5 per cent of girls aged 12 to 17 in 1970 to 9 per cent in1988.

28 This problem is not

isolated to the West: obesity rates are 20 per cent in some Chinese cities and up to 75 per cent in urban Samoa.

29 Many have estimated that because of their Western diet, children of today’s society will have a

shorter lifespan by 10 years compared with their parents. 30

Although official estimates of the cost of obesity add up to 2 to 7 per cent of total health costs, true costs are undoubtedly much greater as not all obesity-related conditions are included in the calculations.

31

World-renowned chef Jamie Oliver estimates that obesity costs Americans 10 per cent of their health care bill, or $150 billion a year, set to increase to $300 billion in 10 years.

32 Non-fatal but debilitating health

problems include respiratory difficulties, chronic musculoskeletal problems, skin problems and infertility, whereas more life-threatening problems include cardiovascular disease, type 2 diabetes, gallbladder disease and certain types of cancers (especially the hormonally related and large-bowel cancers).

33 Approximately

85 per cent of diabetic people have type 2 diabetes, of which 90 per cent are obese or overweight. Of the developing countries, India and the Middle East are expected to take over as the largest populations with type 2 diabetes by 2025. Large increases are also expected by 2025 in Latin America and the Caribbean, China and the rest of Asia. In the analyses carried out for World Health Report 2002, “approximately 58 per cent of [patients with] diabetes and 21 per cent of [patients with] ischemic heart disease and 8 to 42 per cent of certain cancers globally were attributable to a BMI [body mass index] above 21 kg/m2.”

34

25 Will Allen, “The Real Cost of Cheap Food” AlterNet, June 6, 2008, http://www.alternet.org/environment/86986/, accessed September 20, 2008. 26 Eartha Jane Melzer, “EPA Warns of Dioxin in Food, Michigan Messenger, June 4, 2010, http://michiganmessenger.com/38492/epa-warns-of-dioxin-in-food, accessed September 29, 2010. 27 BBC News, “Melamine Found in Cadbury Goods,” September 29, 2008, http://news.bbc.co.uk/2/hi/7641317.stm, accessed September 5, 2010. 28 World Health Organization (March, 2011) “Obesity and Overweight,” http://www.who.int/mediacentre/factsheets/fs311/en/, accessed April 4, 2011. 29 Ibid. 30 Jamie Oliver, “Jamie Oliver’s TED Prize Wish, Teach Every Child about Food,” February 2010, http://www.ted.com/talks/jamie_oliver.html, accessed September 10, 2010. 31 World Health Organization, “Obesity and Overweight,” http://www.who.int/mediacentre/factsheets/fs311/en accessed April, 2011. 32 Jamie Oliver, “Jamie Oliver’s TED Prize Wish: Teach Every Child about Food,” February 2010, http://www.ted.com/talks/jamie_oliver.html, accessed September 10, 2010. 33 Ibid. 34 Ibid.

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SOME CAUSES OF NEGATIVE EXTERNALITIES FROM FOOD The key causes of obesity and its associated diseases are increased consumption of energy-dense, nutrient- poor, calorie-rich foods with high levels of sugar and saturated fats, combined with reduced physical activity. Unhealthy food is defined as products high in sugar, salt and/or fat, and generally nutrient-poor and include confectionary; chocolate; sugary cereals; sugary soft drinks; ice cream; fast food (hamburgers, French fries, pizza, fried chicken); processed meat and meat products, such as hot dogs and sausages; sauces (ketchup, mayonnaise, dips and dressings) and ready prepared meals.

35 Despite eating, people

remain hungry because unhealthy food does not possess the adequate amounts of amino acids, essential fatty acids and antioxidants. In effect, consumers need to consume three slices of bread today to gain the same nutrients that one slice of bread provided in the 1950s.

36 The same effect occurs as a result of

simplified soil levels, caused by an overuse of chemical fertilizers and pesticides: one now needs to eat three apples to obtain the same amount of complex nutrients one apple provided in the 1950s.

37

Many would argue that the prevalence of saturated fats and salty and sugary foods in our diet is no coincidence. Because mammals have a natural vulnerability to fat, sugar and salt, the more they eat of them, the more they want. Some of the leading addiction researchers believe highly processed, modern-day foods interact with the brain in ways similar to drugs of abuse.

38 Dr. David Kessler, author of The End of

Overeating and former U.S. Food and Drug Administration commissioner, explained that the “three points of the compass” — fat, sugar and salt — are “directly connected to the emotional core of our brains” and that companies are interested in finding ways to exploit this vulnerability by finding bliss points to maximize consumer pleasure.

39 Dr. Mark Gold, distinguished professor and chair of psychiatry at

University of Florida College of Medicine, pioneered the hypothesis of “pathological attachment,” which refers to our propensity to become addicted to hedonically appealing food. Studies involving sugar, chocolate and other foods suggest that, like drugs, continued consumption causes changes in the frontal part of the brain that governs insight and impulse control. The moment consumers put a chocolate-glazed doughnut or other high-sugar, high-fat food in their mouths, the brain releases opioids, which give food its pleasure and make us want to keep eating. The brain also releases dopamine, the chemical associated with feelings of reward. The more stimulating the food, Kessler says, “the more vigorously we pursue it.”

40

Jamie Oliver applied this idea to a seemingly untouchable product — milk. To increase sales of milk in schools, it is in the best interest of food producers to inject flavourings, colourings and sugar so that more children will want to drink it. As he put it, “We know our food system is killing the planet, killing us with heart disease, diabetes and cancer and threatens to incubate a deadly global pandemic, but how can we resist when it tastes oh so good?”

41 In effect, because the wet milling process affords food and beverage

companies the power to manipulate the ingredients in food, these companies have the power to inject foods with those ingredients that psychologists claim can make consumers addicted. Critics also claim that the food and beverage industry has reduced the diversity of the foods that our farmers grow, which arguably causes negative health effects:

35 Ethical Investment Research Services (EIRIS), “Obesity Concerns in the Food and Beverage Industry,” February 2006. 36 Michael Pollan, In Defense of Food, Penguin Group, New York, 2008; Michael Pollan, The Omnivore’s Dilemma, Penguin Group, New York, 2006. 37 Ibid. 38 Sharon Kirkey, “Many of Us Are Wired in the Brain to Eat,” Edmonton Journal, March 7, 2010, p. S1. 39 Arun Gupta, “Gonzo Gastronomy: How the Food Industry Has Made Bacon a Weapon of Mass Destruction,” AlterNet, July 23, 2009, http://www.alternet.org/story/141498/, accessed October 23, 2009. 40 Ibid. 41 Jamie Oliver, “Jamie Oliver’s TED Prize Wish: Teach Every Child about Food,” February 2010, http://www.ted.com/talks/jamie_oliver.html, accessed September 10, 2010.

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As small and mid-size farms got swallowed up by the massive monoculture operations we now call “conventional,” the varieties of fruits and vegetables grown on those farms got whittled down to just those few that shipped the best and had the longest shelf life.

42

Eating a more varied diet is “associated with a higher intake of macro- and micro-nutrients as well as higher nutritional adequacy and diet quality.”

43 In effect, dietary diversity scores appear to have an inverse

relationship with obesity, suggesting that greater diversity in an individual’s diet can reduce the likelihood of obesity and diabetes.

44

Food and beverage industry advocates argue that the power to improve the food available in the marketplace is in the hands of consumers. However, many studies have shown that low-income consumers or consumers more severely hit by the recent financial crisis are particularly susceptible to relying on less healthy food.

45 For instance, following the economic downturn, strong sales were recorded by such

products as Kraft Foods’ macaroni and cheese, Delissio Pizza, “processed cheese product” Velveeta and nostalgic favorites such as Jell-O and Kool-Aid. Kraft’s net revenues increased by 19.4 per cent between July and late September of 2009. Kraft’s Lynne Galia said: “We feel that in this challenging environment we’re well positioned to win.”

46 Cara Miller, a mother of four, commented:

A lot of my friends and other Canadian parents that I converse with on a daily basis, they’re feeling that crunch. The prices keep going up . . . . I can go to the grocery store and if I buy four liters of milk it’s costing me almost $7, but if I go buy two-liter bottles of Coca Cola, it’s going to cost me two and change. That’s a problem that I have, and I think it’s a problem for society in general.47

TRENDS IN CONSUMER BEHAVIOUR Approximately half of all the food that U.S. citizens eat is processed.

48 Bill Pecoriello, CEO of Consumer

Edge Research, an independent stock-research firm in Stamford, Connecticut, explained that “The consumer can move to baked chips, or pretzels, or Sun Chips, but they’re not yet giving up their chips for an apple or carrot stick.”

49

42 Kerry Trueman, “Welcome to the Food Revolution,” AlterNet, August 25, 2008. http://www.alternet.org/environment/96072/welcome_to_the_food_revolution/, accessed December 3, 2010. 43 L. Azadbakht et al., “Variety Scores of Food Groups Contribute to the Specific Nutrient Adequacy in Tehranian Men,” European Journal of Clinical Nutrition, issue 59, 2005, pp. 1233–1240; P. Mirmiran et al., “Dietary Diversity Score in Adolescents – A Good Indicator of the Nutritional Adequacy of Diets: Tehran Lipid and Glucose Study,” Asia Pacific Journal of Clinical Nutrition, issue 13, 2004, pp. 56–60; P. Mirmiran et al., “Dietary Diversity Score in Adolescents – A Good Indicator of the Nutritional Adequacy of Diets: Tehran Lipid and Glucose Study,” Journal of the American College of Nutrition, issue 25, 2006, pp. 354–361; N. Steyn et al., “Food Variety and Dietary Diversity Scores; Are They Good Indicators of Dietary Adequacy?” Public Health Nutrition, issue 9, 2006, pp. 644–650. 44 L. Azadbakht and A. Esmailzadeh, “Dietary Diversity Score Is Related to Obesity and Abdominal Adiposity among Iranian Female Youth,” Public Health Nutrition, vol. 14, issue 1, 2010, pp. 62–69. 45 Zosia,Bielski, “Really Cheap Eats: How Low Will We Go?” Globe and Mail, January 12, 2009, http://www.theglobeandmail.com/life/really-cheap-eats-how-low-will-we-go/article965395/, accessed April 6, 2010. 46 Ibid. 47 Ibid. 48 Will Allen, “The Real Cost of Cheap Food, AlterNet, June 6, 2008, http://www.alternet.org/environment/86986/, accessed September 20, 2008. 49 Nanette Byrnes, “Pepsi Brings in the Health Police,” Bloomberg Businessweek, January 14, 2010, http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm?chan=innovation_branding_brand+profiles, accessed September 10, 2010.

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Yet, there is no question that consumers and the general public are beginning to catch on to the negative effects of the food and beverage industry. Despite hard economic times, U.S. sales of organic products, both food and non-food, reached $24.6 billion by the end of 2008, representing a 17.1 per cent increase from 2007.

50 The Organic Trade Association Executive Director Christine Bushway said that “organic

products represent value to consumers, who have shown continued resilience in seeking out these products.”

51 Organic food sales are anticipated to increase an average of 18 per cent each year. The sales of

larger grocery natural food stores combined with smaller independent natural food stores and chains account for 44 per cent of organic food and beverage sales.

52

But organic food and beverages represents only 3.7 per cent of the total food and beverage industry, meaning that 98 to 99 per cent of sales are for less healthy products.

53 And it’s important to keep in mind

that because organic and natural food tend to be more expensive, 1 per cent of unhealthy food has many more calories than 1 per cent of healthier food, meaning that 1 to 2 per cent is likely an exaggerated amount when we consider the amount of food consumed, as opposed to sales. While governments and corporations respond to rates of obesity by pushing for increased physical activity, a growing body of research shows that the amount of energy burned through exercise is far less important than the number of calories consumed.

54 “People get fat because they eat more than people who are

lean.” 55

Consider the fact that the average female is advised to consume approximately 1,800-2,000 calories per day, yet the average person consumes between 2,800 and 3,200 calories per day.

56 Walking for

60 minutes at a very brisk pace would expend approximately 280 calories, 57

meaning that the consumer would remain 920 calories above the recommended intake. This example is not to suggest that physical activity is irrelevant but the onus falls more on calorie intake than on physical exercise. Put another way, one cannot combat poor eating habits with physical exercise. CORPORATE SOCIAL (IR)RESPONSIBILITY IN THE FOOD & BEVERAGE INDUSTRY Amid growing criticism toward the food and beverage industry, food companies responded with a seemingly endless set of claims that they are socially responsible:

We empower individuals to make informed choices about how to maintain the essential balance between energy intake (calories consumed as food) and energy expenditure (calories burned in physical activity). – McDonald’s Corporation.58 We have launched new broad-based physical and nutrition education programs that reach even the least athletic students. – Coca-Cola Corporation.59

50 Dan Shapley, “Organic Products Market Grows to $24.6 Billion,” Globe-Net, May 8, 2009. 51 Ibid. 52 Ibid. 53 Organic Trade Association, “Industry Statistics and Projected Growth,” http://www.ota.com/organic/mt/business.html, accessed April 6, 2011. 54 Sharon Kirkey, “Many of Us Are Wired in the Brain to Eat,” Edmonton Journal, March 7, 2010, p. S1. 55 David Kessler, The End of Overeating: Taking Control of the Insatiable American Appetite, Rodale Books, New York, 2009. 56 U.S. Department of Agriculture, “Profiling Food Consumption in America,” http://www.usda.gov/wps/portal/usda/usdahome, accessed March 3, 2011. 57 “Calorie Calculator,” http://exercise.about.com/cs/fitnesstools/l/blcalorieburn.htm, accessed March 3, 2011. 58 Quoted in Ludwig and Nestle, “Can the Food Industry Play a Constructive Role in the Obesity Epidemic,” Journal of the American Medical Association, 2008, 300 (15), pp. 1808-1910. 59 Ibid.

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We can play an important role in helping kids lead healthier lives by offering healthy product choices in schools, by developing healthy products that appeal to kids and by promoting programs that encourage kids to lead active lives. – PepsiCo.60 Helping children and their families make healthy food choices while encouraging physical activity has become part of how Kraft gives back to communities. – Kraft Foods.61

The food and beverage industry has spent millions of dollars on various charities, such as McDonald’s children’s charities and Kraft’s “Make a Delicious Difference Week.”

62 Other food and beverage

companies have sponsored major events meant to promote physical activity in children as a means to reduce obesity. For example, PepsiCo donated $11.6 million over five years to the YMCA to support, among other events, an annual community day “to celebrate healthy living, encourage kids and families to get excited about physical fun and activity . . . engage kids in play to be healthy.

63 Coca-Cola has launched

more than 150 physical activity programs in more than 100 countries to “reduce inactivity and help increase physical activity around the world.”

64 But, to many skeptics, these philanthropic gestures appear

hollow when put into perspective of the amount of calories consumed in a soft drink. In effect, a child can easily consume more calories from a soft drink than would be expended at a sports event sponsored by a beverage company.

65

In a report to its investors, Ethical Investment Research Services (EIRIS) compared a number of food and beverage companies on their response to the obesity epidemic. Exhibit 1 provides the levels of risk determined by EIRIS and the performance of a selected number of food and beverage companies according to these levels. Consumers have undoubtedly a wider selection of healthier products than they did in the past. Claims of reductions in salt, sugar and saturated fat and increases in fiber, omega-3 fatty acids and whole grains are plastered all over food and beverage products. Yet, many interpret these claims to be greenwashing.

66 A

study requested by the World Health Organization found that despite McDonald’s’ claims to being more socially responsible and to have discontinued the use of trans fats, the fast-food giant continued to use trans fats in its cooking oil.

67 Both McDonald’s and Kraft remained heavily engaged in marketing unhealthy

products to children despite promises to fight childhood obesity. 68

McDonald’s used toys, games, movie tie-ins and trips to Disney World to promote supersized versions of Happy Meals.

69

60 Ibid. 61 Ibid. 62 Kraft Foods, “More Than 100 Kraft Foods Volunteers Team Up with Local Charities to Make a Delicious Difference in Bentonville and Rogers,” press release, October 6, 2009, http://www.kraftfoodscompany.com/mediacenter/country-press- releases/us/2009/us_pr_10062009.aspx, accessed September 30, 2010. 63 PepsiCo, “PepsiCo Joins with America’s YMCAs to Help Americans Live Healthier Lives,” press release, March 8, 2006, http://phx.corporate-ir.net/phoenix.zhtml?c=78265&p=irol-newsArticle&ID=828887&highlight, accessed September 26, 2010 64 Coca Cola Company, “Active Healthy Living: Support Active Healthy Lives Through Product Variety, Nutrition Education and Physical Activity Programs,” http://www.thecoca-colacompany.com/citizenship/fitness_active_lifestyles.html, accessed September 28, 2010. 65 David Ludwig and Marion Nestle, “Can the Food Industry Play a Constructive Role in the Obesity Epidemic?” Journal of the American Medical Association, October 15, 2008, vol. 300, no. 15, pp. 1808–1810. 66 Greenwashing is defined as the act of misleading consumers regarding the environmental practices of a company or the environmental benefits of a product or service, www.sinsofgreenwashing.org. 67 A. Lewin et al., “Food Industry Promises to Address Childhood Obesity: Preliminary Evaluation,” Journal of Public Health Policy, 2006, vol. 27, no. 4, pp. 327–348. 68 Ibid. 69 Ibid.

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The integrity of the industry’s corporate social responsibility (CSR) initiatives is weakened when considering that it spent $56.8 million in political lobbying in 2009. A good chunk of these efforts have gone to oppose health groups that wanted to restrict vending machines in schools and the use of trans fats in restaurants and food and beverage products.

70 Ironically, although companies in the industry have put

forth impressive statements regarding their commitment toward reducing the negative effects of their products, they

lobby vociferously against policies to improve children’s health, make misleading statements and misrepresent their policies at government meetings and other public venues; and make public promises of corporate responsibility that sound good, but in reality amount to no more than [public relations].

71

PepsiCo’s lobbying expenses rose 300 per cent to $4.2 million in 2009 from 1.17 million in 2008. Much of the increased lobbying expenses were due to the industry’s fight against increased taxes on soft drinks.

72

According to the Center for Media and Democracy, several food and beverage companies such as Coca- Cola, Cargill and Wendy’s have contributed undisclosed donations to the Center for Consumer Freedom (CCF), an organization that lobbies aggressively against obesity-related public health campaigns, scientists who advocate for healthier diets, and legislation to regulate marketing of junk food to children.73 The food and beverage industry has also been criticized for funding studies that result in conclusions that favour companies. The likelihood of a conclusion favouring industry was four-fold to eight-fold higher if the study received full rather than no industry funding.74 Food journalist Michael Pollan argued that companies are interested in funding studies that uncover the latest nutritional fad (e.g., omega 3 fatty acids, fiber) so that they can fortify their existing products with this ingredient and ride the media’s coverage of these findings. Companies such as PepsiCo, Kellogg and General Mills were recently criticized for instituting a very lax and misleading certification program called Smart Choices that was meant to help consumers find healthier food options. Organizations, including the Food and Drug Administration, criticized the fact that unhealthy foods such as Froot Loops, Fudgesicle bars and Frosted Flakes were branded with the Smart Choices logo despite their lack of nutritional content; Froot Loops, for example, is 41 per cent sugar.75 Although the program was meant to be independent in its certification decisions, critics were particularly skeptical because the program was funded by the makers of these sugary products. Each company would pay fees of up to $100,000 a year to be able to use the Smart Choices label, and the fees were based on the total sales of products that bore the label. As one critic put it, “This means that the more food items certified by the Smart Choices program, the more money it collects, which gives it an incentive to apply the label

70 Open Secrets, “Food and Beverage: Background,” http://www.opensecrets.org/lobby/background.php?lname=N01&year=2009, accessed September 15, 2010. 71 Michele Simon, “Can Food Companies Be Trusted to Self-Regulate? An Analysis of Corporate Lobbying and Deception to Undermine Children’s Health,” Loyola Los Angeles Law Review, 2006, no. 39, pp. 169–236. 72 Open Secrets, “PepsiCo Inc.,” http://www.opensecrets.org/lobby/clientsum.php?year=2009&lname=PepsiCo+Inc&id=Center for Responsive Politics, November 20, 2009, accessed September 15, 2010. 73 David Ludwig and Marion Nestle, “Can the Food Industry Play a Constructive Role in the Obesity Epidemic?” Journal of the American Medical Association, October 15, 2008, vol. 300, no. 15, pp. 1808–1810. 74 Michael Pollan, In Defense of Food, Penguin Group, New York, 2008; Michael Pollan, The Omnivore’s Dilemma, Penguin Group, New York,2006. 75 Mike Smith, “Froot Loops Are a Bowl of Sugar, Not a Smart Choice,” Change.org, September 7, 2009, http://food.change.org/blog/view/froot_loops_are_a_bowl_of_sugar_not_a_smart_choice, accessed September 12, 2009.

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liberally.” 76

In response, companies stated that some processed foods deserve the check mark because they are fortified with vitamins and minerals. But, as pointed out by Dr. Michael Jacobson of the Center for Science in the Public Interest, “You could start out with some sawdust, add calcium or vitamin A and meet the [Smart Choices] criteria.”

77 Under pressure from state and federal authorities who feared consumers

would be misled, the food companies backed away from the labeling program. PepsiCo said that it was cutting its ties with the program while Kellogg said that it would begin phasing out packaging bearing the program logo as its inventories ran out. William Neuman from the New York Times stated that the regulators’ actions were a “remarkable turnaround for an initiative that was developed by many of the country’s largest food manufacturers…[that had]…taken at least two years to develop.

78

CORPORATE SOCIAL RESPONSIBILITY AT PEPSICO When Indra Nooyi started her job as CEO of PepsiCo in 2006, PepsiCo changed its “fun for you” slogan to “better for you” and “good for you,” backed up by a diversification of products, including fruit juices, nuts and oatmeal. Nooyi didn’t see this approach as a tradeoff for profits and insisted that both were possible, as reflected in her motto: “performance with purpose,”79 which referred to delivering sustainable growth by investing in a healthier future for people and the planet. The PepsiCo website claims: “As an industry leader, we have a responsibility to help develop solutions to key global challenges, such as obesity.”80 As part of its commitment to delivering sustainable growth, PepsiCo established more than a dozen policies that addressed corporate governance, human sustainability, environmental sustainability and talent sustainability. On September 9, PepsiCo announced its inclusion in the 2010 Dow Jones Sustainability World Index and the Dow Jones Sustainability North America Index, signifying its position as a sustainability leader in the beverage sector. Human Sustainability In 2009, PepsiCo announced 11 ambitious goals and commitments that spoke to the sustainability of people in both developed and developing countries (see Exhibit 2). Four of these goals and commitments spoke directly to PepsiCo’s products, four were related to the marketplace and the remaining three related to the surrounding community. Many would argue that a vast majority of PepsiCo’s products contained ingredients that were detrimental to human health. According to The Economist, “virtually all of Pepsi’s products [are] bad for you — or ‘fun for you,’ as the firm likes to put it.”81 To remedy this perception, PepsiCo acquired Quaker Oats and other wholesome brands such as TrueNorth nut snacks and SoBe Lifewater. In 2006, PepsiCo paid $1.3 billion to purchase Naked Juice, a maker of soy drinks and organic drinks that were advertised as having been made with high concentrations of antioxidants and without any added sugars or preservatives.82

76 Jim Hightower, “Food Industry Is Now Calling Junk Food ‘Healthy’ – Why Could That Be?” AlterNet, September 17, 2009, http://www.alternet.org/story/142668/food_industry_is_now_calling_junk_food_%27healthy%27_-_why_could_that_be/, accessed October 1, 2009. 77 Ibid. 78 William Neuman, “Food Label Program to Suspend Operations, The New York Times, October 23, 2009, http://www.nytimes.com/2009/10/24/business/24food.html, accessed October 25, 2009. 79 Economist, “Taking the Challenge,” May 25, 2010, http://www.economist.com/node/15772138, accessed May 31, 2010. 80 PepsiCo, “Human Sustainability,” http://www.pepsico.com/Purpose/Human-Sustainability.html, accessed September 13, 2010. 81 Economist, “Taking the Challenge,” May 25, 2010, http://www.economist.com/node/15772138, accessed May 31, 2010. 82 PR Newswire. “PepsiCo agrees to acquire Naked Juice Company,” http://www.prnewswire.com/news-releases/pepsico- agrees-to-acquire-naked-juice-company-56477082.html, accessed April 6, 2011.

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Because a majority of PepsiCo’s products were processed, food scientists could fortify the food by removing and inserting minerals, vitamins, whole grains, fiber, omega 3 fatty acids and vitamin C. Yet critics were quick to point out that these initiatives merely represented marketing opportunities to distract consumers from the underlying negative health impacts of the product itself or the remaining ingredients that were not advertised. For instance, although PepsiCo’s Quaker “Dark Chocolate Chunk” granola bar was advertised on the package to have “Fiber & Omega-3,” the granola bar was full of unhealthy ingredients, such as white and brown sugar, corn syrup, evaporated cane juice, hydrogenated soybean and cottonseed oils, caramel colour and sorbitan monostereate. That being said, the Quaker brand was, many argued, PepsiCo’s leading health brand.83 In terms of the marketplace, PepsiCo committed to responsible marketing, including joining a leading group of food and beverage companies to “change what younger children are seeing advertised on TV and in other media.”

84 PepsiCo thus only allowed certain products to be targeted to children that met specific

nutritional criteria. In schools, PepsiCo was committed to offering a portfolio of low-calorie and nutritious beverage choices, including bottled water, juices, sports drinks, juice-flavored drinks, iced teas and no- or low-calorie soft drinks. They also removed all high-sugar drinks from schools to which they sold directly.

85

Until recently, PepsiCo hadn’t emphasized research on healthy or unhealthy food. Since taking over in 2006, Nooyi had increased the research and development (R&D) budget 38 per cent over three years, to $388 million in 2008. “Society, people, and lifestyles have changed,” Nooyi said.

86 “The R&D needs for

this new world are also different.” Her goal of expanding sales of healthy products to $30 billion per year in 10 years from $10 billion today (nearly a fifth of projected worldwide retail) would require annual growth of more than 10 per cent, twice the company’s overall historical average growth.

87 Investors were

skeptical that this sales increase could be achieved. PepsiCo had hired an army of experts on health to work in its research and development business, to give credibility to the firm’s claim that it was applying science to creating healthier products for its customers. Mahmood Khan, a British-born doctor recruited to run Pepsi’s R&D at the start of 2008, said he was “pleasantly surprised by how rapidly this new health agenda has been embraced.”

88

Environmental Sustainability In 2009, PepsiCo announced 15 global goals and commitments related to environmental sustainability, which were divided into water, land and packaging, climate change and community (see Exhibit 3). One commitment included the reduction of packaging weight by 350 million pounds, which would avoid the creation of 1 billion pounds of landfill waste by 2012. Other commitments were related to reducing greenhouse gas emissions and improving electricity use efficiency and fuel use efficiency. PepsiCo also engaged in a numerous philanthropic activities, such as committing to provide safe drinking water to 3 million people in developing countries by the end of 2015.

83 Economist, “Taking the Challenge,” May 25, 2010, http://www.economist.com/node/15772138, accessed May 31 2010. 84 PepsiCo, “Performance with Purpose,” http://www.pepsico.com/Purpose/Performance-with-Purpose/Policies.html, accessed September 13, 2010. 85 PepsiCo products sold by independent third parties (e.g., through vending machine) remained available in schools. 86 Nanette Byrnes, “Pepsi Brings in the Health Police,” Bloomberg Businessweek, January 14, 2010 http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm?chan=innovation_branding_brand+profiles, accessed September 10, 2010. 87 Ibid. 88 Economist, 2010, “Taking the challenge,” May 25, 2010, http://www.economist.com/node/15772138, accessed May 31, 2010.

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PEPSICO’S FUTURE There is no doubt that the food and beverage sector, PepsiCo included, has sustained much criticism for its contribution to obesity, disease and ecological devastation. But, at the same time, PepsiCo put forth a number of ambitious policies along with innovative changes to their products and operations. But were these policies and changes enough to position PepsiCo as part of the solution, not the cause, of “one of the biggest public-health challenges, a challenge fundamentally linked to [their] industry: obesity.”

89

According to Nooyi, responding to this issue was necessary to avoid food companies from going the way of tobacco firms, “which are perennially held responsible by governments for the health problems associated with their products, and penalized accordingly.”

90 Governments appear to be playing a similarly

active role in the food and beverage industry. Some jurisdictions have banned trans fats, which are a very common ingredient in much junk food; salt has been banned in restaurants in New York as a result of a bill introduced in early 2010

91 by the state assembly; and Michelle Obama has launched a campaign against

obesity in children. Critics claim that although PepsiCo has some innovative ideas to address its social and ecological footprint, these ideas are isolated in nature and represent incremental improvements rather than the courageous radical changes to their operations required by Nooyi’s goal of being part of the solution for obesity. Put another way, the core of PepsiCo’s business remained the products that had been and continued to be responsible for these negative effects. As was explained in the Economist article, “politicians and public-health campaigners may not regard selling more healthy products, while continuing to profit handsomely from unhealthy ones, as the best way to tackle obesity.”

92

There is a growing belief that it is PepsiCo’s inherent nature to cause social and ecological issues and that any attempt by PepsiCo to act as a force for change would be at odds with the company’s fundamental purpose of profit creation.93 For instance, why would PepsiCo want to shift to using ingredients that, on the one hand, represented higher costs (e.g., organic or natural ingredients) and, on the other hand, would not want to leverage the consumers’ vulnerability to consuming saturated fat, salt and sugar? Was it even possible to combine the firm’s strategic efforts with being a force for change in an increasingly obese world where diet was inextricably linked to disease, overeating, heart disease and even ecological devastation? PepsiCo’s strategic shift might make sense if PepsiCo were merely responding to the mainstream market’s shift away from unhealthy products. But PepsiCo wanted to play a much more proactive role of shifting the market to healthier products.94 Was there a strategic advantage for PepsiCo? With the possibility of a strategic advantage in mind, some fundamental questions began to emerge for PepsiCo. Should PepsiCo completely disassociate itself from unhealthy ingredients and products? Should the company leave the competitive likes of Coca-Cola and Nestlé completely? If so, when? Should PepsiCo disassociate itself right away or over time? How long of a time? Or should the company straddle the market by being in both the unhealthy product mix and the healthy product mix by keeping true to higher margin unhealthy products while introducing new healthier products? “It’s ok to have a slice of

89 Ibid. 90 Ibid. 91 David Weiner, “Salt Ban for Restaurants? Lawmaker Introduces Bill to Kill Salt,” http://www.huffingtonpost.com/2010/03/10/salt-ban-for-restaurants_n_493455.html, accessed March 3, 2011. 92 Economist, 2010, “Taking the Challenge,” May 25, 2010, http://www.economist.com/node/15772138, accessed May 31, 2010. 93 Quoted in Ludwig and Nestle, Can the food industry play a constructive role in the obesity epidemic, Journal of the American Medical Association, 300 (15), 2008, p. 1809. 94 PepsiCo, “Human Sustainability,” http://www.pepsico.com/Purpose/Human-Sustainability.html, accessed September 13, 2010.

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birthday cake on your birthday,” said Mehmook Kahn, Pepsi’s first ever chief scientific officer and former practicing physician specializing in nutrition. He said, “Would you eat it every day of the week? That’s a different question . . . we can actually make an impact on what is available for consumers.”

95

Another option for PepsiCo would be to create healthy options while making the bad stuff less bad. Rather than change the entire product line, perhaps it would be feasible to make PepsiCo’s existing products as healthy as possible, recognizing that a potato chip, for example, could never be as healthy as a plain cooked potato. But how healthy should the company go? Clearly, what is considered healthy has varying interpretations. Are potato chips healthy? Is Pepsi-Cola healthy? Another option was to use PepsiCo’s marketing and public relations team to exaggerate their efforts despite remaining true to their core products. This strategy would involve marketing the small number of PepsiCo’s healthier products and the incremental environmental improvements the company was making but remaining true to the firm’s core business. This approach would afford the company constant returns, while creating the image that it was changing. Many senior executives preferred this idea, and many companies had been very successful in marketing change while avoiding any sacrifice that such a change would require operationally. To this point, perhaps PepsiCo’s marketing team should work to point the finger of blame away from how many calories people consumed to how few calories they burned. As one executive said “Why aren’t we going after computer and cable-TV companies for creating a sedentary lifestyle?”

96

Was it possible to use PepsiCo’s expertise in product design, packaging, manufacture and distribution to make these new healthier products more enticing. PepsiCo had built its empire on the manufacturing and distribution of instantly recognizable products. Was continuing this trend important in deciding on a future strategy? Should PepsiCo build some new competencies to act as a mechanism to differentiate PepsiCo from its competitors. If so, what should these new competencies be? And how should the firm be positioned in the marketplace? Should PepsiCo shift completely from the likes of Coca-Cola and Nestlé to healthy product competitors? In an economic recession PepsiCo sales should have increased rather than plateaued as they did in 2008/09. She was convinced that the world was beginning to change and didn’t want PepsiCo to be left behind.97 In a call to companies like PepsiCo, world-renowned chef and food activist Jamie Oliver said:

They need to help us shop. They need to show us how to cook, quick, tasty, seasonal meals for people that are busy. This is not expensive . . . it needs to be done across the board in America soon, and quick. The big brands, you know, the food brands, need to put food education at the heart of their businesses. I know, easier said than done. It’s the future. It’s the only way.98

95 Nanette Byrnes, “Pepsi Brings in the Health Police,” Bloomberg Businessweek, January 14, 2010, http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm?chan=innovation_branding_brand+profiles, accessed September 10, 2010. 96 Economist, 2010, “Taking the Challenge,” May 25, 2010, http://www.economist.com/node/15772138, accessed May 31, 2010. 97 Nanette Byrnes, “Pepsi Brings in the Health Police,” Bloomberg Businessweek, January 14, 2010, http://www.businessweek.com/magazine/content/10_04/b4164050511214.htm?chan=innovation_branding_brand+profiles, accessed September 10, 2010. 98 Jamie Oliver, “Jamie Oliver’s TED Prize Wish: Teach Every Child about Food,” February 2010, http://www.ted.com/talks/jamie_oliver.html, accessed September 10, 2010.

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Exhibit 1A

EXPOSURE TO RISKS OF OBESITY

*One Great Britain pound = US$0.61. Source: Ethical Investment Research Services (EIRIS), “Obesity Concerns in the Food and Beverage Industry,” February 2006.

Exhibit 1B

PERFORMANCE OF F&B COMPANIES ON HEALTHY PRODUCTS *One Great Britain pound = US$0.61. Source: Ethical Investment Research Services (EIRIS), “Obesity Concerns in the Food and Beverage Industry,” February 2006.

Exposure Category Thresholds

High >33% turnover related to unhealthy foods OR GBP 2 billion turnover from unhealthy foods

Medium 15% to 33% turnover related to unhealthy foods OR GBP 1 billion turnover from unhealthy foods

Low Between 5% and 15% turnover related to unhealthy foods OR GBP 0.5 billion turnover from unhealthy foods

No <5% turnover related to unhealthy foods AND GBP 0.5 billion turnover from unhealthy foods

Company Total Turnover (GBP bn)

Turnover from unhealthy products (GBP bn)

Percentage

Unilever 28.6 11.4 39.9%

Kraft Foods 16.7 10.9 65.3%

PepsiCo 15.2 12.2 80.1%

Cadbury 6.7 6.0 89.6%

Coca-Cola Company 11.4 10.3 90.4%

McDonald’s 11.0 10.5 95.5%

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Exhibit 2

PEPSICO HUMAN SUSTAINABILITY GOALS AND COMMITMENTS Products

 Increase the amount of whole grains, fruits, vegetables, nuts, seeds and low-fat dairy in our global product portfolio.

 Reduce the average amount of sodium per serving in key global food brands, in key countries, by 25 percent by 2015, with a 2006 baseline.

 Reduce the average amount of saturated fat per serving in key global food brands, in key countries, by 15 percent by 2020, with a 2006 baseline.

 Reduce the average amount of added sugar per serving in key global beverage brands, in key countries, by 25 percent by 2020, with a 2006 baseline.

Marketplace

 Display calorie count and key nutrients on our food and beverage packaging by 2012.  Advertise to children under 12 only products that meet our global science-based nutrition

standards.  Eliminate the direct sale of full-sugar soft drinks to primary and secondary schools around the

globe by 2012.  Increase the range of foods and beverages that offer solutions for managing calories, like portion

sizes. Community

 Invest in our business and research and development to expand our offerings of more affordable, nutritionally relevant products for underserved and lower-income communities.

 Expand PepsiCo Foundation and PepsiCo Contributions initiatives to promote healthier communities, including enhancing diet and physical activity programs.

 Integrate our policies and actions on human health, agriculture and the environment to ensure they support each other.

Source: PepsiCo, “Performance with Purpose,” http://www.pepsico.com/Purpose/Performance-with-Purpose/Policies.html, accessed September 13, 2010.

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Exhibit 3

ENVIRONMENTAL SUSTAINABILITY GOALS AND COMMITMENTS Water

 Improve our water use efficiency by 20 percent per unit of production by 2015.  Strive for positive water balance in our operations in water-distressed areas.  Provide access to safe water to 3 million people in developing countries by the end of 2015.

Land and Packaging

 Continue to lead the industry by incorporating at least 10 percent recycled polyethylene terephthalate (rPET) in our primary soft drink containers in the U.S., and broadly expand the use of rPET across key international markets.

 Create partnerships that promote the increase of U.S. beverage container recycling rates to 50 percent by 2018.

 Reduce packaging weight by 350 million pounds — avoiding the creation of 1 billion pounds of landfill waste by 2012.

 Work to eliminate all solid waste to landfills from our production facilities Climate Change

 Improve our electricity use efficiency by 20 percent per unit of production by 2015.  Reduce our fuel use intensity by 25 percent per unit of production by 2015.  Commit to a goal of reducing greenhouse gas (GHG) intensity for U.S. operations by 25 percent

through our partnership with the U.S. Environmental Protection Agency Climate Leaders program.

 Commit to an absolute reduction in GHG emissions across global operations. Community

 Apply proven sustainable agricultural practices on our farmed land.  Provide funding, technical support and training to local farmers.  Promote environmental education and best practices among our associates and business partners.  Integrate our policies and actions on human health, agriculture and the environment to make sure

they support each other Source: PepsiCo, “Environmental Sustainability,” http://www.pepsico.com/Purpose/Environmental-Sustainability.html, accessed September 13, 2010.

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