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September 07, 2005

The healthy version costs more in Harlem

Pathmark of Harlem has Doritos on promotion this week. Doritos, high in fats and sodium, are about as unhealthy as corn chips can get. In fact, Doritos' maker, PepsiCo's Frito-Lay division, dominates the salty-snack aisle and makes few products of great nutritional value (except for Tropicana and some recently-acquired businesses like Quaker).

I have generally been skeptical of claims that food companies are responsible for America's obesity crisis. Unlike cancer-stick makers, America's purveyors of junk food never claimed that their product was healthy. And recently, Frito-Lay has slowly introduced baked versions, though these products are sold at higher prices and have increased sodium per serving. (E.g. Baked Doritos have 220 mg vs. 200g for regular Doritos). Given their high sodium content, Baked Doritos are hardly healthy, but indulge me for a moment if I call Baked Doritos "the healthy version."

This week's promotion at the Harlem Pathmark might cause one to change his mind on the culpability of junk-food sellers for the obesity epidemic. Why? Because in very small letters is a note that the promotion "excludes Baked." (Here is a copy of the sales circular.) In other words, the market leader of a junk food category is in a poverty-stricken neighborhood like Harlem, where obesity is particularly acute, charging twice as much for the health version of its product as the unhealthy version. Meanwhile, the company touts "the important role that [PepsiCo] can play in helping people lead healthier lives" especially "in the Hispanic and African-American communities." (See also.) When in a market where most customers are poor and can afford few healthy foods, a company who charges twice as much for the healthy version may arguably be considered culpable for contributing to an obesity problem.

I see no reason to explain charging a high price for a healthier version of one's product. In a hyper-competitive aisle like salty snacks, it is highly likely that an allowance from Frito-Lay is behind the promotion. Cost of sales and distribution for a baked product might be higher, but cost of sales at the manufacturer level is very small in proportion to overall cost. Frito-Lay faces significant distribution costs because Doritos are sent DSD (direct-to-store), but distribution costs for the baked product are probably little more than for the fried product, depending on how fixed costs are allocated.

It would seem reasonable that Baked Doritos sell at a higher price (i.e. are not in special deals) because Frito-Lay knows that conscious eaters will pay more for them. Unfortunately, in neighborhoods like Harlem, a promotion that pitches Doritos but excludes the baked version looks more like Frito-Lay is gouging the poor by making healthy eating prohibitively expensive. If Frito-Lay is to run promotions on Doritos, baked Doritos should not be excluded. A family that scrapes for every dollar, like most in Harlem, should not have to pay an extra $1.74 to eat a bit more healthfully.

PepsiCo has been invited to respond; I will post a reply if/when received. (Indeed, I note that I'm not anti-Pepsi: I defended Indra Nooryi after her controversial speech here at Columbia Business School in May.)

UPDATE 1: Christine Jones (no relation), PepsiCo VP of Consumer Relations, has written to say that she has forwarded the request for comment to her "counterpart at Frito-Lay."

UPDATE 2 (9/13): I received the following from an anonymous Consumer Affairs representative at Frito-Lay today. Forgive them for addressing me as Ms. Jones:

Dear Ms. Jones:

Thank you for the opportunity to respond to your question about pricing on
Baked Doritos. Frito-Lay is committed to providing consumers with the highest
quality snacks and keeping our price levels as low as possible. As with all
consumer goods, the prices charged are influenced by raw materials and
manufacturing, as well as distribution costs. Since they were first introduced
in the late 1990's, the baked varieties of our chips remain more expensive for
us to make than our regular chips. As a result, the higher production costs
for Baked Doritos are reflected in the price to our consumers with a suggested
retail price that is the same across the country. Just so you know, there have
been a variety of reduced price events on the Baked products offered at all
Pathmark stores throughout this year.

Frito-Lay is committed to providing consumers with great tasting, superior
quality choices that cross the spectrum of nutritional variety. For years,
we've led the industry in research and testing of different cooking oils. In
early 2003, we completed a full conversion to non-hydrogenated cooking oils
virtually eliminating trans fat from our snack chips. Trans fats are
considered by the scientific community as among the worst types of fats because
research indicates that they raise the LDL (or bad cholesterol) while lowering
the HDL (or good cholesterol). Frito-Lay was also the first company to include
trans fat information on the nutrition label of its packaging - prior to the
U.S. Food and Drug Administration's final ruling in July 2003 requiring the
inclusion of this information by January 1, 2006. The company actively
followed the nutrition research on trans fatty acids and moved proactively to
include trans fat information in accordance with the FDA's interim guidelines.

Moreover, in our conversion out of hydrogenated oils, Frito-Lay switched to
using corn oil in brands such as Doritos, Tostitos, and Cheetos (Fritos have
always been made with corn oil). Corn oil is very high in mono and
polyunsaturated fats. The 2005 Dietary Guidelines for Americans recommend that
most fats/oils should come from sources of polyunsaturated and monounsaturated
fatty acids such as corn and other vegetable oils. These fats are recommended
because total and LDL-cholesterol levels are reduced when saturated and trans
fats in the diet are replaced with unsaturated oils such as corn oil which
helps reduce the risk of heart disease. Therefore, Frito-Lay brand snacks made
with liquid vegetable oils are a healthy choice for all consumers. In
addition, Sunchips brand snack chips are made with sunflower oil - also very
high in unsaturated fats - and provide a full serving of whole grains.

Our snacks can be part of a balanced diet and part of a healthy, active
lifestyle. We are committed to continue to look for ways to offer consumers a
wide variety of choices and sell them at a price that represents a fair value.
Thanks again for your comments and the constructive spirit in which they were
offered.

Sincerely,

Frito-Lay Consumer Affairs

Reference #: AAAA-6FZSDP

To which I replied:

Thank you for your reply concerning the significantly higher price of Baked Doritos in low-income neighborhoods of New York and the contribution this makes to the national obesity problem. You claim that the cost of producing and distributing baked product is higher. I find it difficult to believe that this would justify a 100% price difference.

For a typical branded food product, raw materials, conversion, packaging, and distribution costs typically total around 20-30% of gross sales value. Thus, in order to justify a 100% higher price for Baked, the costs of Baked would have to be 4 to 5X as high. (This would produce the same unit margin per package.) While a Baked product will always be more expensive until it has the same volume as the fried product (because of overhead allocations), I don’t think that the difference is enough to drive the 100% differential in price observed in the Harlem Pathmark. Variable distribution costs, for example, are the same for baked and fried because they use the same DSD. (Perhaps you could provide some numbers to back your assertion of higher costs.)

Furthermore, your response does not address the claim that you charge more for a healthier version of your product because wealthy consumers are willing to pay more for the healthier version. Why else would you put “excludes Baked” in the half-off ad? If you are running promotions separately on Baked, could you please explain?

If food companies want to avoid blame for the obesity epidemic, they cannot charge premiums for healthier versions of their product in low-income neighborhoods like Harlem where people cannot afford many food options. The healthier product must be made just as accessible to the poor as the base product.

Posted by adrianjo at September 7, 2005 09:23 PM