Salt Sugar Fat: How the Food Giants Hooked Us (31 page)

In the coming months, Drane and his team would uncover even richer insights into who liked the Lunchables and why. But first, they would get some invaluable help from the executives who oversaw not only Oscar Mayer but all of General Foods and Kraft. These were the men who ran Philip Morris, and they were taking a keen interest.

B
y 1990,
Philip Morris had all but cornered the market for cigarettes. Its share of sales had grown to 42 percent, while the nearest rival, R. J. Reynolds, had slipped below 29 percent. With the purchase of General Foods and Kraft, it had also become a consumer goods goliath, posting $3.5 billion in annual profits on $51.2 billion in sales, with 157,000 employees worldwide. Half of its revenue now came from food, but tobacco, led by the Marlboro brand, was still the more lucrative enterprise, pulling in 70 percent of the profits. It was, as Hamish Maxwell said when he retired as the company’s CEO,
“a lovely business, because it’s so relatively easy. Cigarettes have tremendous brand loyalty, you don’t have to bring out new products every five minutes.”

When they did make any changes at Philip Morris, the decisions were quick, almost instinctual.
One Kraft executive recalled being in awe of the way the tobacco executives ran their Corporate Products Committee. At one of the monthly meetings, Marlboro’s manager for Australia had traveled to New York to ask for permission to change the iconic pack design. “Here is the old one,” he said, sliding it down the table. “And here is the new one.” Go for it, the committee said.

The new food division, however, injected some strain into their handling of the company’s affairs. Philip Morris had acquired the two food
giants as a way to take the vast sums of cash the company was earning from cigarettes and put it to work making more money. General Foods (with its Jell-O and Post cereals), and Kraft (with its Velveeta cheese and Miracle Whip) were seen as ways to broaden the company’s portfolio to include brands that were less controversial but still powerful.
But it had paid dearly for General Foods, shelling out some $5.7 billion to buy the food giant in November 1985, and three years later it paid even more handsomely for Kraft in a deal valued at $12.9 billion. The Kraft purchase especially drew complaints from Wall Street that they had overpaid. Though not overly anxious about this criticism, the Philip Morris executives were resolute: They would get their money’s worth.

This is how Geoffrey Bible ended up spending more than a year at Kraft’s headquarters north of Chicago, abandoning his family to sleep in a company apartment three-quarters of a mile down the road, and devoting his days to learning the food trade.
“Hamish Maxwell was a brilliant guy, in my opinion the best CEO we ever had,” Bible told me. “He was the architect of all this buying of food companies and his attitude was, ‘If you gotta do it, do it big, don’t fiddle around.’ We had sort of screwed around with the smaller companies we acquired and hadn’t done well with any of them. He asked me if I’d go out there for a period of eighteen months or so to learn about the food business and, I suppose, maybe as a backup. A little bit of a safety valve.”

I asked Bible about his first impressions of Kraft, whose executives were decidedly more formal and yet less steadfast in their devotion to the company. They tended to build their careers by moving from company to company within the consumer goods and fast food industries, whereas the Philip Morris executives stayed put.

“I never really worried much about the culture there,” he said. “Cultures are cultures and you can’t change them. Believe me, I’ve been through too many acquisitions to think they’re going to change. They were different from us, and I sensed there was a certain … resentment isn’t the right word, but we were a tobacco company, and tobacco wasn’t highly thought of. We had had General Foods for a few years, and to some degree
that was helpful, but there was a clash. The General Foods and the Kraft people didn’t really hit it off. They had different styles. But they both had terrific brands, and I’d say that’s what attracted Hamish, the great brands.”

One of Bible’s goals was to help smooth the merger by fostering a synergy between the food giants that could tie all of their expertise together, from the laboratories in Tarrytown, where people like Al Clausi, the chemist, labored to keep the brands fresh and attractive, to the sales force that roamed the country making sure that those products got the most prominent placement in the grocery store, to the advertising executives at the Leo Burnett agency who dreamed up the campaigns that convinced people to pick up those products and take them home. (The Burnett agency not only worked on food, such as Velveeta cheese for Kraft; in 1955 it created the cowboy known as the Marlboro Man.) To push this concept of synergy along, Philip Morris brought its far-flung staff to a Marriott hotel on the North Shore of Chicago, where they held a two-day retreat in December 1990 that was billed as the “Philip Morris Product Development Symposium.”

Bible helped kick things off with a speech that was part war stories, part pep talk. He focused on the one thing that every one of the food managers needed to do if their products were to continue to dominate the processed food world. They had to understand, deeply, the mind of the consumer. “The simple beauty of the Kraft General Foods challenge is that everybody eats,” Bible told them. “This is part of the new job I’m especially enjoying: The potential is at once limitless and incredibly daunting. The fascinating challenge is to discover unmet needs surrounding this behavior that has been with mankind since day one. The needs are there, waiting in the detritus of modern life to be excavated and defined as likely today to center around time or convenience as they are around taste, value or nutrition, and as likely to involve the subtleties of how, when, why, or where people eat as much as what they eat. So that’s point number one. We don’t create demand. We excavate it. We prospect for it. We dig until we find it.”

For added inspiration, the food managers were treated to the inside story of how Philip Morris turned its own famous brand, Marlboro, from a loser nobody wanted into a cigarette that hooked more people than any other brand in the world, and how it added new brands and line extensions.
Philip Morris didn’t accomplish this by being the smartest cigarette maker; it did it by being the fastest and most aggressive in spotting the consumer’s ever-changing vulnerabilities, as Philip Morris research and development official John Tindall explained. The company had gone from a 9 percent share of the cigarette market in 1954 to a 42 percent share in 1989 not by being the trendsetter but by quickly following its rivals when they came up with blockbuster innovations, like the slimmer cigarette called the 120s, which lent some needed glamour to smoking. It spun potentially devastating developments into gold by always keeping the mind of the consumer at the forefront of everything it did. Lesser companies might have panicked in 1964 when the Royal College of Physicians and Surgeons released its first report on smoking and health, but the Philip Morris managers seized upon it with a brilliant response. They began selling filtered cigarettes as a “healthier” alternative, which in turn broke open an entire new market for sales: women.
“Suddenly, because of the smoking and health publicity, filter cigarettes became not only acceptable but necessary,” Tindall said. “Filter cigarettes offered what smokers perceived as a health benefit, and the rapidly growing demographic segment, smoking women, could smoke filter cigarettes without getting tobacco in their mouths, and with only one end of the cigarette leaking tobacco into their purses.”

One of the best examples of Philip Morris responding quickly to marketplace shifts was happening right at that moment, Tindall said. With the addictive properties of nicotine becoming more widely known, the company was working to create a low-nicotine cigarette, and in this endeavor it had the food scientists to thank. Philip Morris was borrowing the technology General Foods used to extract caffeine from coffee to pull the nicotine out of tobacco.
“Obviously, there was concern that a low-nicotine cigarette
might put the cigarette industry out of business,” Tindall said. “The long-term management philosophy prevailed, though; we would compete in any category that had a chance for success.”
^*

In the audience that day were 86 research and development officials from General Foods and another 125 from Kraft, who represented all the major brands, from boxed cereals to frozen desserts. But none of them would benefit more from all the talk about divining the consumer’s mind and chasing trends than the people from Oscar Mayer, who at that moment were poised to take their own product, the Lunchables, to new heights.

F
or a brief moment, when production costs were outstripping revenue, it looked like Philip Morris had made a bad bet on the Lunchables. Right after Hamish Maxwell signed off on giving the trays more development money, which kept the Kraft bankers from shutting the whole venture down, sales dropped, and Bob Drane’s team scrambled to slash production costs. Drane even gave up his most treasured part of the tray, the yellow napkin,
“which I fought like crazy to hang on to. It was like one and a half cents, but every element was examined in detail to figure out how to reduce the costs without screwing up the quality.” Oscar Mayer also gradually learned how to accomplish high-tech assembly, in which workers were replaced by machinery that accelerated and automated the factory lines, further reducing costs. Projected to lose $6 million in 1991, the trays instead broke even; and the next year, they earned $8 million.

Having extinguished this fire, the Lunchables team could focus its attention, once again, on boosting sales. And it did this by turning to one of the cardinal rules in processed food: When in doubt, add sugar.
“Lunchables with Dessert is a logical extension,” an Oscar Mayer official reported
to Philip Morris executives in early 1991. To accomplish this, they would have to spend $1.2 million to retool the production lines yet again. But the “target” remained the same as it was for regular Lunchables—“busy mothers” and “working women” aged twenty-five to forty-nine, he said—and adding cookies and puddings would bring several advantages. The “enhanced taste” would attract shoppers who had grown bored with the current trays; the added sweets would let the company charge thirty cents more per unit; and the dessert line would keep Oscar Mayer a step ahead of competitors who were reacting to the Lunchables success by putting out their own versions of cold, ready-to-eat lunch.

A year later, with the trays increasingly being eaten by kids, the dessert Lunchable morphed into the Fun Pack, which came with a Snickers bar, a package of M&Ms, or a Reese’s Peanut Butter Cup as well as a sugary drink. The Lunchables team started by using Kool-Aid and Cola but switched to Capri Sun in 2000 when Philip Morris added that drink to its stable of brands.

By 1995, six years after their launch, the Lunchables were giving the tobacco executives some of the only good cheer in the financial reports from Oscar Mayer. In appearing before the Corporate Products Committee that fall, Bob Eckert, president of the Oscar Mayer unit, went through all the bad news in red meat: Bologna sales were down; bacon was down; even hot dogs had sunk 4 percent.
“Our processed meat categories get more than their fair share of negative stories about fat, leukemia, nitrates and the like,” Eckert lamented. In response, Oscar Mayer had begun making a new line of fat-free meats—hot dogs, bologna, sliced ham—that were projected to reach $100 million in sales.

The Lunchables, however, used the regular products and were already a superstar in the Oscar Mayer lineup. It had gone from being a money loser—or, as Eckert put it, “a bleeder”—to being “a growth engine,” a foundation of the company’s profits. “We’re leading the hottest segment of the supermarket’s refrigerated case,” he said. That year, the Lunchables hit a string of milestones: 100 million pounds in trays sold, half a billion dollars in revenue earned, and $36 million in profits. Lunchables had come so far,
so fast that Oscar Mayer was scrambling to find more places to make the trays. “We must expand manufacturing capacity,” Eckert told the tobacco executives.

Sugar wasn’t the only catalyst being used to advance the Lunchables sales. All three components—salt, sugar, and fat—would get hefty boosts. A line of the trays, appropriately called Maxed Out, was released that scoffed at the federal government’s guidance on nutrition. These and other permutations had as many as 9 grams of saturated fat, or nearly an entire day’s recommended maximum for kids, with two-thirds of the max for sodium salt, and 13 teaspoons of sugar.

When I asked Geoffrey Bible, former CEO of Philip Morris, about this shift toward more salt, sugar, and fat in meals for kids, he did not dismiss the nutritional concerns that this raised. Indeed, he said, even in their earliest incarnation, Lunchables were held up for criticism. “One article said something like, ‘If you take Lunchables apart, the most healthy item in it is the napkin.’ ”

Well, they did have a good bit of fat, I offered.

“You bet,” he said. “Plus cookies.”

But speaking in general about the nutritional aspects of the products that Philip Morris sold through its food division, Bible said the company was in a tough spot. The prevailing attitude among the company’s food managers—through the 1990s, at least, before obesity became a more pressing concern—was one of supply and demand.
“People could point to these things and say, ‘They’ve got too much sugar, they’ve got too much salt,’ ” he said. “Well, that’s what the consumer wants, and we’re not putting a gun to their head to eat it. That’s what they
want
. If we give them less, they’ll buy less, and the competitor will get our market. So you’re sort of trapped.”

Bible said the nutritional aspects of the company’s products were typically left in the hands of brand managers, who faced an uphill battle whenever they sought to introduce a new product. But given the consumer’s fickleness, the risks of failure were even greater if they tried to pull back on the keystones of their formulations, the salt, sugar, and fat. Bible said the
most vivid example of this that he could recall involved Robert McVicker, a Kraft vice president for technology who died in 2001, and Michael Miles, the company’s former CEO.
“Bob was very keen to get a low-fat peanut butter,” Bible said. “Peanut butter wasn’t a big business for us, but it was big in the country, so if you find one it could pay. But it was going to cost a lot of money. So Mike had a rule, which I thought was a pretty sensible rule. He said to Bob, ‘If you can find a brand manager who’s prepared to absorb the R&D cost, go for it.’ Now, if I’m the brand manager, and they say, ‘Geoff, this is probably going to cost you $5 million and if you want to put it in a test market, another $10 million, and then if we roll it out to a bigger test market, this thing will cost you $30, $40 million.’ And I say, well, ‘No thanks.’ You see your bonus disappearing. So it doesn’t work, unless you can find somebody who’s prepared to say, ‘Okay, I’ll take the punt. If it doesn’t work, I’ll eat the money, and I may lose my job, because that’s what I’m paid to do, pick winners not losers.’ A lot of these initiatives didn’t really get out of the box because it’s hard to find the funding, the champion who will get behind them. I think everybody did their best, but again, it’s what the consumer wants that we tend to make.”