030738 Food Firms Aim To Boost Image

Grilled chicken, grape tomatoes and blue cheese nestled in a bed of romaine lettuce and carrots dressed in herbed vinaigrette. Blueberries and strawberries swirled in yogurt.

These sound more like items you'd find on a fancy spa menu than at McDonald's. But this spring they joined the menu offerings at the Golden Arches.

"We've been listening to what our customers want for a long time," said Ken Barun, vice president of the restaurant's healthy lifestyles program, created in May. "Now they're telling us they want more menu choice and more of a balanced lifestyle. McDonald's wants to offer quality new choices so customers can have balance in their diets."

McDonald's denies legal concerns spurred its healthy menu. Indeed, salads have boosted its sales.

Big Mac, Meet Big Lawsuit

But a recently dismissed well-publicized suit, filed in federal court in New York, alleged that marketing efforts behind McDonald's burgers and fries caused obesity, and that children and teens are not aware that the foods are unhealthy.

Kraft Foods was also the target of recent legal action. In a San Francisco suit that was dropped, an attorney claimed that Kraft's Oreos were unhealthy. He sought to ban Kraft from selling the cookies to children.

Then, on July 1, Kraft, 84% owned by tobacco giant Altria, formerly known as Philip Morris, said it would set a portion limit on single-serving packages. These would include vendor packs of Oreos, candy bars and drinks. It's also volunteering to limit marketing to schools.

"It's the right thing to do for our customers, and yes, it will generate good will," said Michael Mudd, a Kraft senior vice president. "But we also think it's the right thing to do for business. As more people become convinced of the importance of healthy lifestyles, they'll be looking for products and portion sizes to help them achieve their goals. We think there's a growth opportunity here."

McDonald's and Kraft say they have a track record of offering consumers healthy alternatives. Since 1973, McDonald's has offered nutritional information on its burgers on posters, pamphlets and, recently, on the Web. It has sold yogurt parfaits, fresh fruit and granola since 1999.

And Kraft, in addition to Oreos, Oscar Mayer cold cuts and Velveeta cheese, sells meatless Boca burgers, nonfat Knudsen sour cream and fat-free Jello. It's the first food maker to volunteer to cut portion sizes and restrict marketing efforts.

Industry analysts say food firms hope product changes will improve public opinion, especially in the face of litigation.

Fighting For Public Opinion

"Obviously the companies are trying to do what they can to short-circuit any litigation," said James Morris, a food analyst with Utendahl Capital Partners. "One thing these (portion and menu changes) will do is make the companies look better in the public eye."

Others say that since Altria is paying tens of billions for tobacco suits, it prefers to take action on its food products now, rather than wait for something to happen. Indeed, Altria's Philip Morris is still appealing judgments asking it to pay billions in damages.

Kraft's U.S. business already is struggling in the face of price competition from private-label brands. Altria doesn't need another headache, analysts say.

"Kraft is just being smart and setting the guidelines in this area, rather than getting dragged into it later," said Amy Greene, an analyst with Avondale Partners.

Kraft would "rather be on the front end of coming up with these things, than having to mirror what others do later," she said.

Kraft's smaller portion sizes don't have to mean smaller profit. In a recent report, Prudential Securities' John McMillin wrote, "Now, portion size may decline, but smaller sizes can actually enhance margins." Per ounce, the company could charge more.

But Kraft wouldn't mind if positive public opinion of its new portion sizes helps dissuade would-be plaintiffs.

"If it makes it even harder for a plaintiff's attorney to portray us as a company that doesn't care, than so be it," Kraft's Mudd said. "Were our intentions good? Yes. Do we think there's a sound business reason for taking these steps? We do. Would we rather not be sued? Well, of course.

"But we're not in control of the (litigation). Plaintiffs' attorneys will decide if they wish to file suit or not. All we can do is what's right for the company and the people who use the products. Logic would tell you that would make plaintiffs' attorneys less apt to file a suit. But we live in an anything-goes legal environment."

In mid-June many of the lawyers who successfully sued the tobacco industry met in Boston to discuss doing the same to restaurants and food companies.

The meeting, another sign the fight against food makers is just beginning, focused on the lawyers' stance that food companies have forced Americans to become addicted to fatty foods. Legal efforts would include class-action suits and go far beyond the recent actions against McDonald's and Kraft.

Customer demand goes both ways. Some diners don't want vegetables; they prefer burgers. And restaurants that want to stay in business must sell what customers want to eat, not what they should eat, industry watchers say. After all, customers go to Wendy's and McDonald's for burgers, not celery sticks.

"Restaurants care about being good corporate citizens," said Dennis Lombardi, a consultant with Technomic Inc., a Chicago-based firm that tracks the food industry. "It's good for their public image. But you can't pay all your expenses just by being good corporate citizens. If the majority of customers want cheeseburgers, fries and sodas, then you'd better offer it or you'll be out of business."

Others say a food company's job is not to police what Americans eat.

"It's not their role in life to try to teach their clientele to love carrots," said Walter Olson, senior fellow at the Manhattan Institute and editor of overlawyered.com. "It all gets back to whether you accept the idea that people wander into Burger King wanting raw carrots, and that it's the restaurant's advertisement that's tricked them into wanting a hamburger."

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