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Bad image chips away at Olestra

Published Sep. 29, 2005

The fat substitute's slim market spotlights concerns about growth and marketing at Procter & Gamble.

In a corporate dining room at Procter & Gamble's headquarters two years ago, chief executive John Pepper stabbed his fork, by turns, into salad, chicken-vegetable stir fry and carrot cake.

The lunch, during which Pepper asked the chef to set aside a little extra dressing for him to take home, was a carefully orchestrated attempt to show that he was putting his mouth where his money was _ in P&G's much-ballyhooed olestra, a fat substitute. The salad dressing, stir-fry oil and cake frosting were made with olestra.

Though olestra is approved for use only in potato chips and other salty snacks, the menu made clear that the company's ultimate goal was to turn olestra into a staple, just as its Crisco was a generation earlier. It confidently projected almost $1-billion in worldwide sales by the end of this year.

Olestra did rack up decent sales last year, but the company grossly miscalculated the size of the market. Part of the problem was that regulatory approval was so long in coming that the fickle cycle of consumer taste had edged away from low-fat food. P&G never overcame olestra's image problem _ backed up by numerous complaints that it causes upset stomach in some people. It did not help that few companies followed the lead of Frito-Lay, which until recently had exclusive rights to put olestra in its snacks.

What this adds up to is that with luck, sales may hit half that $1-billion target. P&G, under a new chief executive, admits that olestra, an amber-colored fake fat marketed as Olean, will probably not be the liquid gold that management once envisioned.

"We acknowledge the current performance isn't what we would have liked," company spokeswoman Sydney McHugh said. Far from it, in fact.

Last month, Durk Jager, who in January replaced Pepper, now chairman, stunned analysts and investors by disclosing that olestra production last year at a new $250-million plant was 30 percent to 40 percent below forecasts. Plans to seek broader regulatory approval to add olestra to foods like french fries and cookies have been put on hold.

Not that olestra is a pure flop. "Consumers have now enjoyed more than 1.5-billion servings of snacks that are made with Olean," McHugh said. The company said it remained confident in olestra's long-term prospects.

Frito-Lay, by adding olestra versions of its already popular Doritos, Ruffles, Tostitos and Lay's chips and calling them Wow snacks, pulled in $347-million last year, Information Resources Inc. said.

Procter & Gamble's olestra version of Pringles chips added $100-million, the company said. But all this falls far short of what P&G dreamed of when it forecast $500-million in domestic revenue and $400-million in international sales by 2000.

There is always the chance that just as Nutrasweet took about a decade to catch on, olestra may one day truly blossom.

For now, though, the backpedaling from the lofty goals is a testament to the struggle P&G, long known as a marketing powerhouse, has had in coming up with the next hot brand to rev up its slowing growth engine.

Procter & Gamble has set a highly publicized 10-year goal of doubling its revenues to about $70-billion by 2005. It said it would almost certainly miss that target but was confident it would return soon to its traditional double-digit earnings growth rate. Analysts say that without large acquisitions, P&G will be hard-pressed to move the needle that far.

The company recently restructured its business to speed product introductions, which should make it more competitive with smaller, nimbler rivals. It recently introduced several products that show potential, like Febreze, a spray that removes odors from fabrics, and Swiffer, an electrostatic mop with a disposable cloth.

With olestra, though, the question is how a company that brought the world Tide, Pampers and Crest could have invested half a billion dollars and about 25 years in a product that came up so short.

"I guess the headline is, "The consumer has spoken,' and it's like a political campaign that never got off the ground," said Mark Godfrey, a senior analyst with the Invesco Funds Group, which holds 1.6-million shares of P&G. "It seemed like people had a negative perception of it right off the bat."