NEW YORK ( TheStreet) -- The Quaker Oats brand, acquired by PepsiCo (PEP) - Get Report for about $13.4 billion in 2000, has long been known primarily for its steel-cut oats that take 30 to 45 minutes to cook.
But now the 114-year-old Quaker Oats brand is trying to offer increasingly time-starved consumers cups of instant oatmeal and granola bars.
"As we have moved from the baby boomer generation to the millennial generation, time has become increasingly limited," said Dr. Mehmood Khan, PepsiCo's vice chairman and Chief Scientific Officer.
It's just one example of the kind of changes the food and beverage giant is trying to adapt to by changing the way it develops and thinks about its new products. Khan is part of an executive team at at PepsiCo being led by chairman and CEO Indra Nooyi that is moving aggressively to create products that address trends such as consumers' growing interest in health and wellness, in addition to convenience.
Since 2011, PepsiCo's spending on R&D has surged 37% to $718 million. The funds have been used to hire more nutritionists and food scientists, as well as to bring in chefs whose job is to scour the globe for new flavors for snacks and beverages.
Juice drink being tested by PepsiCo's culinary team.
The collective efforts have yielded several notable new products. Launched in 2013, 80-calorie Mountain Dew Kickstart is now pulling in about $400 million in annual U.S. sales, according to PepsiCo. Not too shabby for a beverage designed to target a subset of consumers that crave carbonated caffeine in the morning, but want to cut out the calories inherent to soda.
Other successes pointed out by Khan include Tropicana 50, a reduced calorie juice line that was launched in 2009 after research showed consumers were diluting their morning OJ with water to cut back on sugar intake. Within the regular Tropicana business, a new product coined "tropical green" containing spinach, kale, kiwi and other fruit is "on fire," according to Khan.
In total, new product innovations now represent about 9% of net revenue at PepsiCo, up from 6% in 2010.
And more products with a healthier angle are also waiting in the wings.
The use of olive oil and avocados in juice drinks due to their healthy fat properties is an emerging trend, noted a PepsiCo chef at a product sampling at the company's upstate New York headquarters. One juice tested was a mixture of kale, romaine, spinach, avocado, celery, and some apple to soften the acidity.
Khan says there is a budding opportunity for PepsiCo in nut milks, such as those based on hazelnuts, as consumers seek to reduce saturated fat intake from regular milk. Already, the company's Naked brand has introduced a berry almond nutmilk within its Naked brand.
With the non-soda drinks portfolio starting to churn out successful new products, Quaker Oats appears to be ready to follow suit, where a dose of innovation couldn't arrive quickly enough.
In 2014, the Quaker Foods North America division, which also includes products like Aunt Jemima syrup and Quaker Oats cookies, saw a modest sales increase of 1%, which has been followed by a 1% sales decline so far this year. But there have been signs new product innovations at Quaker are starting to resonate with consumers.
According to the company, it has seen high-single-digit percentage volume growth in ready-to-eat cereals and low-single-digit volume growth in oatmeal.
"Quaker Oats is now starting to appear in forms that are so different than our journey ten years ago," says Khan.
Quaker Oats being used for a savory dish that includes sprinkled cheddar cheese and apples.
The commitment being made by PepsiCo to reinvent Quaker Oats and leverage it across its vast product portfolio likely means that it won't be spinning off the Quaker Foods North America division, much to the chagrin of some on Wall Street who have questioned the division's tepid performance.
The likelihood of PepsiCo keeping Quaker Oats is a point further supported by the company expanding the role of long-time CFO Hugh Johnston in July. Johnston was promoted to vice chairman, and in addition to his CFO duties now oversees the Quaker Foods North America business and PepsiCo's global e-commerce organization.
PepsiCo's efforts to transform itself into one with new products that cater to evolving consumer demands is paying off in the financial results, and stock price. By delivering solid performances in each measure, it has given CEO Nooyi the leeway on Wall Street to continue investing aggressively in research and development, which is the lifeblood of any consumer products business.
The same can't be said for several of PepsiCo's rivals in the space. Mondelez (MDLZ) - Get Report continues to deal with the demands of noted activist investors Nelson Peltz and Bill Ackman and is watching every penny it spends carefully. Research and development expense at Mondelez was $455 million in 2014, down 1.5% from 2012.
At newly formed Kraft Heinz (KHC) - Get Report , its owners 3G Capital Partners, who have a reputation for being ruthless cost-cutters, and Warren Buffett are likely to slash costs in areas such as product development and marketing to offset weak sales.
PepsiCo reported adjusted earnings per share of 83 cents in the first quarter, beating analyst forecasts by 4 cents a share. The Frito Lay division led the charge, as consumers responded favorably to new Doritos 3D jalapeno pepper chips and Rold Gold pretzel dippers. The company also took Cheetos -- long known for its tangy orange cheese topping -- and released a new product with cinnamon sugar flavoring.
In the second quarter, PepsiCo reported adjusted earnings of $1.32 a share, surpassing the consensus forecast by 8 cents a share. Similar to the first quarter, the results were supported by the success in newer products, such as naturally sweetened Mountain Dew in a glass bottle, Mountain Dew Kickstart caffeinated drinks and the innovative Doritos Roulette, which contains several random extra-spicy chips in each bag.
Over the past two years in which PepsiCo's development engine has really been cranking out new products, shares have gained 11.9%, outperforming arch nemesis Coca-Cola (KO) - Get Report whose stock has fallen 1.7% due to its reliance on its soda business. The stock has also beaten the S&P 500, which has gained about 6.5% during the same time span.
"While we remain unenthused with the valuations in our large cap space, we think PepsiCo's solid organic growth, consistent gross margin expansion and strong cash returned to shareholders should allow the stock's multiple to rise slightly from here," wrote JP Morgan analyst John Faucher in a Jul. 10 note. The analyst reiterated his overweight rating on the stock, which is the equivalent of a buy.
As for the soda business the company was founded on back in 1898 by pharmacist Caleb Bradham (who served as the inspiration behind a new craft soda using real cane sugar), PepsiCo seems content to let soda fans continue to enjoy the product, while others reduce their consumption due to health concerns. As this dynamic plays out, the company seems inclined to drive sales of products designed to meet the new demands of consumers in the U.S. and abroad.
Says Khan: "Our portfolio is our strength, we are not anchored to any one type of product."