Is the Low-Carb Boom Over?
 
December 5, 2004
New York Times
by Melanie Warner

LAST July, executives of the American Italian Pasta Company
decamped at the Atkins Nutritionals office in midtown
Manhattan, determined to cook up a new blockbuster product.
They spent several days hammering out a deal to put the
Atkins name on a line of low-carbohydrate, soy-based pasta.

It was the latest food group to be Atkinized. The two
companies seemed certain that soy pasta, with 5 to 10 grams
per serving of what manufacturers call "net carbs," would
be a hit. Regular pasta contains up to 45 grams of
carbohydrates, so the new product would offer a great way
for people on Atkins and other low-carb regiments to
indulge - free of guilt - in fettuccine Alfredo and baked
ziti. Atkins allotted $15 million for a campaign to
announce the introduction.

Today, boxes of the stuff are gathering dust in warehouses
in Excelsior Springs, Mo. Evidently, consumers never quite
cottoned to the unusually chewy pasta. "Low-carb pasta is
an oxymoron," said Marion Nestle, a professor of nutrition
at New York University.

Atkins and American Italian, the largest maker of dry pasta
in North America, have been forced to admit defeat. A month
ago, American Italian said that it didn't ship any soy
pasta in the previous quarter and that sales of its own
line of reduced-carbohydrate pasta were 50 percent below
projections. The company's stock plunged 23 percent on the
news.

The story of soy pasta reflects a general malaise that is
overtaking what was once the hottest - and still the most
controversial - trend in the food business. Last year,
practically every major food company was busy
re-engineering its high-carb goodies into newfangled
low-carb versions. Some 3,737 products, including new
flavors and varieties of existing foods, were introduced
with low-carb marketing in the last two years alone,
according to ProductScan Online, a service that tracks new
products.

Over the last several months, however, manufacturers have
begun to wonder what to do with all of this food. In a
conference call in July, Carlos Gutierrez, the chief
executive of Kellogg (and now President Bush's nominee to
be the next commerce secretary) told investors: "There's a
bit of a glut of low-carb products. Inventories are
extremely high."

Although it may be premature to declare the death of
low-carb foods, many food industry analysts say that the
movement is at least deeply wounded. "The bloom is off the
rose," said Tom Vierhile, executive editor at ProductScan
Online.

Paul Gannon, chief marketing officer at Albertsons, the
grocery chain, said he expects to be selling far fewer
low-carb offerings six months from now. "I think there's a
small percentage that will survive," he said, "and the rest
will go away."

Certainly, many brands of low-carb cookies, cereals and
frozen dinners aren't flying off the shelves the way they
once did. According to ACNielsen LabelTrends, total sales
for products marketed as low-carb grew 6 percent for the 13
weeks that ended Sept. 25, versus double-digit and
triple-digit gains in such periods late in 2003 and in the
first half of this year.

Some analysts say that it is a case of supply vastly
outstripping demand. While many dieters have grown
disillusioned with low-carb dieting - either because they
lost weight quickly then gained it back or because they
missed eating traditional ice cream and pasta - companies
are still churning out new products. Consumers may also
have been scared by some doctors' warnings that low-carb
plans encourage dieters to consume too many calories and
too much saturated fat, which may contribute to heart
disease.

According to the NPD Group, a research firm, the percentage
of Americans who followed low-carb diets like Atkins, South
Beach or the Zone fell to 4.6 percent in September from 9
percent in January. Over the same period, the number of
products in the low-carb category doubled.

AS a pioneer of all things low-carb, Atkins Nutritionals is
taking some of the biggest financial hits. Formed in 1989
to sell products based on the diet philosophy of Dr. Robert
C. Atkins, the business ramped up quickly after news
articles ignited interest in low-carb eating. Atkins
licenses its name to companies like Entenmann's and
CoolBrands but also sells its own baked goods, snack
products and frozen goods.

Yet in the last six months, after two years of rapid
growth, sales of Atkins products plunged 32 percent,
according to Information Resources Inc. (The figure does
not include data from Wal-Mart.) In May, the company had to
write off $53 million of unsold and expired food, leading
to a loss of more than $58 million for the second quarter
and sending the company into financial turmoil, according
to a Standard & Poor's report.

Seven months earlier, Goldman Sachs and Parthenon Capital,
a private equity firm, bought a majority stake in Atkins
for $533 million, of which $323 million was in loans. Now
speculation is mounting that Atkins may be in default on
its debt payments. John Rutherford, a partner at Parthenon
Capital, sought to put those rumors to rest last week. "We
have not missed any payments," he said in an interview.
"Everything is up to date."

Because Atkins Nutritionals is privately owned, a clear
picture of its balance sheet is hard to come by. But in a
report, Chris Donnelly, an executive at S.& P., said that
the company was operating with a thin margin for error.
Based on his analysis, Atkins will be able to meet its debt
obligations only if revenue is more than $30 million a
quarter. Over the last year, according to S.& P. estimates,
revenue has fallen, from $87 million in January to $51
million in May and $29 million in August.

Atkins's management, working with the partners at
Parthenon, has tried to reduce costs. In September, the
company initiated layoffs of 40 percent of its work force,
cut its 2005 marketing budget by almost half and hired
AlixPartners, a turnaround firm that has worked with Kmart
and the American businesses of Parmalat, the bankrupt
Italian dairy group. "This is happening too quickly for us
to be able to manage without outside help," explained Matt
Wiant, the chief marketing officer at Atkins.

Other specialty low-carb businesses are feeling similar
pain. Keto Foods, a company in Tinton Falls, N.J., that
started selling low-carb foods around the time Atkins did,
is desperately trying to figure out how to stay afloat.
This year the company has stopped producing 75 of its 110
products. "We're in terrible financial condition right
now," said Arne Bey, Keto Foods' chief executive.

Many large food companies that had high hopes for their
low-carb offerings have also been disappointed by recent
sales numbers. Data from Information Resources show that
Total Protein, a low-carb cereal introduced in February by
General Mills, brought in $11.8 million as of Oct. 31. But
in the same period, sales of regular Total declined by $13
million, to $74 million, representing a net loss for the
product. In response, General Mills has lowered the price
of Total Protein and scrapped plans to introduce additional
varieties like Total Protein With Almonds.

The vertiginous pattern of low-carb sales is reminiscent of
previous trends in the food industry. Foods made with oat
bran became the rage in the late 1980's, with the grain
finding its way into everything from muffins and bagels to
potato chips and tortillas.

For several months in 1988, Quaker Oats couldn't produce
enough oats and oat bran to sate the newfound desire for
products that consumers believed would lower cholesterol.
The company had to ration its products and posted
apologetic "Dear Customer" letters in cereal aisles when
supplies were low.

Then came the low-fat obsession in the mid-1990's, spurred
in part by a surgeon general's nutrition study released in
1988 that implored Americans to greatly reduce the amount
of fat in their diets. By 1995, one of every four new food
and beverage products made some kind of low-fat claim,
according to ProductScan.

To replace the fat, many food makers pumped products with
starch and sugar, the very ingredients they now remove for
low-carb products. After a few years, the low-fat trend
faded, though it never disappeared, and brands like Lean
Cuisine, Healthy Choice and Weight Watchers have survived
the shakeout.

MANY people who have lived through these and other food
crazes say the low-carb version is extreme in both its
speed and scope. According to ACNielsen LabelTrends,
low-carb sales were $1.6 billion for the first nine months
this year. "This thing was a flash fire," said Richard
Kochersperger, associate professor in the food marketing
department at St. Joseph's University in Philadelphia. "I
think this time the depth of product failure is going to be
staggering."

Many experts say the main flaw of the low-carb diet is
that, unlike low-fat and oat-bran products, low-carb
offerings aren't very effective at helping people lose
weight and eat healthier. "How can you feed fake muffins,
brownies and pancakes to people who are trying to lose
weight and expect it to work?" asked Dr. Stuart Fischer, a
protégé of Dr. Atkins who worked for nine years as
associate medical director of the former Atkins Center for
Complementary Medicine. "No one in the history of man has
ever been able to lose weight eating anything like those
foods or any substitute for them," said Dr. Fischer, who
now runs his own nutrition practice in Manhattan.

Dr. Fischer, who worked with Dr. Atkins when the movement's
focus was just diet books and nutrition counseling, says he
thinks that most low-carb products offer people a license
to snack and to eat highly processed, nonnutritious and
sometimes calorie-intensive foods. "People think these
products are intrinsically designed for weight loss, which
is a problem," said Dr. Fischer, who will publish his own
weight-loss book early next year called "The Park Avenue
Diet," stressing the importance of lifestyle factors in
weight loss.

Other critics say that many so-called low-carb or
reduced-carb products may be harboring hidden
carbohydrates. In the absence of Food and Drug
Administration regulations on what "low carb" is supposed
to mean, manufacturers can devise their own guidelines.
Karb Karma ice cream, from Ben & Jerry's, has 44 percent
fewer carbohydrates than regular versions, but Lean
Cuisine, from Nestlé, has simply repackaged its frozen
dinners to emphasize the carb count even though the product
hasn't changed.

In 2002, Atkins started using the term "net carbs" on
packaging, subtracting carbohydrates like fiber and sugar
alcohols, which generally have less of an impact on blood
sugar levels than white flour, corn syrup or standard
starches. In low-carb dieting, people try to keep their
blood sugar levels low so their bodies will break down
stored fat for energy.

After Atkins began declaring that some products with, say,
30 total carbohydrates really had only 5 "net carbs,"
nearly every other food manufacturer followed suit. The
problem, scientists say, is that there is uncertainty over
exactly how sugar alcohols like sorbitol, maltitol and
lactitol affect blood sugar levels. Dr. David Ludwig,
director of the obesity program at Children's Hospital in
Boston, said that some sugar alcohols affect blood sugar
levels as much as "net" carbs do. "It's unclear whether the
term has any nutritional significance," he said.

Atkins executives defend using the net-carb measure, saying
that the company had all of its products tested at the
University of Toronto. "We actually measured them
clinically with patients to test their blood sugar
response, so it's no longer a theoretical number," Mr.
Wiant said. Nevertheless, the company will start using the
term "net Atkins count."

Two years ago, regulators at Health Canada, the country's
equivalent of the F.D.A., banned the use of all low-carb
claims on packages. Under the new rules, which go into
effect for most food manufacturers in December 2005, all
carbohydrate-related claims, including references to carbs
in the product's brand name or trademark, are prohibited.

For its part, the F.D.A. has said in the past that it is
devising standards for low-carb labeling; it is expected to
complete its rules sometime next year. The agency did not
return phone calls requesting comment.

Critics of Atkins Nutritionals say it would have been
better off sticking to the principles espoused by Dr.
Atkins in his 13 books. For three decades, he recommended
that people eat whole foods that are naturally low in
carbohydrates - meat, cheese, eggs, fish and nuts. He also
said that in later stages of the diet, after the initial
weight loss, people could add back whole grain or
slow-digesting carbohydrates like those in oatmeal and
certain vegetables and fruits.

It wasn't until late in his career that Dr. Atkins decided
to create low-carb snacks for people craving sweets. The
first Atkins product - the Advantage snack bar - was
introduced in 1997.

Dr. Fischer says he doesn't think that Dr. Atkins, who died
in April 2003, ever envisioned dieters' being tempted by as
many low-carb indulgences as there are today. "Atkins
always wanted diet desserts, but what started out as a
small idea got carried away," he said.

Since Dr. Atkins's death, the company has more than tripled
the number of products bearing its name, to 175 from 50.
Dean Rotbart, who previously published a newsletter about
the low-carb industry, said that the dizzying proliferation
of products was doing a disservice to Dr. Atkins's name.
"Somebody should have stood up and said, 'We're not going
to sell our soul for a product,' " Mr. Rotbart said.

Mr. Wiant at Atkins responded to the accusations by saying
that the company had engaged in many internal philosophical
discussions about the merits of selling products. In the
end, though, the company decided that, given the behavior
of American consumers, it is better to offer acceptable,
low-carb versions of forbidden foods, he said.

"The reality is that we would probably all be better off if
we ate three meals a day at home cooked from scratch with
whole ingredients," Mr. Wiant said. "But it's 2004 and
people are on the go and there's a real need for
convenience products."

AS a result of this approach, Atkins Nutritionals derives
the bulk of its revenue from food products; the only other
source of income is royalties from cookbook and diet book
sales. Last year, the company's revenue was an estimated
$200 million. By contrast, Weight Watchers, a dieting
institution since the 1970's, gets 5 percent of its revenue
from licensing and food products and 95 percent from
weight-loss meetings, where customers receive advice about
their diets, as well as support from others in the group.

Dara Mohsenian, a consumer products analyst at J. P.
Morgan, said that for a diet company, that is a much
sounder business model than one dependent on selling
products that are subject to consumer whims.

The stock of Weight Watchers, which went public in 2001,
has been hurt by the low-carb trend; it is down 16 percent
from its split-adjusted record high of $49 in late 2002.
But analysts believe that, while meeting attendance is
down, the company's overall fundamentals are solid. For the
first nine months of 2004, revenue rose 8.8 percent, to
$792 million, and net income grew 32 percent, versus the
same period of 2003.

In August, Weight Watchers added a diet program that is a
modified low-carb regimen. But Mr. Mohsenian said the
program, called Core Plan, doesn't represent a big change
in Weight Watchers' message or philosophy. "I think they've
taken the correct path in not radically altering their
direction, given that sometimes you just have to let these
fads run their course," he said.

Mr. Bey at Keto Foods says he wishes that he would have
stuck to what he knows best: selling specialty products at
health food stores to resolute low-carb dieters. In early
2003, the company, which is privately held, envisioned big
prospects outside its niche. It expanded its product line
and went into large supermarkets.

"If I could do it over again I would have stayed a cottage
industry and not assumed supermarkets were the answer,"
said Mr. Bey. "But it was a low-carb gold rush, and like
everyone else, we got swept up in it."
 
Atkins Facts:
 
> What the Experts Think of Atkins
> Faulty Science
> Short-Term Side Effects
> All Long-Term Studies on Atkins a Wash
> Long-Term Side Effects
> The Safer Alternative
> References 1-1160

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