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.”