Low-Carb Bubble

August 23, 2004
by Steve Maich

IN THE HISTORY of almost any business fad, there is a point at which people insist what’s happening is not a fad at all but permanent social change – the beginning of a new mainstream. Often, that’s the moment when big corporations, terrified of being left behind a burgeoning groundswell, over-invest. It’s also when things usually start to fall apart.

Tom Vierhile has watched many such crazes unfold. As executive editor of Productscan Online, a Naples, N.Y.-based company that tracks new consumer products, he saw North Americans fall in and out of love with wine coolers in the 1980s; then it was foods containing oat bran; in the early ‘90s, clear drinks were all the rage. To Vierhile, it appears the Atkins diet and its low-carbohydrate knock-offs are heading down the same road, taking with them millions of dollars spent on development and merchandising by food giants that clambered onto the bandwagon just as its wheels started to fall off. “It reminds me a lot of investors who around 1999 thought it would be a great time to invest in tech funds, and then proceeded to lose their pants,” says Vierhile. “The pattern is very, very similar.”

Indeed, recent surveys suggest Americans are starting to lose their taste for high-protein regimens and are switching back to less restrictive diets. (Far fewer carb-lite products have appeared in Canada, and industry representatives say the dieting trend is lagging by eight to 12 months here.) Last month, Kellogg CEO Carlos Gutierrez became the first major food executive to admit the industry may have overestimated low-carb’s potential, acknowledging that the rapid proliferation of products had created “a bit of a glut” in the market. “We’re clearly seeing that the low-carb trend, or fad, has peaked,” he told investors. That sentiment was echoed by General Mills chief Stephen Sanger, who said he didn’t believe the diet would be a long-term factor in the industry. Just like those Internet start-ups that found themselves starved of capital and bereft of customers in 2000, food execs are now wondering what’s in store for their huge investments in low-carb.

It’s a business that didn’t even exist a few years ago. Dr. Robert Atkins first published his revolutionary approach to dieting in 1972, but it didn’t catch on until an updated version of the book hit bestseller lists in 1997 – and stayed there for almost 400 weeks. Soon, it seemed every other person was counting carbs and shunning potatoes, and the packaged-foods industry scrambled to keep up. In 2002, 339 new low-carb products were introduced in the U.S. In 2003, that figure almost doubled to 633. In the first six months of this year, the category exploded, with 1,863 products launched.

Dr. Atkins died in 2003, but the company he started, Atkins Nutritionals, remains a leader in the low-carb market. Last year, its sales of Atkins-branded foods and books more than tripled, topping US$ 200 million, and two private investment firms paid almost US$ 700 million for a majority stake.

A long list of companies whose products are loaded with carbs, from Krispy Kreme Doughnuts to Canada’s bakery giant George Weston, have blamed the trend for disappointing profits and sales. Not surprisingly, many have rushed to get in on the revolution. Fast food chains like McDonald’s and Burger King introduced high-protein platters with no bread. Kraft Foods, reeling from four quarters of falling profits, is cutting about 6,000 jobs and using some of the savings to promote lower-carb products. General Mills and Unilever rolled out entire low-carb lines. But almost as soon as all these products went on sale, executives started warning that the party was winding down.

HOLLY LEWIS’S experience with the Atkins diet helps explain why the low-carb trend is on the wane. The Toronto actor is by no means overweight, but she felt losing five pounds could help her get better roles. Seeing magazines filled with stories of starlets shedding pounds by gorging on meat, Lewis decided last fall to give Atkins a try. After reading up, she cut her carb intake drastically. She soon dropped a dress size and felt sure the diet was working.

Within a few weeks, however, she started having intense cravings for sweets and some minor stomach aches. But the most noticeable side effect was lethargy, and she was finding it more difficult to memorize lines. “I read about the connection between carbohydrates and brain function, and that made me nervous,” she says. Six months after she started, Lewis switched to a more balanced diet.

Research suggests Lewis is just one of millions of North Americans who embraced the low-carb lifestyle only to find it disappointing. Morgan Stanley analyst William Pecoriello commissioned surveys on the eating habits of 2,500 American adults in each of the last three quarters, and in the latest poll, completed at the end of June, the low-carb craze posted its first decline. The survey showed about 10 per cent of Americans were on a low-carb diet, down from an average of 12 per cent in the first three months of the year. Pecoriello forecasts that by year-end, the number will be closer to five per cent.

None of the food giants will say how much they’ve spent chasing Dr. Atkins’ disciples. But given the costs of developing and marketing new consumer products, Vierhile says the industry’s total low-carb investment likely runs close to a billion dollars. If eating low-carb ends up relegated to niche status, much of that investment may turn out to be wasted, he says. “The later you get into a market like this, the greater the chance of losing money. It seems like that lesson is forgotten time and time again. The biggest companies tend to enter these fads at the wrong time, coming in full bore at the peak. That’s happened here.”

The giants like Kellogg and General Mills can take comfort in the fact that if people stop eliminating carbs, they’ll shift back to some of their former favourites. The companies can also quietly pull weak products off the shelves without noticeably hurting profits. Atkins Nutritionals seems to be in a tougher spot. But Ernest Jacquet, co-CEO of Parthenon Capital, majority owner of Atkins, isn’t conceding defeat. The market has slowed, he says, but dieting is a seasonal business that peaks around the first quarter. “We’re very comfortable that in the long run things will keep growing.”

Industry analysts are less sanguine. This spring, Wall Street observers predicted Atkins Nutritionals could sell shares to the public, valuing it at more than US$ 2 billion. But for those forecasts to come true, low-carb will have to reverse its slump. The trouble is, fads rarely regain momentum once they’ve lost it.