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Unilever, Hain Add `Low-Carb' Foods and Wonder: Fad?
March 31 (Bloomberg) -- Irwin Simon, chief executive of Hain Celestial Group Inc., the maker of Health Valley cereals and Terra potato chips, decided last May to enter the $30 billion market for low-carbohydrate foods and beverages.
``We are going to get killed if we don't get into the low- carb business,'' Simon, 45, recalled telling his top managers. The company's 80-product line of Carb Fit foods, including tortilla chips and instant hot cereal, will be on the shelves by Thursday.
Food companies such as Hain, Nestle SA and Unilever are calculating how much money to put behind low-carbohydrate products favored by the Atkins diet. Guessing wrong may hurt sales. Many are hedging their bets by adding ``low-carb'' products or revising their marketing even as they question the Atkins diet's longevity.
Sales of foods, beverages and publications geared to lowering carbohydrates will double in 2004, according to Denver- based LowCarbiz, an online industry newsletter. Sales by traditional food manufacturers grow by 4 percent to 6 percent a year, said Amy Bonkoski, who helps manage $25 billion, including Kellogg Co. and Kraft Foods Inc. shares, at National City Corp.'s private-client group in Cleveland.
The Atkins diet, which has enjoyed periodic bursts of popularity since the 1970s, was pioneered by the cardiologist Robert Atkins, who died last year. It advocates shedding pounds by boosting protein intake and avoiding carbohydrates -- energy- supplying sugars and starches. Foods generally high in carbohydrates include potatoes, pasta, breads and cereals. Even vegetables and fruits have carbohydrates.
Meeting Demand
``The Atkins fad has come, and the Atkins fad will go,'' Campbell Soup Co. Chief Executive Douglas Conant, 52, said last month in an interview. ``At the same time, our consumers want lower-carb foods, and we are going to provide them.''
Kellogg, the largest U.S. cereal maker, raised its earnings forecast in December as it introduced more lower-calorie snacks. Afterward, Chief Executive Carlos Gutierrez, 50, said of Atkins on Bloomberg Radio: ``Is it a fad or is it a trend? You have to really think through that and be careful as to how much you invest behind it and how much you believe it will be around in 10 years.''
Kellogg spent $126.7 million on research and development in 2003. The company doesn't disclose investments in particular product lines, said Kellogg spokesman Simon Burton.
At Unilever, the world's No. 3 food maker, Co-Chairman Antony Burgmans, 57, called the Atkins diet's weight-loss rate ``not sustainable'' last August. Even so, the company added low- carb versions of its Slim-Fast shakes and snack bars. This month, Unilever announced the addition of 14 products to its Carb Options line, including noodle soup and peanut spread.
Nestle Cautious
Unilever declined to disclose how much of last year's $1.29 billion spent on research and development was devoted to low- carbohydrate foods.
Nestle, the world's largest food company, won't join the low- carb parade, though it's trimming carbohydrates in a few existing brands.
``I am not willing to jump on the bandwagon just like that,'' Nestle Chief Executive Peter Brabeck said in an interview at his Vevey, Switzerland, headquarters overlooking Lake Geneva. ``It's not so long ago that the United States thought the healthiest thing you could have was a kilo of spaghetti every night.''
Nestle will pursue general nutrition, yet ``we are not going to launch an Atkins brand,'' the 59-year-old Austrian said.
Atkins Products
Atkins Nutritionals Inc., a closely held company founded by Atkins in 1989, produces a range of convenience foods, supplements, snacks and condiments. It's also making it easier for consumers to stick to their diets by placing the foods at delicatessens and gas stations. The company sells its foods and supplements via print and online catalogues and in more than 30,000 U.S. stores, including Wal-Mart and Kroger's, according to the Atkins Web site.
In October, Parthenon Capital LLC bought a majority stake in the company for about $700 million, and Parthenon's co-founder, Ernest Jacquet, says he may take Atkins public within two years.
Atkins Nutritionals declined to reveal its sales figures.
Estimates of the number of U.S. adherents to the Atkins diet vary widely. The Valen Group, a Cincinnati consulting firm, conducted an e-mail survey in December that put the share of U.S adults controlling carbohydrates at 28 percent. The NPD Group Inc., a marketing information company based in Port Washington, New York, surveyed 5,000 adults over two weeks and found in August that 4 percent were on a low-carb diet.
More Protein
Still, food sales figures show consumers are interested in higher-protein meals. Rising demand for protein boosted sales at Jackson, Mississippi-based Cal-Maine Foods Inc., the largest U.S. egg producer, to $165.7 million in the quarter ended Feb. 28 from $106.8 million a year earlier. The shares stood at about $3.50 a year ago and have soared 10-fold to more than $35.
Sales at Springdale, Arkansas-based Tyson Foods Inc., the world's biggest meat processor, rose 12 percent to $6.51 billion in the quarter ended Dec. 27 from $5.80 billion a year earlier. The shares have more than doubled in the past year.
Shares of Hain, which is 17 percent owned by Pittsburgh- based H.J. Heinz Co., have risen more than 40 percent in the last year, climbing above $24 in January. Joining Hain's Carb Fit line are Heinz's Smart Ones Truth About Carbs frozen entrees.
At last May's meeting of Hain managers, in a second-floor conference room at the corporate offices in Melville, New York, Maureen Putman, general manager of the grocery division, suggested creating a new low-carb brand. Among the possible names were Carb Solution, Carb Caution and Carb Fit.
`Defensive Tactic'
Simon said he chose Carb Fit because it suggests wellness along with lower carbohydrates.
Launching Carb Fit ``was a defensive tactic,'' he said in an interview last month at an analyst conference in Scottsdale, Arizona. ``We saw sales of our existing brands getting hurt by the carb craze.''
Hain's Health Valley Carb Fit Chocolate Chip Cookies and PureSnax Carb Fit Red Hot Soy Nuts already are on the market. Carb Fit sales figures aren't yet available. Hain reported net income of $27.5 million on sales of $466.5 million in the fiscal year ended June 30. In the quarter ended Dec. 31, Hain earned $10.4 million on sales of $142.8 million.
``Right now, low-carb diets -- Atkins, South Beach, name your poison -- is where the growth is,'' said National City's Bonkoski. ``We are seeing people who are demanding eggs and meat because they are following these high-protein diets.''
Tossing Out Pizza
Tom McMurray, a North Carolina lawyer, used to eat Krispy Kreme doughnuts, Burger King hamburgers and Hershey's chocolate Kisses. He says he's lost 50 pounds in the past year by cutting carbohydrates.
``We threw the DiGiorno pizza out of the freezer,'' said McMurray, 47. DiGiorno, a Kraft brand, sells 10 varieties of frozen pizza in supermarkets.
Analysts and investors are of two minds. Some, such as Morgan Stanley's Michael Steib, see a long-term trend; others, including Delaware Investments' Nancy Crouse, doubt Atkins's staying power, citing past diet trends that have come and gone.
In the 1990s, many nutrition advocates suggested limiting fat intake, resulting in a surge in carbohydrate consumption in the U.S. Among the diets with fleeting popularity was the ``cabbage soup diet,'' which allows unlimited amounts of the soup for a week, with some fruits and vegetables.
``The low-carb craze is not just a fad,'' said Steib. ``It's important for the big global food manufacturers to participate.''
Growth Trajectory
A Morgan Stanley report in December said 19 percent of U.S. adults were on a low-carbohydrate diet or had tried one during 2003.
``I don't know whether this means the low-carb craze is about to end, but most of the major companies are now pursuing the low-carb offerings,'' said Crouse, who helps manage $98 billion, including Kraft and Kellogg shares, at Philadelphia- based Delaware Investments. ``The trajectory of growth in Atkins dieters could well be peaking.''
Doug Asiello, who helps manage $149 billion, including 1.6 million General Mills Inc. shares, at AIM Capital Management Inc., calls Atkins a fad like many other diets.
``We don't believe Americans are going to go away from pasta and pizza dough and baked rolls for the long term,'' he said.
Jen Griffin, 28, is among the Atkins skeptics. After losing more than 70 pounds by limiting the amount of food she ate, Griffin, who lives in Ada, Ohio, tried a low-carb diet for a few weeks. She started each day with bacon and eggs and at midday ate ``meatwiches,'' or cheese rolled up in lunchmeat.
Rising Hunger
Griffin, a small-business owner, stopped the diet when she realized that her grocery bill and hunger were rising.
``I feel by eating smaller portions, getting five fruits and vegetables in a day and keeping track of what I eat, I can be more successful,'' Griffin said.
Reports in the New England Journal of Medicine and Harvard Health Letter say the Atkins method may reduce weight rapidly and lower the risk of heart disease. A one-year study of 63 obese patients cited in the medical journal found that those on the low- carbohydrate diet lost more weight at three and six months than those on a conventional low-fat diet. There was little change at 12 months.
Critics such as the Washington-based Physicians Committee for Responsible Medicine say foods recommended by Atkins that are high in fat are linked over time to heart disease, colon cancer and other ailments.
Kellogg, whose brands include Rice Krispies and Eggo waffles, has run radio commercials poking fun at a woman on a high-protein diet whose fast-food order includes a half-pound cheeseburger with bacon, chicken wings and fried pork rinds.
`A Bit Ridiculous'
Kellogg's Gutierrez said in an interview last month that the ads, for Kellogg's Morningstar Farms frozen vegetable burgers and sausages, are designed to say: ``Look, we know you are confused. We know the whole thing seems a bit ridiculous. Here's something you can try.''
Consumers are focused on dieting as obesity in the U.S. grows. The percentage of U.S. adults categorized as obese -- measured by ``body mass index,'' or a ratio of weight to height - - rose to 20.9 percent in 2001 from 12 percent in 1991, according to the U.S. Centers for Disease Control and Prevention. Conditions related to obesity, including heart disease, may soon surpass smoking as the leading cause of preventable death, the agency said this month.
After General Mills reported March 16 that fiscal third- quarter profit rose less than 1 percent, Chief Executive Stephen Sanger said on a conference call that most of the items the No. 2 U.S. cereal maker introduced last year failed to address consumers' ``weight management and carb concern.''
Interstate Bakeries Corp., the Kansas City, Missouri-based maker of Wonder bread and Hostess Twinkies, today suspended dividend payments on its common stock because sales are falling as consumers switch to low-carbohydrate diets. The company has said demand for bread and rolls have declined in recent quarters.
Unilever Cuts Outlook
Unilever was forced to cut its outlook for 2003 sales growth twice last year as sales of Slim-Fast foods, the backbone of the Slim-Fast diet plan that competes with Atkins, slumped by 21 percent.
``We didn't see the Atkins diet coming, and it obviously affected our top-line growth,'' Burgmans said last month in an interview at the company's Rotterdam headquarters. ``The fact of the matter is that we have 40 to 50 million Americans on low-carb diets. The fact of the matter is that it's what people want.''
Unilever introduced Carb Options in January with such products as lower-carbohydrate versions of its Alfredo sauce and iced tea that are still marketed in their original form under the Ragu and Lipton brands.
Even Nestle has inched into the field, offering Lean Cuisine meals and PowerBars with lower carbohydrates than previous products.
Per-Slice Measures
Campbell Soup, based in Camden, New Jersey, is highlighting the per-slice carbohydrate content on bags of Pepperidge Farm breads such as Light Style White.
Conant said sales of Campbell's Prego tomato sauce fell in the quarter ended Feb. 1 -- he didn't say how much -- because consumers are eating less pasta. In response, the company is airing TV commercials showing Prego sauce being poured on beef and chicken.
In January, Heinz came out with low-carb ketchup -- 1 gram of carbohydrates per tablespoon, compared with four grams in its regular brand. After four weeks, the product exceeded a ``modest'' undisclosed sales goal for the fiscal year ending in April, Chief Executive William Johnson said in an interview.
Kellogg's Gutierrez isn't convinced low-carb is here to stay.
``We've seen diets come and go, and they are replaced as science changes and science expands,'' he said. ``Ultimately it is how many calories you consume and how many calories you exercise away.''
To contact the reporters on this story:
Chris Burritt in Greensboro, North Carolina, at cburritt~bloomberg.net; Celeste Perri in
Amsterdam at cperri~bloomberg.net.
To contact the editor of this story:
Vincent Bielski at vbielski~bloomberg.net.
Unilever, Hain Add `Low-Carb' Foods and Wonder: Fad?
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