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Gut feelings on how long carb craze will last
June 10, 2004
BY ERIC HERMAN BUSINESS REPORTER
Americans no longer want their daily bread. The trend of eating fewer carbohydrates, sparked by popular diets like Atkins, has reached every grocery store aisle and fast-food drive-through in America. Food companies have launched hundreds of new products, from bunless burgers to low-carb beer. * "It seems that everywhere you go to eat, you're hit with some sort of low-carb option," said Jim Gawley, vice president for business development of the Food Institute, an Elmwood Park, N.J.-based trade group.
The Atkins diet turned dieting on its head by teaching people it was OK to eat fat and red meat if you cut back on carbs. The phenomenon has attracted millions, sparking food companies to introduce 1,559 new low-carb products since 1999. But many food categories -- makers of bread and pasta, example -- have suffered steep losses.
Low-carb diets first appeared in the 19th century. But a whole new cluster of diets embracing low-carb principles emerged in the last few decades -- including the South Beach Diet and The Zone. The most popular of them sprung from the work of Dr. Robert Atkins, a cardiologist who issued his first diet book in 1972.
The low-carb movement failed to catch on right away. For one thing, it shattered common assumptions about dieting. The Atkins Diet held that eating fat was fine, for example. It shocked some health professionals by allowing people to eat high-cholesterol dishes like bacon and eggs. Meanwhile, it told its adherents to stay away from high-carbohydrate foods like rice, potatoes, cereal, starch, pasta and bread. It also discouraged them from consuming sugar, even fruit.
The diets' popularity started surging in 2000 and has exploded in the past year, largely because of its success in helping many lose weight. Some 35 million Americans -- roughly 12 percent of the population -- are currently on a carb-controlled diet, according to Opinion Dynamics Corp.
A recent survey conducted by Leo J. Shapiro and Associates, a Chicago-based behavior research firm, also found that 12 percent of Americans were on a formal low-carb diet. It found an additional 23 percent were "trying to cut back on carbs," said chairman George Rosenbaum, meaning 35 percent of U.S. adults are reducing their carb intake.
"This has an enormous impact, potentially, on the foods that are sold and served," Rosenbaum said. "It even has a potential social impact on whether people get together to eat and where they eat."
In response to the demand, food companies are going on a binge of new product offerings. According to Mintel International Group, U.S. companies have launched 994 new low-carb products in 2004 so far, compared with 392 products in all of 2003. In 2000, only 26 new carb offerings came on the market.
"Almost every major company is jumping on the low-carb bandwagon," said Bob Goldin, executive vice president at food consultant Technomic Inc. "Nobody wants to be left waiting at the station."
The products keep coming. Just in the past month, Coca-Cola Co. introduced C2, with half the carbohydrates of regular Coke, while rival PepsiCo Inc. said it would unveil its own low-carb this month.
Already marketing its own low-carb bread, Sara Lee Foods said last month it would distribute low-carb frozen pizzas created by Atkins Nutritionals, the company that markets the Atkins diet. Louisville, Ky.-based Brown-Forman Corp. came out with low-carb wines -- Merlot and Chardonnay. This month, Ben & Jerry's released a new line of Carb Karma ice cream.
Companies rolling out low-carb products are responding to the success of those already launched, like Anheuser-Busch's Michelob Ultra Light beer. Food companies sold between $1.5 billion and $2.5 billion worth of retail products labeled "low-carb" in 2003, according to separate estimates by the Food Institute and by LowCarbiz, a trade newsletter. Those sales will double this year, according to both groups.
But the full impact reveals itself in a larger "low-carb economy," according to Dean Rotbart, executive editor of LowCarbiz. Measuring diet books and conferences as well as the sale of traditional food items like meat and eggs, low-carb products hit $15 billion in sales last year and will reach $25 billion in 2004, Rotbart said.
"It's safe to say that it is the fastest-accepted and -recognized diet in American history," Rotbart said.
The low-carb trend is reaching restaurants, too, with chains like T.G.I. Friday's and Ruby Tuesday providing low-carb menu items. This month, St. Louis-based Panera Bread Co. added reduced-carb breads, bagels and breadsticks to its menu. Fast-food chains like McDonald's are offering bunless hamburgers.
The trend has also brought more than 200 low-carb specialty stores into being, according to the Food Institute. Local examples include Low Carb Chicago in Vernon Hills and Good Carbs in Geneva.
Other companies are finding ways to capitalize on the craze without bringing out new products. Asher's Chocalates relabeled its sugar-free chocolates as "low-carb" and saw sales skyrocket, while Perdue has added shelf signage for deli and rotisserie products that say "Zero Carbs" and "For your low-carb lifestyle."
And the food categories blessed by low-carb diets -- cheese and meat, for example -- are seeing sales increases. Cheese sales in supermarkets rose 4 percent in 2003, according to the Food Institute, while meat snacks rose 7.6 percent and canned meat rose 3.3 percent.
The demand for low-carb products has buoyed Atkins Nutritionals, too. Founded by Dr. Atkins, it is now owned by the private equity firm Parthenon Capital and the investment bank Goldman Sachs. Atkins branded products sold $148 million worth of products in 2003, a 225 percent jump from the year before. According to Fortune magazine, the company may conduct an initial public offering of stock later this year or next year.
But for all the new products and increased sales, the low-carb craze has also caused economic pain. Supermarket bread sales dropped 2.5 percent last year, while pasta and cereal sales fell 4.6 percent and 3.8 percent, respectively, according to the Food Institute. Sales of orange juice, which the Atkins diet frowns upon, fell nearly 4 percent, according to the Food Marketing Institute and ACNielsen.
And while Panera Bread is belatedly getting into the low-carb game, the eating trend has already taken a bite out of sales. In the first quarter of this year, Panera's same-store sales role 1.8 percent, a sharp slow-down from the 5.5 growth seen in the same period in 2002 or the 5.8 percent growth in 2001. Panera's shares have fallen about 12 percent this year.
"The popularity of low-carb diets dampened the appeal of [Panera's] bread offerings," Morningstar stock analyst Carl Sibilski wrote in a research report to investors.
Low-carb carnage dots the American food landscape, or seems to. Last month, the New World Pasta Company, the country's largest maker of dry pasta products with brands like Creamette, Prince and Ronzoni, filed for bankruptcy. Published reports said pasta sales have dropped 7 percent so far this year, compounding last year's decline. Northfield-based Kraft Foods Inc. saw its profits drop 34 percent in the first quarter of 2004, and the company said Atkins and other diets were partly to blame.
Last month, Krispy Kreme Doughnuts Inc. reported its first quarterly loss -- $24.4 million -- since going public in 2000. Chief executive Scott Livengood blamed carb-reducing diets. Krispy Kreme's shares have dropped 42 percent this year. Sales at Interstate Bakeries Corp., the country's largest wholesale baker, slipped fell 2.5 percent last quarter to $1.02 billion.
The low-carb phenomenon may be hitting the restaurant industry harder than grocery stores and manufacturers, according to Rosenbaum of Shapiro and Associates. The Shapiro study reveals that 42 percent of people cutting back on carbs are spending less when they eat out. As a result, Americans overall are cutting their restaurant visits by 7 percent, Rosenbaum said.
"You may have a beginning of a beneficial social change that results from this. So as the restaurants get beaten up, the family comes together a little more," he said.
Yet restaurants are not hurting. In fact, their sales will grow 4.4 percent to a record $440.1 billion in 2004, according to the National Restaurant Association. The data suggest those still going to restaurants are spending more.
Industry groups and analysts lack overall data pointing to the total economic losses caused by low-carb. But Rotbart says they are outstripping the gains.
"It clearly has cost mainstream food more than $25 billion -- how much more I couldn't tell you," he said.
What remains unclear is whether low-carb is a passing fad or a permanent change. Many industry observers say the craze has already peaked and will soon slacken.
"My gut feeling is that this might be an 18-month cycle, and we're probably better than half way through it," said Carl Sibilski, an analyst at Morningstar Inc.
Technomic's Goldin agrees, saying the "mania" is "already beginning to abate." Nor does Goldin accept that low-carb is entirely to blame for problems at Krispy Kreme and other food companies. Some analysts have blamed Krispy Kreme's recent problems on its aggressive growth strategy of adding new stores, for example.
"It's such a convenient excuse for faltering performance," Goldin said. "There's a tendency in the industry to blame declines in virtually all these categories on carbs. I don't buy it."
Other diet trends have waned in popularity, including programs focused on fat and cholesterol. And Rotbart predicts a "low-carb backlash."
Some health experts still question the advisability of the diet. The American Heart Association does not recommend it, objecting that it encourages people to eat foods high in saturated fats and cholesterol. A Florida man is suing Dr. Atkins' estate, alleging that two years on the diet raised his cholesterol to dangerous levels.
But even if the introduction of "low-carb" products slows and the Atkins company sells fewer diet books, the approach is likely to leave a permanent imprint on American eating habits.
According to the Shapiro survey, half of the respondents who had been on a low-carb diet in the last five years but were no longer still cut back on their carb intake -- a sign that the low-carb habits persist.
"It's not going to go away," Rosenbaum said.
Gut feelings on how long carb craze will last
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