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CARB DIETS EVOLVING INTO DIETARY WELL-BEING

PALO ALTO, Calif. -- The low-carb dieting craze peaked during the first quarter of this year, but will continue to impact the consumer packaged goods business for the remainder of 2004, according to several new studies from investment bank Morgan Stanley here.Approximately 13% of Americans were following a low-carb diet at the start of the year. This number dropped to about 11% by March. However,

PALO ALTO, Calif. -- The low-carb dieting craze peaked during the first quarter of this year, but will continue to impact the consumer packaged goods business for the remainder of 2004, according to several new studies from investment bank Morgan Stanley here.

Approximately 13% of Americans were following a low-carb diet at the start of the year. This number dropped to about 11% by March. However, the health benefits of a low-carb lifestyle seem so appealing to consumers that the decline in active dieters will be much slower than originally anticipated. To that end, analysts at Morgan Stanley predicted about 8% of the population will still be on a low-carb diet come the fourth quarter. Manufacturers have responded to increasing consumer interest by rolling out numerous low-carb products across many categories. According to the Morgan Stanley report "Low-Carbohydrate Diets: Cross-Industry Insights," 146 low-carb products were introduced in 2003. The majority, 18, were launched in the snack bar category, followed closely by the candy and salty snacks categories -- each welcoming 17 new items. In first-quarter 2004 alone, a reported 127 low-carb items were launched, from baking mixes to ice cream to pasta.

Supermarkets have been forced to carry many of these new stockkeeping units to assuage consumer demand. However, finding the space has presented some challenges along the way.

"It's a balancing act, no doubt. But it's one that you try to do and try to do well, keeping the customer in mind," said Jeff Lowrance, spokesman for Food Lion, Salisbury, N.C.

At New York-based Gristedes, new low-carb products have arrived in full force.

"The only thing I haven't seen yet is low-carb toilet bowl cleaners," mused Bob Schwartz, executive vice president of the chain. "This low-carb phenomenon, craze, fad, trend -- call it whatever -- is playing total havoc. The amount of product that is being introduced and crossing our desks today is probably umpteen times the fold as normal."

Some of the major food manufacturers who already have a high degree of credibility are coming out with low-carb items, like Unilever's Carb Options line that includes pasta sauces linked to the vendor's Ragu brand. While he wouldn't name names, Schwartz said he is being careful about which items he stocks just in case the low-carb movement is indeed a fad.

"If we think [a manufacturer's product is] worthy because their regular stuff is selling well, we might authorize that. Personally, I am afraid that at some point, the sky is going to fall," he said.

Yet figures from Morgan Stanley's consumer research suggest that Schwartz may not have anything to worry about -- at least not in the near term. While about 70% of consumers lose interest in most diets within the first three months, only 45% of consumers who try a low-carb diet do so within that time frame. Also, many people continue to limit their carbohydrate intake even after dropping off of the official diet programs, the research shows.

What this all means for the future of certain grocery categories remains to be seen. In the interim, products like pasta and bread continue to be negatively impacted by the low-carb dieting trend, while the demand for protein-heavy items like cheese and processed meats has increased. Even traditional diet-related products, including low-fat frozen entrees and weight-controlling products from vendors like SlimFast, are seeing sales slump because their main proponents are not necessarily carbohydrate-sensitive, the Morgan Stanley reports claim.

"I don't think the broader, large supermarkets are seeing a significant change in their core business because of low-carb trends," said Mark Wiltamuth, a Morgan Stanley analyst who follows supermarket stocks.

Negative Impact of Low-Carb Diets on Category Consumption (Dec. 2003)

Share of regular users who are consuming less

Category: All Users; Currently on Low-Carb Diet; Tried Low-Carb Earlier this year; Currently on Another Diet; Incremental Impact Low-Carb Diets vs. Other Diets

Crackers: 18%; 59%; 25%; 20%; -39%

Pasta: 25%; 67%; 40%; 30%; -38%

Breakfast cereal: 16%; 52%;24%;15%;-37%

Frozen potatoes: 30% 63% 39% 29% -35%

Popcorn: 24%; 49%; 27%; 19%; -30%

Pretzels: 28%; 60%; 29%; 31%; -29%

Snack bars: 21%; 49%; 33%; 22%; -27%

Corn chips: 45%; 78%; 67%; 52%; -26%

Slim-Fast: 22%; 40%; 17%; 16% ; -24%

Oatmeal: 9%; 29%; 8%; 6%; -23%

Fruit juices & drinks: 14%; 40%; 21%; 16%; -23%

Tortilla chips: 40%; 71%; 53%; 53%; -19%

Puffed cheese snacks: 49%; 72%; 65%; 55%; -17%

Cookies: 41%; 74%; 51%; 57%; -17%

RTD iced teas: 29%; 49%; 24%; 35%; -14%

Hard or chewy candy: 31%; 55%; 32%; 41%; -14%

Chocolate candy: 40%; 63%; 48%; 53%; -11%

Potato chips: 53%; 75%; 64%; 67%; -7%

Regular CSD: 45%; 58%; 62%; 63%; 4%

Source: Morgan Stanley Consumer Research