LOW-CARB LINEUPS AT SUPERMARKETS HURT SPECIALTY STORES 2004-05-03 (2)

LYNNE MILLER

BEVERLY HILLS, Calif. -- Early this year, supermarkets, discount stores and even convenience stores jumped on the diet bandwagon by rolling out new diet-friendly products, even installing dedicated low-carb food sections in selected stores. The ambitious response is taking its toll on low-carb specialty formats, and in recent weeks, the small stores have experienced steep sales declines, prompting company officials to put the brakes on aggressive growth plans and rethink their business concepts.

Case in point: Pure Foods, started by entrepreneurs and business partners Brad Saltzman and Stephen Bikoff in sunny Southern California late last year. The Santa Monica store, about 1,300 square feet, opened in December. Two months later, Saltzman and Bikoff opened a second store in fashionable Beverly Hills. Stocked with 1,300 low-carb, gluten-free and sugar-free stockkeeping units, the stores got off to a promising start. Officials posted week-over-week sales increases of up to 30%.

Encouraged, they sought partners, akin to franchises, to put up capital and open licensed stores in cities across the country. The plan was to have 30 stores open around the country by the end of 2005 -- corporate stores as well as the units operated by partners. But in February, customers stopped coming, and stores started posting double-digit declines in sales. Customers told associates they defected when they realized their neighborhood supermarkets carried the same diet foods at lower prices. In response, officials slashed prices on many products. The company laid off 11 employees -- nearly a third of its total workforce. "One guy quit his job at Trader Joe's to work for us," Saltzman told SN. "He got laid off."

Officials completely overhauled the format of the Beverly Hills store, Saltzman said. They eliminated many low-carb foods entirely, and introduced new items designed to appeal to gourmets. Unusual items like Keto-brand ice creams and low-carb brownies, and a selection of natural foods, were added. The store now looks and feels more like an upscale specialty store with an emphasis on hard-to-find gourmet products and fine foods. Only about 10% of retail space is dedicated to low-carb foods, Saltzman said.

The company last month announced the launch of its new Pure Foods Gourmet Emporium, replacing the old Pure Foods in Beverly Hills. Officials touted the store's vast selection of gourmet, hard-to-find products, such as smoked Scottish salmon by Chef Daniel Boulud, Original New York Cheesecake by Carnegie Deli, Zabar's World Famous Coffee and Preserves by Sarabeth's Kitchen. Take-out and in-store dining options include Weight Watchers-approved meals, low-carb and low-fat items, sandwiches prepared on La Brea bakery breads and other specialty creations. During the grand opening, the company even invited the public to come in for lunch on the house.

The Santa Monica store continues to be a low-carb foods specialty store, though officials are closely monitoring its performance.

"Even though sales are down about 20%, we're still making money," said Saltzman of the Santa Monica store. "We were on track to do $1.1 million. Now we're on track to do $700,000 (in annual sales). That's a huge drop.

"I'm hoping that Santa Monica will continue to slowly increase," he continued. "It'll never do $100,000 a month out of that store, like in January. We'll never see $4,000 days. If Santa Monica can get up to $20,000 a week, then it's a store worth keeping. We're hoping we get back up by bringing in these different products."

His company's sudden fall happened so abruptly, Saltzman sounded dazed as he described the experience to SN. Every time he walks inside a food store now, whether it's a conventional supermarket or a 7-Eleven, Saltzman sees shelves filled with low-carb products and banners and signs promoting the products. The mainstreaming of low-carb foods seemed to happen overnight.

"It's everywhere," he said. "Even little vitamin shops have Atkins-controlled low-carb centers. All of the supermarkets started carrying more of a selection of low-carb foods, which we never thought would happen. We never thought a supermarket would give an endcap to low-carb foods. It happened within a three-week period in February. It just crept up on us. We really did not expect this. It really hurt independent low-carb retailers like ourselves. A lot has changed in the arena of low-carb retailing.

"I'm very nervous," he said. "We have a lot of money invested. We have a lot at risk."

The company has shifted gears. Officials are focusing attention on establishing two new divisions -- vending and distribution. The company will install one vending machine, filled with low-carb items, in NBC Studios in Burbank, Calif., and is close to finalizing two other locations, Saltzman said. Pure Foods is also starting a low-carb food distribution company to serve specialty retailers. By June, the company intends to hire more people for key positions within those divisions.

Saltzman hasn't completely given up on the idea of operating stores, but now realizes specialty stores have to offer customers something they can't get at their neighborhood market. He's counting on the new product assortment to attract shoppers.

"We're prepared to expand at retail if things pick up again," he said.

The Pure Foods experience isn't unique. Other small start-up retailers that opened low-carb specialty stores find their niche has become everybody's turf, a food industry observer noted. To survive, the specialty stores will have to differentiate themselves from mainstream stores.

"From people I've talked to in the food business, low-carb retailers as a whole saw sales really begin to soften in the last couple of months," said Pat Turpin, an investment banker who heads up the food and beverage practice for USBX Advisory Services, Santa Monica, Calif.

"It's still an evolving situation," he said. "It's not a healthy sign at all what's happened in the last couple of months."