DEMAND PERFORMANCE 2004-03-22 (2)

KATHERINE BOWERS

The numbers are staggering: 59 million Americans, or roughly 28% of the population, are currently controlling carbs. Another 20% said they plan to start doing so within the next six months, according to The Valen Group, a Cincinnati-based market researcher.

Others report similar statistics. In 2003, sales of low-carb snacks and beverages alone rang up $333.7 million, a 61% sales gain over the previous year, according to a study commissioned by PepsiCo.

"Definitely within the next 12 months there is going to be significant growth on top of what we're already seeing," said Amira Rashad, vice president of The Valen Group's food and beverage practice.

"Don't bet on low-carb as a fad; we see it as a multi-year trend," wrote Adams, Harkness & Hill analyst Scott Van Winkle in a February report correlating U.S. obesity levels to an interest in low-carb diets.

Mainstream media have kept the spotlight trained on low-carb in the last 18 months, with everything from the Wall Street Journal's wrangling over Dr. Atkins' postmortem weight (was he obese?) to Katie Couric of The Today Show taste-testing low-carb products. The Atkins Nutritional Web site boasts of 2.5 billion media mentions in the past three years. Industry players who have endured the fiber frenzy of the '70s and the low-fat fanaticism of the '80s are banking on low-carb's speeding past fad status.

"This is a classic market transformation. The shift is seismic," said Arne Bey, chairman and chief executive officer of Keto Foods, Tinton Falls, N.J. As one of the oldest and most diversified low-carb food developers with 140 stockkeeping units, Bey has a significant stake in fostering the trend.

"The public has led the way on low carbs," Bey said. "They are way ahead of the industry, even of science. People lost weight when they cut out bread, pasta, rice -- they got results."

The attention shows no signs of abating. This June, for example, physicians for the first time will convene in New York for a low-carb symposium. The Grocery Manufacturers of America has petitioned the Food and Drug Administration to establish labeling regulations for carbohydrates, which will spur further headlines.

Though the long-term safety of low-carb remains hotly debated both in social and scientific circles, retailers surveyed by SN said they are compelled to respond to low-carb -- or risk customers' shopping elsewhere.

Still, many operators are choosing neutral language in their communications about the low-carb lifestyle. No one wants to get caught in the middle of the brouhaha raging between low-fat and low-carb adherents.

"We as merchants are not making any judgments about how people should eat or their choices," said Randy Wedel, senior vice president of marketing and merchandising for St. Louis-based Schnuck Markets. "We just want to present a balanced range of product."

Even so, in the past year, the regional grocer has doubled the size of its egg display and is considering reducing space allotted to orange juice and refrigerated milk. Mad cow scares notwithstanding, meat counter sales have ripped double-digit gains for the past six months.

There are other changes afoot within Schnucks stores.

"It's almost comical the returns we're getting on the beef snack category," Wedel said. "We're putting in between four and eight 12-foot sections. I don't know how long it will last, but I do know the category is on fire right now."

Other products seeing stunning sales growth: sparkling waters, steak sauces and other meat condiments, artificial sweetener Splenda and bagged salad mixes.

In January, Wal-Mart thundered into the category -- the ultimate sign the diet trend had gone mainstream. It created a 16-foot display of low-carb items in its "action alley." The boulevard-like aisle at the front of every Wal-Mart is considered retail's highest-volume site.

Karen Burk, a spokeswoman for the Bentonville, Ark.-based retailer, said the display was well received, although it was a limited-time promotion. It's customary for Wal-Mart to rotate special deals, test items and other impulse purchases in and out of the action alley.

More significantly, Burk confirmed the retailer is considering the development of its own line of low-carb foods. The retailer currently carries a range of Atkins products as well as reduced-carb options from Sara Lee, Hershey's and other large suppliers. A private-label brand "is an area of opportunity we are looking into because it appears to be of interest to our customers," she said.

Indeed, given the steep prices fetched for reduced-carb specialty foods, the market seems ripe for a low-priced player like Wal-Mart.

At a Stop & Shop in Danvers, Mass., for instance, a 12-ounce box of Smarter Carb pancake mix was sale-priced at $6.99, while a 60-ounce box of Bisquick went for $3.39.

Most retailers are using two strategies to address the trend: a dedicated section of reduced-carb foods, usually located within a natural foods aisle; and in-store signs to highlight naturally low-carb foods that are scattered throughout the rest of the store. Some stores are even going so far as to slap low-carb labels on bottled water.

Shaw's Supermarkets has created a low-carb section in all of its 127 Wild Harvests, the natural foods store-within-a-store in its supermarkets, according to spokesman Terry Donilon. Aisle signs flag the section, which includes everything from bars and protein drinks to candy, marinades and pasta.

The category sent up sparks in January 2003, "increased dramatically in spring-summer 2003, and has not slowed down since," he noted.

Paul Howland, natural foods buyer for Chandler, Ariz.-based Bashas', said he has seen low-carb sales surge in traditional dieting seasons.

After seeing a sales boom in January, for instance, he expects another lift in May when swimsuit season begins. Howland stocks the entire Atkins Nutritionals line on a grocery endcap and six feet of aisle space within the Natural Choice natural foods department. Chips, cereal, ice cream and shake mixes are selling well, he said.

Although Bashas' has considered dispersing low-carb options throughout the store, space is currently too tight, Howland said.

Protein bars and shakes -- the earliest, and some say still the best developed, of the low-carb products -- form the backbone of most low-carb sections. However, those products are increasingly being supplemented with reduced-carb versions of the sweets and snacks low-carb eaters still crave. Among other items, the Stop & Shop in Danvers, Mass., stocked Carb Sense "Zero Carb" pancake mix, soy tortilla chips, and a Hamburger Helper knock-off, "cheeseburger pasta mix."

Van Winkle of Adams, Harkness & Hill believes that while it is currently effective to cluster low-carb products so customers can see a range of choices in one spot, eventually the category needs to enter Center Store.

"In the long term, they need to be shown in plain view as an alternative to traditional products," he said. "Not all customers will visit that special section."

Schnucks has tested both approaches -- a segmented section and Center Store integration -- and is leaning toward integration.

"We believe it makes the most sense for customers to make the choice right as they're looking within a certain category, rather than having two different shopping experiences," Wedel said.

Despite the dedicated section within the Danvers store, Stop & Shop spokesman Rick Stockwood said the chain's policy going forward would be to mix low-carb with regular-line products.

"Due to [low-carb foods'] extreme popularity, we have moved them out of the natural foods section and into the main aisles," he said.

Wherever low-carb items end up, retailers agreed that consumers are hungry for basic information: what foods contain carbs, what "net carbs" means (total carbs minus fiber), and what they can cook besides steak and eggs.

Sheboygan, Wis.-based Fresh Brands, parent company of Piggly Wiggly, is doing a comprehensive media campaign on low carb. The company participates in a regular local television cooking segment, and uses outdoor and radio advertising to tell customers it stocks a range of low-carb foods.

"Everybody is writing or saying something about low carb, so we try to get involved," said Brenda Krainik, spokeswoman for the retailer.

Another crucial next step for low-carb products: taste tests. As retailers gear up for a blizzard of launches over the next 12 months, they said they expect to do lots of in-store tasting so a customer learns what a low-carb muffin or corn chip actually tastes like. There have been roughly 800 low-carb launches in the past two-and-a-half years.

Keto Foods' Bey said engineering a product to taste exactly like the full-carb version is the "Holy Grail" for low-carb developers. With the exception of his ice cream, which he claims taste-tested well against several premium national brands, Bey concedes none of Keto Foods' products have reached Holy Grail status yet. Bey also worries the low-carb industry could be tripped up by products with unpalatable tastes or faulty carb claims.

"We're already seeing some high-carb products masquerading as low -- a serving size that's one-eighth of a bagel, for instance," he said. "Or something that doesn't taste right that turns a customer off from the category."

Bashas' Howland said he's already seeing "too many products coming across my desk" that appear to be rushed to market.

"Many of these items contain ingredients that some natural food stores will not carry," he continued. "The controlled-carb lifestyle has some long-term health concerns, and [the consumption of] items that contain ingredients some people deem unacceptable only adds to health concerns. I would like to see some more thought put into new items for the carb-conscious consumer."

Diet Do's and Don'ts

The diets typically begin with a detox period where carbs are heavily restricted or banned entirely. After several weeks, they can be slowly reintroduced in very small increments.

Diet: meat; eggs; fish; dairy; grains; fruit; vegetables; bread; pasta; fruit juices

ATKINS: yes; yes; yes; no milk/yogurt; no; no; few; no; no; no

NEW HPHFF*: yes; yes; yes; yes; yes; yes; yes; no; no; yes

SOUTH BEACH: yes; yes; yes; no; no; no; few; no; no; no

* The New High-Protein Healthy Fast-Food Diet

Source: SN research

American Weight Issue Percentiles

17.2% of households have someone who is currently on a low-carb diet

19.2% of households have someone who has been on a low- carb diet in the past

60% of adults are overweight

15% of children are overweight

90% of households are concerned about obesity as it pertains to their families

33% of Americans are obese (they have a Body Mass Index higher than 30)

Source: ACNielsen