The Low-Carb Food Fight Ahead
Chicago lobbyist Samuel Smith lost 35 pounds this year on the Atkins Diet. To keep them off, the 36-year-old spends up to $100 a week on Atkins' breakfast bars and ice cream, and low-carbohydrate pizzas from other makers. That growing array of products is making his new low-carb lifestyle a cinch. Now, Smith says, "I can eat all the things that I want."
With an estimated 32 million carb-conscious Americans like Sam Smith spending $2.5 billion a year on low-carb foods, the diet once dismissed as a fad has gone mainstream. That's good news for the company behind the craze, Atkins Nutritionals. Created in 1997 by Dr. Robert C. Atkins, the late cardiologist who pioneered the diet, the privately held outfit sells 120 products and has licensed its name to dozens of companies. On Dec. 9, T.G.I. Friday's joined the fray, launching an Atkins-endorsed menu. "There's not much growth in the food industry," says John M. McMillin, an analyst at Prudential Securities Inc., "and Atkins is getting most of it."
Well, for now anyway. With food giants from Kraft Foods Inc. (KFT ) to General Mills Inc. (GIS ) climbing on the low-carb bandwagon, Atkins is about to get a lot of company. Says Atkins President Scott Kabak: "Competition is inevitable." But he insists the Atkins brand will withstand the assault from Big Food.
Atkins will have its work cut out just handling its own expanding appetite. This year, analysts estimate the company doubled its revenues, to $200 million. Moreover, Atkins has introduced 100 products in the past three years and, says Kabak, plans to "maintain that pace for years to come." The company's sizzling growth caught the eye of Goldman, Sachs & Co. (GS ) and Parthenon Capital, a Boston private equity firm. In October, the two paid $600 to $800 million for a majority stake in Atkins. Parthenon co-CEO Ernest Jacquet, says Atkins could go public before the end of next year, adding: "Our job is to manage growth."
How to expand is the subject of considerable debate within the company, says one insider. On one hand, deals like Friday's help broaden awareness of Atkins. Yet with the diet still subject to attacks that it represents a "junk-nutrition" approach, some Atkins execs have argued that tie-ins with the wrong partners make it easier for enemies to score hits. They decided to tie up with Friday's only because it has made efforts to offer more nutritional choices. Maintaining the Atkins brand is crucial. As Richard Snead, CEO of Friday's parent Carlson Restaurants Worldwide Inc., says: "The Atkins name confers trust."
The Atkins label also means the company can charge high prices -- such as six bucks for a box of cereal. While execs won't divulge numbers, analysts suspect margins are substantial, since making low-carb food costs little more than producing regular fare. Atkins pasta, for example, is based on soybeans, which don't cost much more than wheat, yet Atkins charges $4.99 a box, twice as much as wheat-based noodles.
Atkins may be forced to cut prices as more players enter the market. Many companies are waiting for the government to define what constitutes a low-carb product. Already, however, Kraft aims to highlight the low-carb content of some of its meats and cheeses. In March, Heinz (HNZ ) One Carb Ketchup will hit stores. And General Mills plans to announce several new low-carb products in the next few weeks. The Atkins Diet seems here to stay. For Atkins Nutritionals, that prospect holds both promise and peril.
By Brian Grow in Chicago, with Gerry Khermouch in New York
— With assistance by Gerry Khermouch