Atkins Gets Itself in a Stew

How the company that launched the low-carb diet craze fell victim to its own high-profile success

By Pallavi Gogoi

Until as recently as last year, the Atkins approach to eating still had plenty of adherents, with legions of dieters giving up their bread and other carbohydrates to load up on red meat and other forms of protein. At one point, Atkins was so popular that some food companies that specialized in carbs struggled to stay alive.

In June, 2004, New World Pasta Co., the nation's largest noodle maker, mostly under the Ronzoni pasta brand, declared bankruptcy, saying too many customers had turned from pasta to protein. Krispy Kreme Doughnuts (KKD ) even blamed the Atkins diet for poor sales.

Yet the tables have turned -- and rather quickly, too.


  The namesake company, Atkins Nutritionals, filed for Chapter 11 bankruptcy protection on Aug. 1. A combination of factors -- copycat products and diets, coupled with the private company's overspending on marketing and what some critics say was a lack of focus -- brought it to this point.

It didn't help that a coroner's office document following the 2003 death of founder Dr. Robert Atkins in a fall purportedly showed he was not only overweight but had cardiac problems. In the end, "It was the perfect storm of the South Beach diet getting hot along with Atkins' death along with mismanagement of the company," says Burt Flickinger III, director at marketing consultant Strategic Resources in New York.

When contacted Aug. 1, the Ronkonkoma,(N.Y.)-based company didn't comment beyond the press release confirming its bankruptcy-court filing in New York.


  Following its debut in the 1972 book Dr. Atkins' Diet Revolution, the Atkins nutritional approach sparked a craze -- and immediate criticism. Based on the doctor's research, it endorsed controlling carbohydrates in the diet and replacing them with meat and other protein. Yet dieticians criticized the diet's focus on fatty foods and what they saw as its low consumption of fruits and vegetables. In 1989, Dr. Atkins founded the company.

Still, the food plan became a national phenomenon -- with legions of dieters loading up on bacon and steak, and eschewing pasta -- and drew plenty of support. Less than two years ago, Goldman Sachs (GS ) and Parthenon Capital, a Boston private equity firm, together paid between $500 million to $800 million for a majority stake in Atkins Nutritionals. There were even some discussions of taking the company public.

Yet high-profile success almost certainly contributed to its current woes. Many large companies such as Kraft Foods (KFT ), Unilever (UL ), and General Mills (GIS ) jumped on the low-carb food craze with mass production of meals, breads, and spreads aimed at Atkins devotees. With so many choices, little wonder that a smaller company like Atkins began to founder.


  Atkins Nutritionals continued to believe it could charge a steeper price for the Atkins name, even in the face of brutal competition from giant food companies. "The Atkins folks overpriced themselves -- people who are eating replacement bars are smart enough to know that $2.99 for the Atkins bar is more than double the price of a regular energy bar," says Rick Bozzelli, a merchandising manager for McCaffrey's Supermarkets, a grocery-store chain with outlets in Pennsylvania and New Jersey.

Once Atkins Nutritionals figured out it was being trumped by its rivals, it started expanding its offerings and launched dozens of products, from baked goods to diet drinks. But the Atkins concept was already starting to lose its pizzazz, and these products never caught on.

According to research firm NPD Group, low-carb diets hit a peak in February, 2004, when some 9.1% of Americans were on following the regimes. In mid-July, 2005, only 2.2% of adults were on a low-carb diet.


  But the company isn't giving up yet. It has been cutting costs, and has laid off 40% of the workforce. In June, 2005, it named Mark Rodriguez as CEO, an award-winning marketer. He plans to focus on marketing only the Atkins bars and shakes.

Industry experts believe Rodriguez is uniquely positioned to bring the company back from bankruptcy because of his food-industry experience. "Rodriguez is a brilliant marketer and is credited with making bottled water a huge success," says Flickinger at Strategic Resources.

Rodriguez and those leading Atkins will have an uphill battle. "Anytime a brand name becomes segregated in supermarket shelves, it has to be powerful enough to retain that position, and Atkins just didn't have that power," says McCaffrey's Bozzelli.


  While the Atkins diet created buzz and helped change the way Americans think about food, it was ultimately a fad. "It was a diet based on monotony and didn't have enough that people could meaningfully eat long term," says professor Brian Wansink, who is director of Cornell University's Food & Brand Lab.

A fad may set off plenty of excitement, but unless there's a more solid plan, in the long run it will fail to feed the taste for profits.

Gogoi is a reporter for BusinessWeek Online in New York

Edited by Beth Belton

    Before it's here, it's on the Bloomberg Terminal.