Fortune: Atkins World

When did carbs replace fat as nutritional enemy No. 1? What does it mean for the pork-rind industry? Is Wonder Bread toast? And what the heck is ketato? How low-carb mania is roiling the food business.

By Matthew Boyle

http://www.fortune.com/fortune/inve...65936-1,00.html

The Lexus RX-300—license plate EGGMAN1—barrels west on Route 30 in Pennsylvania's York County. We're on the road to Wellsville, a farm community blanketed in December's first snowfall. At the wheel of EGGMAN1 is Paul Sauder, the third-generation head of R.W. Sauder, one of the leading egg processors and marketers in the Northeast, shipping over three million eggs a week.

Our destination is the chicken house at the Eisenhower farm, one of 80 farms that supply Sauder with eggs. The house contains 47,000 egg-laying hens—"layers"—stacked in cages three high, seven birds to a cage, in six rows stretching back 450 feet. It is a relatively small house; more modern ones hold 150,000 birds. Still, the din of the chickens—a bit alarmed by visitors—and the stench of their droppings, which simply fall to the basement below, are overpowering. The dim lighting—the birds would attack each other if it was too bright—suffuses it all with an eerie glow.

One-year change in dollar sales.
Product Change
Bacon Oscar Meyer brand Up 16.9%
Eggs Up 14.5%
Cold cereal Down 1.6%

Source: Information Resources

In Search Of an Alternative to Sugar
Date of discovery
1879 Saccharin Added sugar is a major source of carbs.This early substitute is still sold as Sweet'N Low.
1937 Cyclamate It was banned in the U.S. in 1970 after a study found bladder tumors in rats.
1965 Aspartame Better known as NutraSweet, it was put on the map when Diet Coke added it in 1985.
1976 Sucralose Approved in 1999 and marketed as Splenda, it is riding the low-carb tidal wave.

Today 95.6% of the flock has laid an egg, which is "fabulous," Sauder says (75% to 80% is the average). Sales at Sauder's retail accounts are up by double digits, and the wholesale price of eggs has nearly doubled this year. It's a good day for EGGMAN1. Fabulous, you might say. But then, it's a fabulous time to be in the egg business. Or the beef business. The nut business. The cheese business. What's the connection? Why, the Atkins diet, of course.

Thirty years after Dr. Robert Atkins published his first diet book, low-carbohydrate dieting—or as its devotees call it, the "low-carb lifestyle"—has planted its hooks in the American zeitgeist and refuses to let go. It was derided for years as a pseudo-scientific fad, but in the past few years it has swept the country, partly because some recent studies have supported its efficacy while allaying short-term health concerns, and partly because millions of low-carb dieters have quickly shed pounds after failing to do so by other means. "I've been doing Atkins for two years now, and I cannot say enough good things about it!" raves Amanda Mitchell, 26, an MCI marketer in Arlington, Va.

The extent to which Atkins and its low-carb imitators—Protein Power, South Beach, the Zone—have pervaded our consciousness is downright scary. Editors at the Oxford English Dictionary are considering adding an entry for "Atkins." Is your cocker spaniel tubby? You can now buy low-carb pet food. Need to get away from it all? Spend a week at an Atkins Diet Retreat. While there, wearing your eat meat not wheat thong ($9.99), tune in to QVC's Low-Carb Hour, or flip through the latest edition of Dr. Atkins' New Diet Revolution, a book so powerful that it supplanted Harry Potter as the No. 1 read in England. When a dead Muggle cardiologist bests a wizard on his home turf, there's magic in the air.

Before diving into the Atkins phenomenon, a disclaimer. This story will not try to judge whether Dr. Atkins was right or wrong. The jury's still out on that one. Rather it is a dispatch from Atkins World, a chronicle of the euphoria and panic that low-carb mania has instilled in the business community. "I don't sleep at night anymore. I'm not kidding," says Todd Hatoff, EVP at meat seller Allen Brothers in Chicago, who has had to rewrite his catalog three times in six months to account for spiraling beef prices, which protein-mad dieters are happily goosing. "I'm 33, and I've just gotten an ulcer."

The Atkins effect goes far beyond meat, influencing much of the $587 billion food industry. Sixteen years after the Surgeon General made fat public enemy No. 1, the American consumer—fatter than ever in a low-fat world—has turned a bilious eye on foods like bread and pasta. The response has been leavened with panic. The American Italian Pasta Co. has launched a low-carb pasta under the Atkins brand, and at the same time its CEO, Tim Webster, president of the National Pasta Association, plans a conference in Rome to position regular pasta as a "good"carb.

In contrast, purveyors of protein are cleaning up. Sales of carb-free MacNut oil, made from Australian macadamia nuts, have doubled every quarter since its January 2003 launch. The stock of Cal-Maine Foods, the leading U.S. fresh-egg producer, was up over 800% last year. The cheddar makers at Cabot in Vermont just had their best year ever. And "beef is back in vogue," says C. Larry Pope, COO of pork and beef processor Smithfield Foods.

Companies like Atkins Nutritionals, Carbolite, CarbSense, and Keto Foods introduced Atkins-friendly packaged food at a rate of almost two products a day last year, according to Productscan Online, which tracks the packaged-goods industry. They sell their wares at low-carb specialty stores—the Low Carb Mall, Castus, Viva Low Carb—that are sprouting up like weeds (some 250 at last count). Meanwhile, at food-science labs across the country, researchers are figuring out how to take the carbs out of just about every product we eat. It's anybody's guess how big this market is, but LowCarbiz, an industry newsletter that hatched last July, estimates that it could hit $20 billion (including diet books) this year.

In the past year these Atkins-inspired firms have ventured out of mom-and-pop health-food stores and into the big leagues of American retail. In doing so, they are bumping up against iconic American brands made by food giants like Kraft, ConAgra, and Nestle, which are scrambling to figure out whether low-carb is a fad or a trend. If this is all going to fizzle in two years, should they even bother to introduce new products? They've been burned before. (Remember Kellogg's high-fiber Ensemble brand, made from hearty psyllium-seed husk? Of course not.) If demand stays strong, can they craft new products to meet it? Or will they simply gobble up firms like Carbolite, which has hired Morgan Stanley to field buyout offers? (Atkins Nutritionals has already been snatched up.) So far, few big brands have made much noise in the low-carb market—Heinz's One Carb Ketchup hits stores in January—but that's not to say nothing's going on.

The low-carbohydrate era is breathing new life into some old companies. Launched in September 2002, Anheuser-Busch's Michelob Ultra beer gave the stodgy brewing world a jolt. Projected to sell about one million barrels in 2003, it tripled that and forced rivals like Adolph Coors and SABMiller to play catch-up.

Billions of dollars are on the line. Where they will go is anyone's guess, but it's clear that the smart money is getting into this game. Mighty Wal-Mart—America's largest grocer—is reportedly planning to launch a low-carb store brand sometime this year. (A Wal-Mart spokesman would say only that "this is an area of opportunity.")

Sweet Smell of Success
It's lunchtime at the Park Avenue Cafe on Manhattan's Upper East Side. Smartly dressed waiters maneuver nimbly in the tight space, holding aloft plates of tasty hors d'oeuvres. Women air-kiss and trade business cards. So far, nothing out of the ordinary—for New York, anyway.

But as you move from one circle of guests to the next, a single topic dominates the conversation: low-carb living. Not surprising, since four in ten adults have made at least some effort to cut carbs in the past year. But this is more than the usual Atkins small talk. It is a low-carb love fest. If you lobbed a baked potato into this crowd, the effect would be like a grenade's—you'd clear the place out.

At one table, the culinary director of Ruby Tuesday's raves about the 30 new low-carb items that Ruby's just added to the menu at its 650 casual dining locations. "We even have Splenda in our sugar caddies," she says, speaking of the lunch's sponsor, a sugar substitute.

Wait. What the heck is Splenda? Let's take a step back here.

Despite the vehemence with which Atkins supporters and detractors defend their positions, both sides agree on one point: The American food supply is overloaded with simple carbohydrates like white flour, white rice, and added sugars, especially the high-fructose corn syrup found in soft drinks, sweets, salad dressings—even canned ravioli. Americans are catching on, and 56% of consumers made a strong effort to curtail their sugar intake in 2002, according to one study. In fact, one of the fascinating sidebars to the Atkins phenomenon is the convergence of the low-carb and diabetic markets. (Many low-carb entrepreneurs have siblings or parents who are diabetic.)

Splenda is a perfect example of that convergence. Approved for use in all food and beverages by the FDA in 1999, it is what you get when you remove three of the hydrogen-oxygen groups from a sugar molecule and replace them with chlorine atoms. The result, generically known as sucralose, is very sweet—about 600 times sweeter than sugar. (Aspartame is only 180 times sweeter.) More important, it is remarkably stable. (One complaint about aspartame is that it loses flavor under high heat.) Due to its molecular makeup, sucralose is not metabolized and does not raise blood sugar levels, unlike some sweeteners, and for that reason it has been endorsed by low-carb advocates, including Atkins.

Food and beverage makers can't get enough of it. Splenda is now found in about 3,000 products: Diet RC cola, Starbucks Lite Frappuccino, a light version of Coca-Cola's Powerade, Ocean Spray Light, Diet V8 Splash, Light Hawaiian Punch, Blue Bunny ice cream, and Swiss Miss hot cocoa mix. If you buy a Diet Coke in Japan, you've got Splenda. This month Splenda will appear in new low-carb drinks from Snapple and Tropicana.

But Splenda is more than an additive—it's a bona fide brand. Low-carb manufacturers like Carbolite put the Splenda trademark on their product labels, which bestows a seal of approval akin to the "Intel Inside" logo. At retail, Splenda now commands a market share about equal to that of its two low-calorie competitors—Equal (aspartame) and Sweet'N Low (saccharin)—combined, according to market researcher IRI.

"Our intention is to globalize the brand," says Colin Watts, president of McNeil Nutritionals, a subsidiary of Johnson & Johnson, which markets Splenda. Like the other Splenda folks, Watts talks of it in terms of a movement. "We're redefining how people look at sweetness," says one marketing exec at the Splenda luncheon in New York.

Seconds later, hotshot pastry chef Gale Gand unveils her latest Splenda creations, which include an orange-vanilla panna cotta and chocolate-peanut butter cookies. "Splenda is like a new language that came into my life," she raves, explaining that it has allowed her to make tasty desserts for the low-calorie crowd at her Chicago restaurant, whose clientele includes Oprah Winfrey. If Oprah can send a book's sales to the moon, imagine what she could do for Splenda.

Staff of Life
Providence is not smiling on the bread industry. At least not Providence, R.I., as 50-odd people working in the U.S. bread industry wake up to a damp and dreary November day and shuffle down to the lobby of the historic Biltmore Hotel.

They're here to attend the first annual summit of the newly formed National Bread Leadership Council, a coalition of bakers, retailers, and suppliers that hopes "to restore people's connection to bread." Those words come from Peter Reinhart, author of The Bread Baker's Apprentice and an instructor at Johnson and Wales culinary school, which is hosting the summit. A former seminary student who dropped out to pursue bread baking, Reinhart says, "You have to become religious about the things you're passionate about."

The $11.4-billion-a-year bread industry could sure use some passion right about now. After peaking at 147 pounds per person in 1997, U.S. consumption of wheat flour fell to about 137 pounds last year. Bread baskets in restaurants across the U.S. remain unmolested. Ron Shaich, CEO of bakery cafe Panera Bread (see Investing), says the low-carb trend is costing him 2% to 3% in same-store sales each month. It's no surprise why: According to the bread industry's own research, 40% of Americans ate less bread last year than the year before. "Our products have an image problem," says Judi Adams, president of the Wheat Foods Council.

The bus ride over to Johnson and Wales is uneventful, but once there, things liven up quickly. TV cameras (including those from NBC's Dateline) in the main amphitheater are trained on a panel of bread industry executives who sit at a table bearing a carbohydrate cornucopia—scones, muffins, pastries, and loaves of every shape and size.

Perhaps a catchy tag line would bring people back to bread, an audience member suggests. "We're on that. We have 'Whole grains at every meal,' " replies Kirk O'Donnell of the American Institute of Baking. That's not exactly "Got milk?" but it's a start. "We don't promote ourselves as well as the beef and dairy folks," says O'Donnell later on in the hallway. "It bothers me a little." (In case you didn't notice, November was National Bread Month.) But what bothers him more is how Americans have hung a scarlet "A"—do not eat while on Atkins—around all breads. In truth, once you get past the restrictive early phases—where bread is verboten—the Atkins approach does not condemn all breads, only highly refined white breads, bagels, and hamburger buns that cause spikes in blood sugar. (Burger chains such as Hardee's and In-N-Out now offer burgers sans bun.) It took this country decades to learn the difference between "good" (monounsaturated) and "bad" (saturated) fats, so it's no surprise that our new dietary "demon," carbs, are all being tarred with the same brush.

To answer the negative spin on bread, the NBLC releases a study saying that a majority of "knowledgeable Americans" have a negative perception of the Atkins diet. The survey hammers home the point of the summit, which is to educate Americans about carbs and correct the "crisis of consumer misperception," as one NBLC spokeswoman puts it. And, of course, to provide sound bites for the evening news.

Privately, however, many of the attendees say they could do without the surveys and sound bites. They see low-carb not as a threat but as an opportunity. "I'm not in the education business—I'm in the bread business," says Albert Haase, who is currently developing a reduced-carb bread made with soy flour for his Breadsmith bakeries.

Unlike, say, candy bars, bread is hard (and expensive) to make low-carb. You could take an early version of low-carb bread and squeeze it, and it would return like a sponge to its original shape. And let's not even talk about the taste. By replacing carbs with proteins like soy flour and wheat glutens, you lose both taste and texture. But most breadmakers would rather go low-carb than see another customer walk past their door. "When demand is so great, it leaves us little choice," Haase says.

At lunch—another carb fiesta—Haase trades notes with Mike Basile, CFO of Great Harvest Bread Co., which now offers low-carb bread through about 75% of its 175 franchises. It's not just small specialty breadmakers, either. Panera will introduce three lower-carb breads this year. Baking giants like George Weston Bakeries and Flowers Baking Group have made similar moves, and beleaguered Interstate Bakeries, maker of Wonder Bread, is preparing to release one early this year. If launching low-carb bread is a "gimmick—a desperation move," as one member of the Bread Bakers' Guild believes, then color the bread industry desperate.

Fat for Thought
We've seen this desperation before. When the Surgeon General handed down his mammoth 712-page nutrition study in 1988, it called on Americans to drastically reduce the amount of fat in their diets and increase dietary fiber. Headlines screamed fat intake: the key to weight loss. Diets emerged, such as the T-Factor diet, which blithely suggested that you could ignore calories as long as you kept your fat gram intake to a minimum. "As the carb-to-fat ratio increases, you get thinner people," crowed Martin Katahn, Mr. T (Factor). The diet got plugged by L.A. Law star Susan Ruttan, and away we went.

Pretzel sales soared. Sales of oat-bran cereal rose 215% in one year. Meanwhile, food companies scrambled to provide low-fat alternatives to, well, everything. By 1995 one out of every four new food and beverage products made some kind of low-fat claim, according to Productscan. The problem was, most of them tasted horrible.

Out of this low-fat primordial soup, some sturdy brands emerged, like ConAgra's Healthy Choice, Stouffer's Lean Cuisine, and Nabisco's SnackWell's. Their success was mainly due to their being somewhat edible. (It's the taste, stupid.) Some lessons learned during this period now apply to low-carb.

First, don't underestimate a trend. SnackWell's ran into production problems, and the company had to apologize to a national TV audience in 1993. Similarly, Atkins Nutritionals has reportedly angered several retailers by not being able to keep shelves stocked with its bars and shakes.

Next, don't be late on a trend. Frito-Lay had high hopes for its Wow brand of chips, which were made with a faux fat called olestra. But health concerns about olestra delayed the national rollout, and Wow missed the window. Likewise, by the time Kraft and its ilk are ready to sell low-carb items to shoppers, their attention might be elsewhere.

Finally, for a diet food to become a brand, it has to stand for something besides losing weight. ConAgra's Healthy Choice accomplished that, with a message that conveyed healthy living. Can Atkins Nutritionals do the same? "Atkins is a diet," says branding guru Jonathan Asher. "It could be a brand, but it's not there yet."

Protein Dreams
If you really want to see where low-carb is going, head to Los Alamos. No, not the top-secret nuclear lab in New Mexico. This Los Alamos is in New Jersey, not far from rocker Jon Bon Jovi's mansion in Middletown. Unfortunately there's not much to see, because this Los Alamos is lacking in some critical infrastructure—for starters, a ceiling. And doors.

The skeletal lab is currently under construction, along with the rest of Keto Foods' new 80,000-square-foot headquarters. With sales growing at a 300% clip, Keto, like many low-carb companies, has outgrown its current environs and is moving to snazzier digs nearby. The new headquarters will proudly display Keto's low-carb products, a stable that will increase from 140 to 212 by the end of 2004 in more than 40,000 stores, including Kroger, GNC, and Walgreens. The product line includes not only the usual assortment of shakes and bars but also spaghetti, frosted flakes, and five flavors of "ketato" mix, which promises the "taste of luscious mashed potatoes."

And that's how CEO Arne Bey wants it. For the past five years his passion has been to make low-carb food with the taste and texture of regular food. "When I hear, 'It's not that bad,' it pisses me off," Bey says, offering a visitor a chocolate Keto shake in lieu of lunch. "My goal in life is to hear, 'Wow—is this really low carb?' And the Holy Grail is 'I would eat this stuff even if it wasn't low carb.' "

It's no easy task. For example, unlike carbohydrates, proteins don't play well with water, which is necessary for most food production. "Protein turns to cement," Bey says. "We've broken a lot of expensive equipment." Keto has seven patents in the works, including one that Bey calls the "Rosetta stone" of low-carb food technology: a process to make proteins "walk and talk" like a carbohydrate on a molecular level.

Bey is not alone in his quest. At the Texas A&M Food Protein R&D Center, professor Mian Riaz is pushing protein to its limits. Over the past six months, major food companies have paid his research team to experiment with soy proteins, which are found in a host of low-carb foods.

The price tag for one project can reach $70,000. And clients expect a lot for their money. "They want everything zero-carb," Riaz says. "Sometimes it is possible. Sometimes it is not."

First you need to pump up the protein content in the soybean. That's done by extracting the oil, sugars, and fibers from the soy in a series of steps that increase the protein from 38% to 90%, leaving you with soy protein "isolate," as it's called, which you can make stuff with.

When you take the starchy carbs out of a snack—Cheetos, for instance—and replace them with pure protein, a Cheeto ceases to be a Cheeto. "With starch, you have puffy. With protein, you lose puffy," Riaz explains. To recapture that puffiness, Riaz uses machines called extruders to expand the protein and adds special derivatives to smooth the texture and mouth feel.

But it's not just a texture problem—you also lose flavor. "Proteins don't taste good," he says, so Riaz adds a flavor to mask the soybean's taste. Then he adds another over that to get the taste he's after—cheese, meat, whatever. Riaz works with flavor developers, such as Geneva-based Givaudan, who know what flavors work best in different situations. Snapple, for instance, when deciding what flavors to use in its new low-carb drink—which contains soy protein—found that blueberry worked best while apple didn't work so well. (Snapple did not work with Texas A&M.)

But back to Keto. Grabbing a strawberry yogurt bar off one of his production lines, Arne Bey munches for a bit, ponders, then chides his staff: "I want this a bit softer." Sometimes Bey gets a bit too deep into his products: Late one night his wife caught him at his desk, simply staring at a bottle of low-carb ketchup.

After Atkins
When Dr. Robert Atkins died this past April at 72, after injuries sustained from slipping on a patch of ice in front of his Manhattan medical practice, one obvious question arose: Who would fill the void? Well, if Atkins was the father of low-carb, perhaps we should find its mother.

That may well be Fran Gare, 64, a former New Jersey interior designer who was a close friend of Atkins's for more than 20 years, co-wrote four cookbooks with him, and has created her own line of low-carb desserts and baking mixes sweetened with Xylitol, a sugar substitute. (It's extracted from corncobs, and Gare imports three truckloads a month from China.)

Gare keeps a pretty low profile—her sales are only $5 million. But she says Wal-Mart is talking to her about using her products in a low-carb store brand. "I'm the mother of low-carb baking," she says.

Gare believes she's the true keeper of her mentor's legacy. She spent plenty of time on the defensive in the 1970s—"we were all called quacks"—so now she feels justified going on the offensive. "Somebody has to step up—I owe that much to him," she says. Gare rails against charlatans who are keen to make a quick buck off this fad: "It's a real crisis situation."

At the same time, Gare acknowledges that the whole low-carb frenzy is much bigger than she ever imagined. When she got her latest royalty check for the Atkins books she worked on, "I almost fell off my chair." Hold on tight, Fran. And the rest of you—from eggmakers to sugar fakers, bread bakers to protein shakers—should hold tight as well. Fad or trend, low-carb eating is giving all of us a wild ride.

Feedback: mboyle~fortunemail.com

Wow, that's an excellent article.

I agree. I found the Keto production information especially interesting. Also, how nice to see a well-informed author (about low-carb).

That article was excellent

However, there is one important distinction between the low fat craze and the low carb craze that the pessimists fail to see.

Low fat started out from the gate as accepted by the establishment. People right from the beginning were told by doctors and the establishment that cutting fat intake was good.
The meaning of this distinction being it wasn't a positive word-of-mouth situation that brought the low fat craze from infancy to it's zenith... in fact, most people found just the opposite true. Low fat started out accepted and pushed, and only took everyone else a while to "catch on" (read: be indoctrinated into) to the trend. The bottom line is, the low fat trend was not fueled by word of mouth, at the basic social foundation, of it's effectiveness. They were sold into a pyramid scheme.

Never would you here from someone say "oh hey check out this new [generic-low-fat] diet... it's great! I feel better than ever, losing weight in gobs, and best of all I'm not hungry!!!" No, people struggled to do low fat. The reason they struggled to do low fat, despite the fact it was less enjoyable and equally effective as plain old calorie restriction, is because their drs. and the government were all telling them they should do it if they want to lose weight and be healthy.

Low fat was very much like a pyramid scheme. Well, the pyramid is now about to collapse because the people at the bottom have stopped buying.

However, atkins is an opposite pyramid. Atkins started right from the start as being condemned by the establishment as foolish irresponsible quackery, dangerous, ineffective, and unhealthy. However, something interesting happened. It turned out it worked, and it grew in popularity among the pyramid base. Word of mouth did it's thing as people boasted about the weight loss and health improving benefits of low carbing, and it slowly grew in popularity until our leaders and marketplace could no longer ignore it.

This is the difference. We were aggressively sold low fat, but we had to fight to buy low carb. Low carb from its inception was fueled by substance; real people all found it helped them and was enjoyable even despite massive resistance from the establishment. On the other hand, low fat was fueled on a lot of hypotheticals, a lot of maybes disseminated from the medical establishment and government giving it the stamp of approval, but not a lot of real world evidence observed in the consumers.

This is why low carb is not even close to being a fad, and it's not even a trend. It's momentum is fueled by the real world improvements in health and control over eating habits of real people. It's a revolution of the way we look at human nutritional needs.

Thanks for posting this

Really interesting article. Next question...will LC'ers start loading up on "frankenfoods" like the LF'ers did? Which helped lead to the mess we have with health issues now. Dr A advocated good, wholesome food. I wonder what he would think of the new processed stuff exploding on the market?

BTW: I am not really anti-LC products. If they help folks stay LC, good. But why substitute one type of processed food for another?

I like the supplemental LC foods. BBQ sauce, tortillas. Stuff that isn't the focus of the meal, but can enhance it. We don't buy the bread, muffins, etc, but love to get the stuff you can use as enhancers.

Very interesting! Thanks for sharing.

Great article, thanks for sharing. The world is changing and low carb is here to stay!
I just hope that as more products become available the prices become more reasonable!

Great article!



I wasnt crazy about that line since I do believe that saturated fats ARE good for you.

But I am just being nit picky.

Thanks for posting this article. It was nice to see positive and informative press for a change!

I think ItsTheWooo has pointed out a very important distinction: that low carb eating has come about against very strong opposition. It's one thing to have low fat pushed at you, it's quite another to eat this way and have all your relatives ready to catch your collapsed body (much lighter, of course.)
All the food industry people thinking "fad" are going to be caught by surprise. This thing has been gathering steam for thirty years, and I can't wait for the mainstream research to realign their heads and catch on.
For people who want to eat none of these LC products, that's fine. But many people, including my husband, find it much easier to follow a low carb lifestyle if they can have some substitutions for foods they are used to. He found it easy to give up cereal, for instance, but he can't do without grilled cheese. So the Arnold's low carb bread has more nutrients and protein than regular bread. Isn't that a good thing?
To convert the world, we have to give a little here and there.

DIETING
Atkins World
By Matthew Boyle

When did carbs replace fat as nutritional enemy No. 1? What does it mean for the pork-rind industry? Is Wonder Bread toast? And what the heck is ketato? How low-carb mania is roiling the food business.

I am the EGGMAN
The Lexus RX-300—license plate EGGMAN1—barrels west on Route 30 in Pennsylvania's York County. We're on the road to Wellsville, a farm community blanketed in December's first snowfall. At the wheel of EGGMAN1 is Paul Sauder, the third-generation head of R.W. Sauder, one of the leading egg processors and marketers in the Northeast, shipping over three million eggs a week.

Our destination is the chicken house at the Eisenhower farm, one of 80 farms that supply Sauder with eggs. The house contains 47,000 egg-laying hens—"layers"—stacked in cages three high, seven birds to a cage, in six rows stretching back 450 feet. It is a relatively small house; more modern ones hold 150,000 birds. Still, the din of the chickens—a bit alarmed by visitors—and the stench of their droppings, which simply fall to the basement below, are overpowering. The dim lighting—the birds would attack each other if it was too bright—suffuses it all with an eerie glow.

Today 95.6% of the flock has laid an egg, which is "fabulous," Sauder says (75% to 80% is the average). Sales at Sauder's retail accounts are up by double digits, and the wholesale price of eggs has nearly doubled this year. It's a good day for EGGMAN1. Fabulous, you might say. But then, it's a fabulous time to be in the egg business. Or the beef business. The nut business. The cheese business. What's the connection? Why, the Atkins diet, of course.
Thirty years after Dr. Robert Atkins published his first diet book, low-carbohydrate dieting—or as its devotees call it, the "low-carb lifestyle"—has planted its hooks in the American zeitgeist and refuses to let go. It was derided for years as a pseudo-scientific fad, but in the past few years it has swept the country, partly because some recent studies have supported its efficacy while allaying short-term health concerns, and partly because millions of low-carb dieters have quickly shed pounds after failing to do so by other means. "I've been doing Atkins for two years now, and I cannot say enough good things about it!" raves Amanda Mitchell, 26, an MCI marketer in Arlington, Va.

The extent to which Atkins and its low-carb imitators—Protein Power, South Beach, the Zone—have pervaded our consciousness is downright scary. Editors at the Oxford English Dictionary are considering adding an entry for "Atkins." Is your cocker spaniel tubby? You can now buy low-carb pet food. Need to get away from it all? Spend a week at an Atkins Diet Retreat. While there, wearing your eat meat not wheat thong ($9.99), tune in to QVC's Low-Carb Hour, or flip through the latest edition of Dr. Atkins' New Diet Revolution, a book so powerful that it supplanted Harry Potter as the No. 1 read in England. When a dead Muggle cardiologist bests a wizard on his home turf, there's magic in the air.

Before diving into the Atkins phenomenon, a disclaimer. This story will not try to judge whether Dr. Atkins was right or wrong. The jury's still out on that one. Rather it is a dispatch from Atkins World, a chronicle of the euphoria and panic that low-carb mania has instilled in the business community. "I don't sleep at night anymore. I'm not kidding," says Todd Hatoff, EVP at meat seller Allen Brothers in Chicago, who has had to rewrite his catalog three times in six months to account for spiraling beef prices, which protein-mad dieters are happily goosing. "I'm 33, and I've just gotten an ulcer."

The Atkins effect goes far beyond meat, influencing much of the $587 billion food industry. Sixteen years after the Surgeon General made fat public enemy No. 1, the American consumer—fatter than ever in a low-fat world—has turned a bilious eye on foods like bread and pasta. The response has been leavened with panic. The American Italian Pasta Co. has launched a low-carb pasta under the Atkins brand, and at the same time its CEO, Tim Webster, president of the National Pasta Association, plans a conference in Rome to position regular pasta as a "good"carb.

In contrast, purveyors of protein are cleaning up. Sales of carb-free MacNut oil, made from Australian macadamia nuts, have doubled every quarter since its January 2003 launch. The stock of Cal-Maine Foods, the leading U.S. fresh-egg producer, was up over 800% last year. The cheddar makers at Cabot in Vermont just had their best year ever. And "beef is back in vogue," says C. Larry Pope, COO of pork and beef processor Smithfield Foods.

Companies like Atkins Nutritionals, Carbolite, CarbSense, and Keto Foods introduced Atkins-friendly packaged food at a rate of almost two products a day last year, according to Productscan Online, which tracks the packaged-goods industry. They sell their wares at low-carb specialty stores—the Low Carb Mall, Castus, Viva Low Carb—that are sprouting up like weeds (some 250 at last count). Meanwhile, at food-science labs across the country, researchers are figuring out how to take the carbs out of just about every product we eat. It's anybody's guess how big this market is, but LowCarbiz, an industry newsletter that hatched last July, estimates that it could hit $20 billion (including diet books) this year.

In the past year these Atkins-inspired firms have ventured out of mom-and-pop health-food stores and into the big leagues of American retail. In doing so, they are bumping up against iconic American brands made by food giants like Kraft, ConAgra, and Nestle, which are scrambling to figure out whether low-carb is a fad or a trend. If this is all going to fizzle in two years, should they even bother to introduce new products? They've been burned before. (Remember Kellogg's high-fiber Ensemble brand, made from hearty psyllium-seed husk? Of course not.) If demand stays strong, can they craft new products to meet it? Or will they simply gobble up firms like Carbolite, which has hired Morgan Stanley to field buyout offers? (Atkins Nutritionals has already been snatched up.) So far, few big brands have made much noise in the low-carb market—Heinz's One Carb Ketchup hits stores in January—but that's not to say nothing's going on.

The low-carbohydrate era is breathing new life into some old companies. Launched in September 2002, Anheuser-Busch's Michelob Ultra beer gave the stodgy brewing world a jolt. Projected to sell about one million barrels in 2003, it tripled that and forced rivals like Adolph Coors and SABMiller to play catch-up.

Billions of dollars are on the line. Where they will go is anyone's guess, but it's clear that the smart money is getting into this game. Mighty Wal-Mart—America's largest grocer—is reportedly planning to launch a low-carb store brand sometime this year. (A Wal-Mart spokesman would say only that "this is an area of opportunity.")

Sweet Smell of Success
It's lunchtime at the Park Avenue Cafe on Manhattan's Upper East Side. Smartly dressed waiters maneuver nimbly in the tight space, holding aloft plates of tasty hors d'oeuvres. Women air-kiss and trade business cards. So far, nothing out of the ordinary—for New York, anyway.

But as you move from one circle of guests to the next, a single topic dominates the conversation: low-carb living. Not surprising, since four in ten adults have made at least some effort to cut carbs in the past year. But this is more than the usual Atkins small talk. It is a low-carb love fest. If you lobbed a baked potato into this crowd, the effect would be like a grenade's—you'd clear the place out.

At one table, the culinary director of Ruby Tuesday's raves about the 30 new low-carb items that Ruby's just added to the menu at its 650 casual dining locations. "We even have Splenda in our sugar caddies," she says, speaking of the lunch's sponsor, a sugar substitute.

Wait. What the heck is Splenda? Let's take a step back here.

Despite the vehemence with which Atkins supporters and detractors defend their positions, both sides agree on one point: The American food supply is overloaded with simple carbohydrates like white flour, white rice, and added sugars, especially the high-fructose corn syrup found in soft drinks, sweets, salad dressings—even canned ravioli. Americans are catching on, and 56% of consumers made a strong effort to curtail their sugar intake in 2002, according to one study. In fact, one of the fascinating sidebars to the Atkins phenomenon is the convergence of the low-carb and diabetic markets. (Many low-carb entrepreneurs have siblings or parents who are diabetic.)

Splenda is a perfect example of that convergence. Approved for use in all food and beverages by the FDA in 1999, it is what you get when you remove three of the hydrogen-oxygen groups from a sugar molecule and replace them with chlorine atoms. The result, generically known as sucralose, is very sweet—about 600 times sweeter than sugar. (Aspartame is only 180 times sweeter.) More important, it is remarkably stable. (One complaint about aspartame is that it loses flavor under high heat.) Due to its molecular makeup, sucralose is not metabolized and does not raise blood sugar levels, unlike some sweeteners, and for that reason it has been endorsed by low-carb advocates, including Atkins.

Food and beverage makers can't get enough of it. Splenda is now found in about 3,000 products: Diet RC cola, Starbucks Lite Frappuccino, a light version of Coca-Cola's Powerade, Ocean Spray Light, Diet V8 Splash, Light Hawaiian Punch, Blue Bunny ice cream, and Swiss Miss hot cocoa mix. If you buy a Diet Coke in Japan, you've got Splenda. This month Splenda will appear in new low-carb drinks from Snapple and Tropicana.

But Splenda is more than an additive—it's a bona fide brand. Low-carb manufacturers like Carbolite put the Splenda trademark on their product labels, which bestows a seal of approval akin to the "Intel Inside" logo. At retail, Splenda now commands a market share about equal to that of its two low-calorie competitors—Equal (aspartame) and Sweet'N Low (saccharin)—combined, according to market researcher IRI.

"Our intention is to globalize the brand," says Colin Watts, president of McNeil Nutritionals, a subsidiary of Johnson & Johnson, which markets Splenda. Like the other Splenda folks, Watts talks of it in terms of a movement. "We're redefining how people look at sweetness," says one marketing exec at the Splenda luncheon in New York.

Seconds later, hotshot pastry chef Gale Gand unveils her latest Splenda creations, which include an orange-vanilla panna cotta and chocolate-peanut butter cookies. "Splenda is like a new language that came into my life," she raves, explaining that it has allowed her to make tasty desserts for the low-calorie crowd at her Chicago restaurant, whose clientele includes Oprah Winfrey. If Oprah can send a book's sales to the moon, imagine what she could do for Splenda.

Staff of Life
Providence is not smiling on the bread industry. At least not Providence, R.I., as 50-odd people working in the U.S. bread industry wake up to a damp and dreary November day and shuffle down to the lobby of the historic Biltmore Hotel.

They're here to attend the first annual summit of the newly formed National Bread Leadership Council, a coalition of bakers, retailers, and suppliers that hopes "to restore people's connection to bread." Those words come from Peter Reinhart, author of The Bread Baker's Apprentice and an instructor at Johnson and Wales culinary school, which is hosting the summit. A former seminary student who dropped out to pursue bread baking, Reinhart says, "You have to become religious about the things you're passionate about."

The $11.4-billion-a-year bread industry could sure use some passion right about now. After peaking at 147 pounds per person in 1997, U.S. consumption of wheat flour fell to about 137 pounds last year. Bread baskets in restaurants across the U.S. remain unmolested. Ron Shaich, CEO of bakery cafe Panera Bread (see Investing), says the low-carb trend is costing him 2% to 3% in same-store sales each month. It's no surprise why: According to the bread industry's own research, 40% of Americans ate less bread last year than the year before. "Our products have an image problem," says Judi Adams, president of the Wheat Foods Council.

The bus ride over to Johnson and Wales is uneventful, but once there, things liven up quickly. TV cameras (including those from NBC's Dateline) in the main amphitheater are trained on a panel of bread industry executives who sit at a table bearing a carbohydrate cornucopia—scones, muffins, pastries, and loaves of every shape and size.

Perhaps a catchy tag line would bring people back to bread, an audience member suggests. "We're on that. We have 'Whole grains at every meal,' " replies Kirk O'Donnell of the American Institute of Baking. That's not exactly "Got milk?" but it's a start. "We don't promote ourselves as well as the beef and dairy folks," says O'Donnell later on in the hallway. "It bothers me a little." (In case you didn't notice, November was National Bread Month.) But what bothers him more is how Americans have hung a scarlet "A"—do not eat while on Atkins—around all breads. In truth, once you get past the restrictive early phases—where bread is verboten—the Atkins approach does not condemn all breads, only highly refined white breads, bagels, and hamburger buns that cause spikes in blood sugar. (Burger chains such as Hardee's and In-N-Out now offer burgers sans bun.) It took this country decades to learn the difference between "good" (monounsaturated) and "bad" (saturated) fats, so it's no surprise that our new dietary "demon," carbs, are all being tarred with the same brush.

To answer the negative spin on bread, the NBLC releases a study saying that a majority of "knowledgeable Americans" have a negative perception of the Atkins diet. The survey hammers home the point of the summit, which is to educate Americans about carbs and correct the "crisis of consumer misperception," as one NBLC spokeswoman puts it. And, of course, to provide sound bites for the evening news.

Privately, however, many of the attendees say they could do without the surveys and sound bites. They see low-carb not as a threat but as an opportunity. "I'm not in the education business—I'm in the bread business," says Albert Haase, who is currently developing a reduced-carb bread made with soy flour for his Breadsmith bakeries.

Unlike, say, candy bars, bread is hard (and expensive) to make low-carb. You could take an early version of low-carb bread and squeeze it, and it would return like a sponge to its original shape. And let's not even talk about the taste. By replacing carbs with proteins like soy flour and wheat glutens, you lose both taste and texture. But most breadmakers would rather go low-carb than see another customer walk past their door. "When demand is so great, it leaves us little choice," Haase says.

At lunch—another carb fiesta—Haase trades notes with Mike Basile, CFO of Great Harvest Bread Co., which now offers low-carb bread through about 75% of its 175 franchises. It's not just small specialty breadmakers, either. Panera will introduce three lower-carb breads this year. Baking giants like George Weston Bakeries and Flowers Baking Group have made similar moves, and beleaguered Interstate Bakeries, maker of Wonder Bread, is preparing to release one early this year. If launching low-carb bread is a "gimmick—a desperation move," as one member of the Bread Bakers' Guild believes, then color the bread industry desperate.

When did carbs replace fat as nutritional enemy No. 1? What does it mean for the pork-rind industry? Is Wonder Bread toast? And what the heck is ketato? How low-carb mania is roiling the food business.

Fat for Thought
We've seen this desperation before. When the Surgeon General handed down his mammoth 712-page nutrition study in 1988, it called on Americans to drastically reduce the amount of fat in their diets and increase dietary fiber. Headlines screamed fat intake: the key to weight loss. Diets emerged, such as the T-Factor diet, which blithely suggested that you could ignore calories as long as you kept your fat gram intake to a minimum. "As the carb-to-fat ratio increases, you get thinner people," crowed Martin Katahn, Mr. T (Factor). The diet got plugged by L.A. Law star Susan Ruttan, and away we went.
Pretzel sales soared. Sales of oat-bran cereal rose 215% in one year. Meanwhile, food companies scrambled to provide low-fat alternatives to, well, everything. By 1995 one out of every four new food and beverage products made some kind of low-fat claim, according to Productscan. The problem was, most of them tasted horrible.

Out of this low-fat primordial soup, some sturdy brands emerged, like ConAgra's Healthy Choice, Stouffer's Lean Cuisine, and Nabisco's SnackWell's. Their success was mainly due to their being somewhat edible. (It's the taste, stupid.) Some lessons learned during this period now apply to low-carb.

First, don't underestimate a trend. SnackWell's ran into production problems, and the company had to apologize to a national TV audience in 1993. Similarly, Atkins Nutritionals has reportedly angered several retailers by not being able to keep shelves stocked with its bars and shakes.

Next, don't be late on a trend. Frito-Lay had high hopes for its Wow brand of chips, which were made with a faux fat called olestra. But health concerns about olestra delayed the national rollout, and Wow missed the window. Likewise, by the time Kraft and its ilk are ready to sell low-carb items to shoppers, their attention might be elsewhere.

Finally, for a diet food to become a brand, it has to stand for something besides losing weight. ConAgra's Healthy Choice accomplished that, with a message that conveyed healthy living. Can Atkins Nutritionals do the same? "Atkins is a diet," says branding guru Jonathan Asher. "It could be a brand, but it's not there yet."

Protein Dreams
If you really want to see where low-carb is going, head to Los Alamos. No, not the top-secret nuclear lab in New Mexico. This Los Alamos is in New Jersey, not far from rocker Jon Bon Jovi's mansion in Middletown. Unfortunately there's not much to see, because this Los Alamos is lacking in some critical infrastructure—for starters, a ceiling. And doors.

The skeletal lab is currently under construction, along with the rest of Keto Foods' new 80,000-square-foot headquarters. With sales growing at a 300% clip, Keto, like many low-carb companies, has outgrown its current environs and is moving to snazzier digs nearby. The new headquarters will proudly display Keto's low-carb products, a stable that will increase from 140 to 212 by the end of 2004 in more than 40,000 stores, including Kroger, GNC, and Walgreens. The product line includes not only the usual assortment of shakes and bars but also spaghetti, frosted flakes, and five flavors of "ketato" mix, which promises the "taste of luscious mashed potatoes."

And that's how CEO Arne Bey wants it. For the past five years his passion has been to make low-carb food with the taste and texture of regular food. "When I hear, 'It's not that bad,' it pisses me off," Bey says, offering a visitor a chocolate Keto shake in lieu of lunch. "My goal in life is to hear, 'Wow—is this really low carb?' And the Holy Grail is 'I would eat this stuff even if it wasn't low carb.' "

It's no easy task. For example, unlike carbohydrates, proteins don't play well with water, which is necessary for most food production. "Protein turns to cement," Bey says. "We've broken a lot of expensive equipment." Keto has seven patents in the works, including one that Bey calls the "Rosetta stone" of low-carb food technology: a process to make proteins "walk and talk" like a carbohydrate on a molecular level.

Bey is not alone in his quest. At the Texas A&M Food Protein R&D Center, professor Mian Riaz is pushing protein to its limits. Over the past six months, major food companies have paid his research team to experiment with soy proteins, which are found in a host of low-carb foods.

The price tag for one project can reach $70,000. And clients expect a lot for their money. "They want everything zero-carb," Riaz says. "Sometimes it is possible. Sometimes it is not."

First you need to pump up the protein content in the soybean. That's done by extracting the oil, sugars, and fibers from the soy in a series of steps that increase the protein from 38% to 90%, leaving you with soy protein "isolate," as it's called, which you can make stuff with.

When you take the starchy carbs out of a snack—Cheetos, for instance—and replace them with pure protein, a Cheeto ceases to be a Cheeto. "With starch, you have puffy. With protein, you lose puffy," Riaz explains. To recapture that puffiness, Riaz uses machines called extruders to expand the protein and adds special derivatives to smooth the texture and mouth feel.

But it's not just a texture problem—you also lose flavor. "Proteins don't taste good," he says, so Riaz adds a flavor to mask the soybean's taste. Then he adds another over that to get the taste he's after—cheese, meat, whatever. Riaz works with flavor developers, such as Geneva-based Givaudan, who know what flavors work best in different situations. Snapple, for instance, when deciding what flavors to use in its new low-carb drink—which contains soy protein—found that blueberry worked best while apple didn't work so well. (Snapple did not work with Texas A&M.)

But back to Keto. Grabbing a strawberry yogurt bar off one of his production lines, Arne Bey munches for a bit, ponders, then chides his staff: "I want this a bit softer." Sometimes Bey gets a bit too deep into his products: Late one night his wife caught him at his desk, simply staring at a bottle of low-carb ketchup.

After Atkins
When Dr. Robert Atkins died this past April at 72, after injuries sustained from slipping on a patch of ice in front of his Manhattan medical practice, one obvious question arose: Who would fill the void? Well, if Atkins was the father of low-carb, perhaps we should find its mother.

That may well be Fran Gare, 64, a former New Jersey interior designer who was a close friend of Atkins's for more than 20 years, co-wrote four cookbooks with him, and has created her own line of low-carb desserts and baking mixes sweetened with Xylitol, a sugar substitute. (It's extracted from corncobs, and Gare imports three truckloads a month from China.)

Gare keeps a pretty low profile—her sales are only $5 million. But she says Wal-Mart is talking to her about using her products in a low-carb store brand. "I'm the mother of low-carb baking," she says.

Gare believes she's the true keeper of her mentor's legacy. She spent plenty of time on the defensive in the 1970s—"we were all called quacks"—so now she feels justified going on the offensive. "Somebody has to step up—I owe that much to him," she says. Gare rails against charlatans who are keen to make a quick buck off this fad: "It's a real crisis situation."

At the same time, Gare acknowledges that the whole low-carb frenzy is much bigger than she ever imagined. When she got her latest royalty check for the Atkins books she worked on, "I almost fell off my chair." Hold on tight, Fran. And the rest of you—from eggmakers to sugar fakers, bread bakers to protein shakers—should hold tight as well. Fad or trend, low-carb eating is giving all of us a wild ride.

Just a little bump.