Grain Giants Go Gluten-Free to Plump Profits on Fad Diet

Grain Giants Go Gluten-Free to Plump Profits on Fad Diet

Grain sellers want to have their gluten-free cake and eat it, too.

As the stretchy protein found in wheat and other grains has become the latest dietary bogeyman, sales at companies like General Mills Inc. (GIS), Kellogg Co. (K) and Britain’s Warburtons Ltd. have come under pressure. Yet instead of fighting back against a fad many dietitians contend lacks scientific grounding, they’re boosting output of pricier gluten-free foods while leaving industry groups to defend their traditional products.Less than one percent of Americans have the disorder that requires a gluten-free diet, yet nearly one in three now eschews gluten, according to trend watchers NPD Group, influenced by bestselling anti-gluten books and celebrity endorsements. The U.S. market for gluten-free foods will climb from $4.2 billion in 2012 to $6.6 billion by 2017, according to researcher Packaged Facts, as bread bakers, craft-beer makers and eateries from Hooters to Michelin-starred Hakkasan embrace the trend.

“Consumers, rightly or wrongly, have made a connection between gluten-free and healthy,” said Nicholas Fereday, an analyst at Rabobank. “Grain companies are hoping this trend crashes and burns sooner rather than later. But any trend is a marketing opportunity.”

General Mills, the Minneapolis-based maker of Cheerios, has transformed most its Chex cereal brand into a gluten-free offering by replacing barley malt syrup with molasses. Sales of Chex have jumped by at least 10 percent in each of the past three fiscal years, while the $6 billion breakfast cereal category has remained stagnant. The company also makes gluten-free versions of its Pillsbury cookie dough and Betty Crocker baking mixes.

Terrorist Grain

Wheat flour consumption has fallen to a 22-year low, according to the U.S. Department of Agriculture. That’s at least partly due to the work of gluten-free advocates like William Davis, author of 2011’s “Wheat Belly,” and David Perlmutter, who released “Grain Brain” this year. Davis calls wheat “the world’s most destructive dietary ingredient,” while Perlmutter says grains are a “terrorist group” that “are silently destroying your brain.”

Doug VanDeVelde, a senior vice president at Kellogg’s U.S. Morning Foods unit, counters that grains “can play a key role in a balanced, nutritious diet.” Kellogg, of Battle Creek, Michigan, unveiled gluten-free Rice Krispies in 2011. PepsiCo Inc.’s (PEP) Doritos Nacho Cheese Tortilla chips went gluten-free the same year.

“We’re responding as we think we should,” said General Mills spokeswoman Kirstie Foster. “There’s a new diet book every week, and most of them really should go without comment.”

Flash Trends

Mark Lang, a food marketing professor at St. Joseph’s University in Philadelphia, says grain producers won’t criticize the anti-gluten authors for fear of fueling sales of their books or offending those who really must avoid gluten.

“Large companies have learned not to overreact to these flash trends,” Lang said. “There is nothing to gain, and you have everything to lose.”

Grain companies are making the most of the dietary shift. On, gluten-free Rice Krispies cost 29 cents per ounce, versus 17 cents for the original kind. Warburtons’ gluten-free bread is about 5 pounds ($8) per kilogram, more than twice the price of its regular bread.

While Warburtons didn’t respond to requests for comment, other bakers say the higher prices reflect the additional costs to produce gluten-free foods, which have more ingredients and must be made in separate plants to prevent commingling.

“My profit margin is about the same on gluten-free bread, but the dollar profits per loaf are much more,” said Mark Blacker, sales and marketing director of Continental Baker in Reading, England.

‘Such Nonsense’

The reluctance of grain producers to defend gluten surprises Michael Pollan, author of “The Omnivore’s Dilemma” and “Food Rules: An Eater’s Manual.”

“The industry has been flat-footed in their response,” Pollan said. “They should be reminding people that gluten is protein, generally thought of as a healthy nutrient, compared to fats or carbs.”

This isn’t the first time grain makers have been dragged through the mud. Fifteen years ago, diets that limited carbohydrates sent sales of white bread and pasta plummeting. Out of that crisis rose industry associations like the Whole Grains Council, which encourages consumers to eat more brown rice and whole wheat bread and counts General Mills and PepsiCo’s Frito-Lay snack unit among its members.

Cynthia Harriman, the group’s executive director, said her initial reaction to “Wheat Belly” was that it was “such nonsense.’” Once she realized “this was not going away,” Harriman used the council’s website to point consumers toward gluten-free grains such as rice and corn.

Bread Smoothies

The Wheat Foods Council, an association of producers formed in 1972, faced a more direct threat, says president Judi Adams, and it lacks the funding for an ad campaign like “Got Milk?,” which cost over $20 million. The council spent $433,000 for public relations in 2011, according to its U.S. tax return. Adams said she’s working with dietitians, who she says are more credible than celebrities backing gluten-free diets.

“We know that consumers are confused,” she said. “Some don’t have a clue what gluten actually is.”

Amid the confusion, one company has stood up for gluten — Canada Bread, a baker that Toronto-based parent Maple Leaf Foods Inc. (MFI) is considering selling. It unveiled a YouTube ad last year where a comedian impersonates a smoothie shop owner, stuffing wads of bread into unsuspecting customers’ drinks to remind them of the nutritional benefits of grains.

No Whispering

The ad has been viewed over 860,000 times. “Even our competitors were talking about it,” said Richard Lan, president of Canada Bread. “If we put out a social media ad based on scientific facts, how many hits would we get?”

The company also helped found the Healthy Grains Institute, an advocacy group committed to “tackling the inevitable myths” found in books like “Wheat Belly.” The HGI’s website attributes the rise of gluten-free to “celebrities and those who promote fad diets” and argues gluten-free foods can lead to weight gain.

“We whispered last year,” said Canada Bread chief Lan. “We will not continue to whisper.”

To contact the reporter on this story: Matthew Boyle in London at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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