Interview: What REALLY Happened To KETO?

Pete Maletto wants to share what happened to KETO Foods

Just a few short years ago, the hottest name in low-carb food manufacturing was KETO. The company was estimated to be worth between $300-$400 million dollars, but then the company began to self-destruct by not paying vendors and defaulting on loans that had been made.

At the same time, some of the biggest names in food, including Kraft and Unilever, literally flooded the market with so many "low-carb" products that KETO began to feel the pinch of competition.

This one-two punch delivered a black eye knockout to one of the giants of low-carb's heyday.

You can read more about the specifics of what happened to KETO Foods in this March 2005 article in Low Carb Luxury.

Even with all the coverage of the rise and fall of KETO, a lot of questions have still been left unanswered about what happened to this seemingly once-invincible mega-company losing its grip and falling flat on its face.

Now, in an exclusive interview with the "Livin' La Vida Low-Carb" blog, former product development director for KETO Pete Maletto (who previously talked about KETO in this brief story) shares his quite candid thoughts about the company, what went wrong that led to the company's demise, and what the future of the low-carb industry holds.

Be prepared to be shocked and surprised by what Maletto revealed in my one-on-one interview with him.

1. What made KETO products so beloved by low-carbers?

Being a hardcore low-carber for so many years gave me a distinct advantage when designing the formulations. I knew what people were looking for because I was looking for them myself. I really felt when I had the opportunity to go forward with my concepts in 1998 that most of these foods were going to do well. But to me the most important aspect was in the design of the foods, containing no sugar alcohols, the high fiber content and pretty much ensuring the standard ingredients that created a macronutrient (fat, protein, carb ratio) profile that was most effective for weight loss.

2. When you heard that KETO was going out of business, how did that make you feel?

Well that’s a long story, but I was the one that actually told management they were going out of business the day I walked out, which was pretty ugly I might add. The CEO Arne Bey was in complete denial the company was insoluble in February 2004. They closed their doors 10 months later. From 25 million gross in 2003, to out of business by December 2004. It’s almost unfathomable to think with the kind of spending that was going on you couldn’t see it coming.

But actually I knew there was a possibility this could happen in early 2003 after the death of Dr. Atkins, which really tore me up inside. When I told new management that we should hold back on any new expansion and wait and see how this whole low-carb marketplace shakes out, they pompously came out and told me that low-carb was bigger than Atkins and KETO WAS even bigger than low-carb. They believed Atkins' death would not impact the low-carb marketplace. This kind of thinking was unacceptable to me because staying based in reality is extremely important when you’re running a company.

At that point I knew that the company perspective was extremely clouded. Personally, if anything made me feel bad it was that more than anything because believing your own hype is extremely dangerous. I knew we were riding Dr. Atkins' coattails as a company and I was proud to do so. Dr. Atkins was my hero and responsible for saving my life as a teenager.


Former Keto Vice-President Dan Maiullo

The other problem was at that very same time Arne [Bey] had gotten rid of our company VP Dan Maiullo, the real brains behind the operation and the guy who had brilliantly pioneered Keto to the growth it had achieved, that betrayal put a very sour note on company morale. Dan was the cornerstone of the business, the organizational leader. But once he was out of the picture, it was utter chaos…and that’s an understatement.

From 1998-2003 Dan Maiullo had set up the company distribution model to work efficiently in the health food industry. Dan was of the opinion that people shopping in mass market stores didn’t care what they ate and the real quality traffic and more targeted customer based for KETO was in health food and specialty stores. The consumer support was better in these food stores as well. It worked very well and grew the company to unbelievable growth.

But the real reason why Dan was backburnered was because Arne saw dollar signs in Wal-Mart gold. He knew Dan would be against the move for many reasons and Arne felt in mass retail he could make TONS more money so he needed to get another VP that had the same vision as he did. When that happened, the new management at KETO decided to summarily dump the 12,000 health food store accounts we had built up in five short years, in favor of Walgreen’s, Wal-Mart, Target, etc.

It was very sad to see because all these small stores were so very loyal to us. These people dedicated entire sections of their stores to KETO because they believed in us and they believed we would stay loyal to them. This betrayal closed hundreds of stores and created a ripple effect to thousands more.

The biggest problem was Arne made this move without any hard market data showing the impact of doing it and decided that he didn’t have to spend very much money on marketing to move the products in these big box stores because after all “everybody knew Keto cause it was bigger than low-carb!”

Well, as I predicted, reality hit and the health food stores noticed mass distribution (with the lower pricing) and stopped carrying the products. In fact, Arne was giving the big box stores huge volume discounts which crushed all the health food stores because they literally couldn’t compete.

At the same time, though, the mass market stores couldn’t move the KETO product due to lack of marketing, like Dan had warned earlier and then eventually, low-carb fell off in 2004. But it was obvious to me that KETO could have survived if the proper measures were taken to protect the business. It was the typical rookie mistake -- overpriced and under-marketed.

So in just 18 months after new management “took over” the business, it was bankrupt. All our hard work was destroyed and so many lives and families were impacted. It was very sad because many of our vendors and suppliers also got hit and their businesses and families suffered. That is why I always preach that it is so important to protect your business especially one as profitable as KETO and keep perspective because you are responsible for so many lives and one bad decision can hurt a lot of good people.

3. If KETO was still around today, do you think the products would still be as popular as they once were?

The low-carb marketplace is not as popular as it once was and KETO hurt and betrayed too many people in distribution to ever be popular again, but I do feel that there is demand for quality low carb products that work.

4. Is there a gap in the marketplace today for products like the ones KETO used to make? If not, then who is filling that gap?

Yeah there is a very big gap in low-carb products right now. I find myself everyday looking for convenient low-carb foods to eat and I come up empty every time. So besides the low-carb WARP 9 Shakes we sell, Arnold Carb Counting Bread and Atkins bars, which I use regularly, I’m back to where I was 15 years ago, just doing it on my own.

5. Where do you see the low-carb food industry going in the foreseeable future?

I think everything has a cycle. Low carb dropped off because of Atkins' death, the up and down media parade and the tons of inferior cheap products that rolled in late 2002-2003. People just got sick of trying to stay on the diet with Frankenfoods that matched the potency of a laxative.

The candies were a huge downfall for low-carb because the package said low-carb, but they were 100% artificial carbs and the uneducated consumer in mass was eating them like crazy, not losing weight and spending a lot of time in their bathrooms. How could a diet with so many artificial ingredients be healthy for you? No wonder why it dropped off like it did.

So many companies got in because they saw the huge profit potential, but they knew nothing from a biochemical human consumption standpoint in developing healthy products without taking cheap shortcuts.

But I think low-carb will bounce back because the science is very sound and the fact is that reducing carbs IS healthy. Dr. Atkins created worldwide carb awareness and proved from a scientific standpoint that low-carb is the healthy way to go.

If no one agrees with that statement look at the diabetes numbers and you’ll understand what I mean. We are looking at epidemic proportions. Dr. Atkins predicted this epidemic would happen over 25 years ago.

In fact, according the CDC there are over 20 million diagnosed diabetics in the U.S. alone. To top it all off there are over 50 million pre-diabetics and 1 out of 3 Americans born after the year 2000 will become a diabetic. Its growth is exploding and this epidemic is all because of the excessive sugar and starch consumption.

6. What are you doing since the demise of KETO?

When I left KETO they were still in business -- barely, but they were still there. Dan Maiullo was still there working as legal counsel and a few months later he resigned. We got together and reminisced about how well we worked together in the good days and decided to become business partners and try it again on our own.

So without much money, but with a lot of experiential know-how we started DynaPure Nutrition and came out with some pretty effective weight loss products and business started taking off quickly. We stuck with our tried and true distribution to health food stores and the WARP 9 product line quickly got popular. Best of all our resale was phenomonal. The weight loss shakes, which were and upgraded version of the Keto Shakes, were the first and only shakes in the marketplace to have Hoodia and Green Tea in them, which are really effective weight loss aids.

About six months later an investment friend of ours asked us if we can develop a functional dietary supplement for a certain type of performance enhancement. So I went to work on it and the results of our invention were outstanding. We have professional athletes using it right now and the clinical testing results have been extremely positive. This new company is called Mind Sports Nutrition, backed by our friend's investment group and they are all really excited about and 100% behind the product. It’s been such a great journey for everyone involved at this point and we plan on launching our marketing in June, so it’s an exciting time for us.

Thirdly, I would never leave out my low-carb life. We have been working over the past year on a very innovative food company called Sugar Sense.

It’s very different from KETO because this company utilizes two very new patent-pending food technologies that will be applied to its products.

One product is Sweet Sense, an amazing, low-sugar ingredient that specifically works on taste bud receptors. Some pretty big time science here with this product. It’s all natural, four times sweeter than sugar, and bakes just like sugar with no aftertaste. It’s really amazing.

This took most of the year to develop, but the big deal to me was to make it all natural and ensure it politically fits into every sector of the health food distribution channel.

This time Dan, myself and another partner who gave me the idea, Bill Palat are the founding partners. Bill is an expert in retail and was himself a successful health food store chain owner for over 20 years. We have all the elements for success.

The Sugar Sense products are not as low-carb as KETO was, but these products have been clinically proven to produce the same amount of glucose exactly like an extremely low-carb food. We achieved this with specific proteins and fibers that produce a low-glycemic index so low that it acts like a low-carb food. They taste just like the real food because that’s what it is, real food -- not Frankenfood. There's nothing artificial here, the taste is identical to its counterpart and the best part is that the technology makes it affordable, which can be passed on to the consumer. I want the Sugar Sense box of cereal to be the same price as a regular box of cereal. I’m not into gouging the consumer like these other guys had done in the past.

Of course, we will be posting the clinical blood sugar trials in our advertising and targeting diabetics and weight loss consumers. Everything will be scientifically supported so that there are no question marks with the consumer or the medical establishments.

We have not launched Sugar Sense yet for a couple of reasons, one being that the investor's dietary supplement project has been consuming us to say the least and secondly, we have not completely secured financing yet to get started.

Sugar Sense is an easy project that Bill could jump into, which can free up Dan and myself up for these other projects, but the real vision is to have all three companies running out of the same building by Jan 2007.

7. Is there any low-carb product or company that you are excited about that perhaps the rest of us haven't heard about yet?

Not really, it’s been so dead on low carb product introductions, which makes the Sugar Sense launch even more important.

I will say I am very happy Atkins Nutritionals pulled out of Chapter 11 and that they have really cleaned up their product line by taking out the maltitol and going with a much healthier sweetener. Their product development has really come along and I’m proud of their team and what they have done. Right now they are the only major company that does not use maltitol in their bars, which is a real plus for low carb dieters to have a convenient low-carb food that won’t get you sick.

8. Will low-carb as a lifestyle survive this constant media bashing or will it eventually wither on the vine and die?

The media loves to build something up and then destroy it because it makes for good press. Maybe they will build it back up, who knows? Low-carb was perfect for this type of press manipulation, but remember that the cream always rises to the top and when the diabetes numbers get even more elevated the media will jump on that, taking it back to low-carb as the answer.

Low-carb may be slow right now but it will be back. We just need a Dr. Atkins-type of person -- a real person -- in there to tout the health benefits of low-carb again so things could start to happen so much faster.

9. Low-carb retailers are getting more and more scarce as the scaremongering tactics by health "experts" and their friends in the media have taken their toll on business. What recommendations do you have for those few low-carb stores to help them survive and even thrive in the midst of all this?

My advice would be to expand your product selection as much as possible and don’t put all your eggs in one basket. Start carrying all natural, wheat free/gluten free and organic foods with your low-carb foods that way you can draw more people in your store and in some cases get an opportunity to educate them on the healthy benefits of low-carb.

Most of all, get away from the heavy artificial foods. Those are poor products for the healthy low-carb image anyway and its bad for the natural food industry in general.

10. Any final thoughts or words of advice for people who are livin' la vida low-carb?

Yeah, I think the best advice is to avoid ingredients like maltitol, lactitol, and other artificial sugar alcohols. Don’t fall for gimmicks like carb blockers because they don’t work for most people and stay away from other artificial ingredients to get you through your diet. The only exception is Splenda which is okay to use as a sweetener, but stay away from aspartame.

Of course, we still don’t know the side effects from Splenda but it's all we have as a high intensity sweetener. I do like Stevia, though, but it has a slight aftertaste. If you can deal with the aftertaste (and some people like it), then I would say use that. When we get Sweet Sense out there you’ll see a lot of people using that instead.

The other big low-carb tip is to make sure you eat something every three hours, this can boost your metabolism and prevent binge eating…especially on excessive carbs.

I also want to thank all the people that supported me when the fallout at KETO occurred because it meant so much to me. The support from so many especially meant a lot when management went after me for walking out of the business fighting for what I believed in.

But hang in there because low-carb or controlled-carb will definitely be the future. I think we're looking at 2008 to be a comeback year for low-carb. It's up to us to speak out and prove that reducing carbohydrates and boosting protein promotes a much better and healthier quality of life.

Thank you, Jimmy, for this wonderful opportunity to allow me to speak about where many newspapers and columnists were afraid to go. Remember to always fight for what you believe in because in the end your good intentions will come back to you. If we all stick together and fight for low-carb I believe we can see another journey of livin' la vida low carb very soon!

We already are, Pete, we already are. THANKS so much for being willing to share from your heart and we look forward to the exciting things to come from you in the next few years. Comments anyone?