Keto Foods - The Rise and Fall
How Mismanagement Put Keto Foods Out Of Business

Keto Foods started in late 1998 when the former company, Life Services Supplements was being restructured from a multi level marketing company selling dietary supplements.

At that time, CEO Arne Bey shuffled several management positions and Company VP Dan Maiullo was busy trying to organize a new effort to get back into mail order. “At the time we really needed to get something going and I called an old friend who used to work here to come in and help me develop a stronger product presence in mail order”, Maiullo said.

That old friend was Pete Maletto, a former employee of the company who had an extensive background in every area of dietary supplements and health food. At the time, Maletto was busy as a nutritional consultant in an alternative medicine clinic, but with an opportunity to help out and expand the Life Services Supplements line he quickly got to work. “It was funny but when Arne Bey saw Pete walking around working he said to me 'Didn’t I fire him or something a while ago?' I told him to just leave Pete alone, I really think he’ll help us.'"

And indeed he did, in early 1998 Maiullo and Maletto immediately started a new quarterly company catalog with over 90 new dietary supplements formulated by Maletto, organized by Maiullo and written by company owner Arne Bey.

Arne Bey, who bought the company 8 years before was on the track to something big. Maletto was a big low carb advocate and praised Dr Atkins for saving his life as a teenager with his first book Super Energy Diet. Maiullo understood low carb and it’s health benefits, and supported Maletto in his beliefs. The two then went on a mission to get Bey on the diet. “Pete made these low carb shakes and suddenly Arne lost 15 pounds in over a month and it made him a believer”, Maiullo said.

Maletto said the relationships between himself, owner Arne Bey and VP Maiullo had incredible chemistry that took Life Services Supplements to the next level. Arne Bey and Dan Maiullo thought the shakes were a hit. After first trying to sell them to Atkins, they decided to sell them through the Life Services Supplements mail order business.

Incredibly, the shakes started to sell more and more each month and business was picking up. Low carb already had quite a cult following and customers were ecstatic about finding the Keto Shakes available from Life Services. When Arne Bey came back from vacation, Maiullo told him “Get ready, we’re going into the food business.” The numbers didn’t lie, low carb was making its mark on Arne Bey, first personally and now financially.

With more and more benefits of low carb dieting provided by Dr. Atkins in the media, Keto Foods hung onto the coattails. Bey pushed the marketing envelope in the monthly company mail order newsletter he wrote personally. People became interested in what Keto Foods was doing and what they had to offer.

Within one year Maletto had already developed nearly 30 Keto low carb products. “I had a ton of support with Dan running the business and all the great employees that were so dedicated in helping us out. We had the best team and it was truly an amazing experience.”, Maletto said.

By late 1999, Keto Foods was doing well in its Life Services mail order business. VP Dan Maiullo then decided to take the mail order marketing model and direct it to health food stores. Keto Foods focused its advertising in a few health food trade magazines and suddenly it was overnight success. Stores from all over the US called in wanting Keto products.

The Keto product line boasted the first of many types of low carb foods such as cereal, pasta, tortilla chips and even orange juice. Consumer success with low carb was skyrocketing and Dr Atkins was making it well known in the media by introducing new books and continually promoting the health benefits to those who adhered to his diet.

Keto Foods reaped the benefit of Dr. Atkins media promotion and the timing was impeccable. In late 2000, the company had only been selling low carb products for a little over two years but was growing at an exponential rate. Expansion was needed and a new building was leased for shipping, warehousing and their own extruded bar line. Keto Foods started producing its own low carb bars before the summer of 2001 and claimed an important area of growth that maximized profits in protein snack bars. “I wanted to approach bar manufacturing like a bakery in a sense, making them everyday and shipping them out fresh. We had an edge in quality and freshness and we were the only ones doing that.”, said Maletto.

As 2002 approached, Keto Foods was gaining momentum in the natural foods marketplace. Keto products had little or no sugar alcohols which helped low carb dieters to lose weight. The word was getting out and by 2002, Maletto had created over 110 Keto Low Carb products. They were claiming shelf space at every health food store venue, a strategy Maletto and Maiullo wanted to exploit.

Keto Foods even had it’s own direct distribution to health food store and consumer sales. This enabled it to utilize even greater control of where it’s products were sold. This distribution control implemented by Maiullo also proved valuable to the independent health food stores themselves because it solidified the loyalty health food stores had in Keto and it's ability to stay away from mass market retailers and distributors. The marketing model that Maiullo had put in place was based on thousands of relationships with health food stores across the nation. This was important to consistent company growth and assured the consumer support needed by the low carb industry that only local health food stores can provide.

In late 2002 Atkins made its move to mass. Suddenly Atkins products were being sold in Wal-Mart and other mass venues and supermarkets. Health Food Stores felt the impact of the move and store traffic waned. Popularity of low carb soared. A glut of low carb products made its way into the marketplace, many of them inferior in taste and ingredients.

Despite it all Keto Foods was still growing as health food stores pushed the loyal product line heavily. Atkins started having difficulties delivering due to the Wal-Mart distribution and Keto was delivering, picking up more business than ever. They moved into their third building for customer service and warehousing.

Then as things were growing something happened to the chemistry of the three leaders at Keto. In early 2003 Arne Bey hired former Solgar manufacturing VP Will Lederman and made him VP of Keto Foods. Dan Maiullo was back burnered to in house legal counsel.

The next step confirmed the obvious. Maiullo’s marketing model was thrown in the trash and an entirely new model in which the company had no experience was adopted. Despite the objections by Maiullo that incredible marketing dollars were needed to be successful in mass market, his comments went unheard. Then in late 2003, Keto products were sold to mass retailers.

Betrayed health food stores owners around the nation grumbled seeing Keto Foods in supermarkets, drug chains and mass markets at cheaper prices than what they could sell it for. “They didn’t even give us a chance to compete, they just put us out”, claimed one irate health food store owner. His business had dropped over 30% since Atkins and Keto went mass.

Bey and Lederman then decided to lease a new building that would house the entire company and remove them from the other three. Company spending on leasehold improvements went into the millions to ready Keto for the next ship to sail on.

As business was still going strong by December 2003 management was busy stocking up on inventory for the new year to come. But as mass was coming on, the now betrayed health food stores were dropping Keto left and right.

Keto Foods moved into the new glorious building, manufacturing equipment was being purchased and company spending on expansion was at an all time high. According to Merril Lynch, the company spent over 3 million on the leased building, an obviously bad business move. Lack of organization was also obvious, and new management was still operating out of the other three buildings. This cost the company greatly as the timing of the move into the new building was grossly miscalculated.

Maletto claimed he was disappointed in the wrong business and relationship moves that were made. “When Dan was in charge we were doing so well because of his business knowledge and our confidence in his guidance. But when he was betrayed it sent two unspoken messages out to the employees, one that our leader was gone and two, am I next?”

Then it happened like a clash of thunder. The phones stopped ringing. Mass wasn’t moving product like intended due to the lack of marketing and the media was feeling the death and absence of Dr Atkins. Employees I spoke to said , “company morale was at an all time low."

Keto Foods started to bleed. Expenses were up and sales were down. One last effort to increase distribution was made as Keto landed a huge order from Tree Of Life. But unfortunately Tree of Life only distributed to health food stores, the same stores that wanted nothing to do with Keto six months prior.

In March 2004, company visionary and product creator Pete Maletto resigned from Keto Foods. The company for which he had formulated over 200 products would be just a memory. Maletto amazingly created and developed the first low carb versions of nearly every food category in the business.

When I asked Pete why he would walk away from a large salary and all the effort placed into the business he just said, “I knew it was too late to do anything about the poor decisions, but believe me I tried. I just personally couldn’t do it any more and I needed to keep my integrity intact. All the employees, stores, vendors and suppliers I had developed relationships with were like family and they helped us acheive our success. But then suddenly they were being hurt by greed, disrespect and disloyalty from upper management. It was one of the worst management spectacles I had ever seen and I knew it was just a matter of time before he would go out of business. After all our hard work, I had to see it wash away by complete mismanagement. It was such a sad and embarassing time for me.”

Maletto was right and just after he left in late April, Keto employees were being laid off at a rapid pace, cutbacks were made and now product was expiring in the new warehouse. The company that had nearly 135 employees at this time one year ago had dwindled to under 30 by June of 2004. The leasing expenses, company expansion and inventory had bankers breathing down their neck. Sales were at an all time low.

In June 2004, Dan Maiullo who warned Arne Bey this would happen a year prior found the opportunity to walk away from Keto Foods. He had spent 14 years working for Arne Bey and over 16 years with the Life Services/Keto. Maiullo left to start a new dietary supplement company with Pete Maletto called DynaPure Nutrition.

More layoffs and cutbacks occurred and Bey had creditors all over him. Sales were unable to justify the millions the bank had loaned to the company.

In August, Lederman and Bey had a disagreement that lead to the termination of Lederman. Recently, the two were allegedly in a court battle over Lederman's contract.

Keto Foods could never recover from the disastrous business decisions and strategy that plagued it. Shortly thereafter, the bank which was owed millions of dollars had brought in crisis management to recover the money spent and to prepare the business for closing.

In an article written in the New York Times last year it was reported;

"Other specialty low-carb businesses are feeling similar pain. Keto Foods, a company in Tinton Falls, N.J., that started selling low-carb foods around the time Atkins did, is desperately trying to figure out how to stay afloat. This year the company has stopped producing 75 of its 110 products. 'We're in terrible financial condition right now,' said Arne Bey, Keto Foods' chief executive. Bey says he wishes that he would have stuck to what he knows best: selling specialty products at health food stores to resolute low-carb dieters. 'If I could do it over again I would have stayed a cottage industry and not assumed supermarkets were the answer' said Mr. Bey who admitted his avariciousness . 'But it was a low-carb gold rush, and like everyone else, we got swept up in it.'"

On December 10th Keto closed it's doors for good and went out of business, owing millions of dollars to bankers, vendors, contractors and suppliers. In a report by the Newark Star Ledger, additional creditors are left wondering whether they will ever be paid. Nick Stello, one of the owners of Stello Foods in Pennsylvania, which made low-carb spaghetti sauce for Keto, obtained a court judgment seeking a payment of about $5,000. Another firm that did consulting for Keto has obtained a $51,000 judgment. The company's former landlord is suing for $34,000, a flavor company $35,000, and an ad agency for $30,000. Smaller businesses such as Broad Waverly Staffing of Red Bank also have sued for unpaid bills.

Maletto further commented on his time with the tremendous success of the company and claimed it was valuable business experience that he never could of have received in a classroom. "Watching how the whole thing went down and gathering much more perspective I realized the journey just made me an even better person and businessman, no matter how painful the ending was."

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