The Flabby Business of Shrinking Waistlines
Business + Economy

The Flabby Business of Shrinking Waistlines


Weight Watchers (NYSE: WTW), which has helped millions of people shed unwanted pounds over the past five decades, has been doing some slimming down of its own – and not the healthy kind.

As dieters are increasingly turning to tech-based alternatives like activity trackers or diet and nutrition apps, attendance at Weight Watchers meetings has plummeted over the past few years and sales have slipped. The company’s online business hasn’t grown fast enough to make up the difference.

Even as the broader stock market posted strong gains over the past year, shares of the New York-based company have plunged nearly 50 percent. Wall Street analysts aren’t sure if the business will ever recover.

“The consumer has changed and we haven't kept pace,” CEO Jim Chambers, who joined the company in August, said during the company’s latest earnings conference call. “We need to turn this company inside out. Frankly, I'm not sure if it's inside out or upside down, I just know that to win, we need to change.”

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Americans spend roughly $66 billion annually on diets and low calorie products such as sodas. But when it comes to the actual process of dieting, many chose to do it on their own. Only 1 in 10 dieters works with a formal program, a trend evident in Weight Watchers’ financials.

The company is expected to report results for the fourth quarter and full year 2013 next month, but Wall Street’s expectations for the company are low.  Analysts expect double-digit revenue declines in the next two quarters and declines in profit. During the three months ended September 28, attendance at meetings plunged nearly 15 percent to 9.5 million, continuing a trend that began in 2011. The company’s North American meetings business reported revenue of $163.7 million, down 13.7 percent on a year-over-year basis. Sales at rose 1 percent to $125.5 million.

In announcing those results, Chambers also warned, “2014 will be a very challenging year.”

“The meetings business used to be their big money-maker,” says Kurt Frederick, an analyst with Wedbush Securities, adding that he expects the declines to continue for at least the next few years. “They have a lot of challenges.” Frederick has a “neutral” rating on Weight Watchers stock.

Wall Street analysts aren’t convinced yet that Chambers can help the company combat the surging growth of apps such as MyFitnessPal, which has 40 million users. These programs enable users to keep track of the calories they consume and some also work in conjunction with activity bands, the increasingly popular wearable gadgets that track physical activity.

A Weight Watchers spokesperson didn’t respond to emails and phone calls requesting comment for this story, but Chambers told analysts that, despite the “easily understandable appeal” of weight-loss apps, the company did not think they would solve the obesity epidemic.

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That may be, but Weight Watchers’ more traditional rivals have also been eating its lunch, even as they’ve experienced some troubles of their own. Nutrisystem (NASDAQ: NTRI) is in the midst of a turnaround and Medifast (NYSE: MED), another publicly traded diet company, expects 2014 to be better than last year as it shutters underperforming diet centers and converts other locations to franchises.

Under CEO Dawn Zier, Nutrisystem, which is based in Fort Washington, PA, has begun a push into retail stores that appears to be paying off. It tested selling prepared healthy meals last year in Walmart stores and plans to do a similar trial this year at Target. Shares of Nutrisystem have surged 65 percent over the past year.

In an interview, Zier argued that diet programs such as Nutrisystem could be competitive in the changing marketplace. “If it were easy (to lose weight), we would all be thin,” she said in an interview. “Not everyone thinks they can do it on their own and be successful.”

While admitting that the diet apps are useful, Weight Watchers has said that people are more successful at losing weight if they work in a structured program. That’s a view backed up by dieticians. “Mobile apps seem to be engaging people for short periods of time but unless they provide tips for behavior change, feedback on change, more incentives for change they tend to not provide long-term motivation,” says Connie Diekman, former president of the Academy of Nutrition and Dietetics, in an email. “Diet programs that include personal meetings foster longer term changes. The inclusion of mobile apps in diet programs seems to serve as an aid to change and keeping people involved yielding more weight loss.”

Weight Watchers' Chambers has tried to woo customers by making its program easier to use as it continues to cut costs and “reimagine” its core offerings. It recently announced Simple Start, a two-week long program aimed at people starting their diets that enables them to choose from a suggested menu of healthy foods.

Weight Watchers is also trying to encourage companies to offer its programs to their employees as part of their benefits. Companies are eager to control their health care expenses and the costs associated with obesity are staggering – $147 billion annually, according to data from the Centers for Disease Control and Prevention.

Colin Watts, the head of Weight Watchers Health Solutions – the company arm aimed at businesses – noted during a recent industry conference that Weight Watchers expects the business to grow from $75 million in revenue to $318 million in 2018.

Weight Watchers, though, will need to increase its appeal to consumers as well.

Unfortunately, much like dieting, that is easier to talk about than to do, especially given that Weight Watchers is competing against apps that serve a similar function at little or no cost. The pioneering weight loss company needs to change with the times or else growth will become increasingly hard to find.

This article has been updated to correct Nutrisystem's retail availability and testing plans.

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