Piling on the Profit
There's no slimming down for companies selling diet products
Summer weather has always spurred on dieters trying to lessen the humiliation of appearing in a bathing suit. But with more Americans fatter than ever, weight loss has become a year-round preoccupation--and a source of profit for a $40 billion industry.
"When you look at the need, that 60 percent of us are overweight, the opportunities are enormous," says Anna Silberman, CEO of Lifestyle Advantage, a new for-profit joint venture of physician Dean Ornish, of heart-health fame, and Highmark, a Pittsburgh-based health insurer. The growing demand for weight-loss products and services has boosted the stock of leading player Weight Watchers International and has attracted new deep-pocketed investors. Multinational food giant Unilever purchased Slim-Fast in 2000, while private investors have taken stakes in Weight Watchers and Jenny Craig. "This is a big space," says financier Rob Sharp, whose MidOcean Partners invested last year in the troubled Jenny Craig chain. "I don't see the need going away."
The weight-loss industry encompasses a motley crew of companies with widely differing approaches, including group and individual support programs, diet pills, and meal replacements. "The industry is inhabited by thousands of companies, some credible, some outright frauds," notes John LaRosa, an analyst at Marketdata Enterprises, a research firm.
Out of the zone. Even with established companies, the business is rough and tumble. Just ask Barry Sears, who has sold 4 million books promoting the Zone, a diet that balances protein and carbohydrates at each meal. He founded ZonePerfect Nutrition Co. seven years ago but lost control to the outside investors and professional managers he brought in. This year the company is selling $100 million of food products under the ZonePerfect brand, but Sears says its nutrition bars don't adhere to all his Zone diet principles--and he isn't benefiting from the firm's recent torrid growth. "There's not a thing I can do about it," says Sears, who is a biochemist. ZonePerfect counters by saying that all its products are in compliance with the Zone. "All a consumer needs to do is read our contents label," says ZonePerfect's chief operating officer, Paul Pruett.
If one motto sums up the industry, it could be "different strokes for different folks." At No. 1, with revenues this year expected to reach $1 billion, is 40-year-old Weight Watchers, with its program of weekly meetings and group support. Next comes Slim-Fast, the maker of bar and shake replacement meals; it's blessed with a core of loyal fans who account for half of its annual $900 million in sales. The third-largest firm, but shrinking rapidly, is Metabolife, the formerly fast-growing seller of diet pills. Furor about ephedra, the chief ingredient in its blockbuster product Metabolife 356, reached a crescendo earlier this year, when the herb was implicated in the death of Baltimore Orioles pitcher Steve Belcher. The Food and Drug Administration is expected to issue new regulations soon on the marketing of ephedra, though an outright ban is considered unlikely.
The industry is riding a wave of scientific findings about the harmful effects of obesity, which add a new sense of purpose to the quest of looking good. According to market research firm NPD Group, 63 percent of U.S. adults would like to lose 20 pounds, the highest percentage in 20 years of counting. "Fifteen years ago no one ever said, `I want to lose 15 pounds because diabetes runs in the family,' " says Karen Miller-Kovach, chief scientific officer at Weight Watchers. "Back then you'd hear, `My husband says my butt is blocking the TV.' "
On a roll. This shift gives Weight Watchers an advantage over competitors who make too-good-to-be-true claims, such as "Eat as much as you want and still lose weight" (box). After floundering in the mid-'90s under food giant H. J. Heinz, Weight Watchers was taken over in 1999 by a European buyout firm that installed as president Linda Huett, a former Yale drama major who had risen through the ranks to head the company's British operation.
Now, in this lackluster economy where growth companies are hard to find, Weight Watchers is on a roll. Attendance is way up, operating income has more than tripled over the past two years, and the company sports a fat 37 percent operating margin. The business oozes cash: Members pay their fees upfront, so there is no need to bill them, and most meetings take place in low-cost leased premises. Since the company's stock became available in a public offering in late 2001, its price has soared. American women lap up the firm's celebrity spokesperson, the duchess of York, Sarah Ferguson, and the "triumph over adversity" tale of how she regained dignity after a failed high-profile marriage. Most important, "she lost weight and has kept it off for seven years," says Eliot Glazer, Weight Watchers' vice president of marketing.
Low-carb pasta? But Weight Watchers faces a challenge from what is the hottest supernova in the weight-loss sky these days: Atkins Nutritionals. That's the company founded by controversial cardiologist Robert Atkins. By the time of his death in April from injuries suffered in a fall, Atkins was no longer a pariah in medical circles (recent positive studies have boosted the credibility of his high-fat, low-carb diet). Trying to quickly capitalize on the favorable press, the company has launched dozens of products in the past two years, including a low-carb bread and, soon, pasta. Last year, sales topped $100 million, and Matthew Wiant, senior vice president of marketing, says sales will double this year. Control of the company has passed to Atkins's widow, Veronica. The managers Atkins hired seem almost relieved to have the focus shift away from the unpredictable founder. "His presence is not necessary for us to get to where we need to go," says Wiant. "We want to become a major player in the food industry, on the order of Pillsbury, Quaker, and Nabisco." Already, Atkins Nutritionals has broken beyond its original natural-food distribution channel and into supermarkets and WalMart.
But success is no sure thing. The low-carb lifestyle is pricey: Atkins's pasta side dishes, such as fettuccine Alfredo, will cost $5.99 for a 12-ounce box. And while Atkins's soy-based, low-carb version of a KitKat bar, called Endulge, tastes yummy, fans of real ice cream are unlikely to agree with Wiant that Atkins's is "as good as Haagen-Dazs."
The latest arena of competition: the Web. Studies show that dieters benefit from personal support, so even companies such as Slim-Fast, which rely on selling products, are investing in Web sites with chat rooms and recipes to build brand loyalty. "The Web offers the chance to give more interactive tools than any brochure," says Michiel Kruyt, vice president of marketing.
Ediets.com, a publicly traded company, has emerged as the single largest dieting location on the Web. Ediets offers bulletin boards for dieters facing specific challenges, such as "suddenly single" and "new mothers," as well as personalized meal planning and shopping lists. It recently added the Atkins and Zone diets. Revenues, $30 million last year, come primarily from the $5 a week it charges members. "The Web gives dieters the convenience and privacy they won't get at Weight Watchers meetings," says CEO David Humble. (Not to be outdone, Weight Watchers ramped up its online presence in 2000 by licensing its name to a separate dot-com company, WeightWatchers.com, of which it owns 38 percent.)
By contrast, after zigzagging through the 1990s, Jenny Craig, which offers one-on-one counseling together with prepared foods, is trying to stage a comeback. It faltered by diluting its emphasis on "real food" when bars and shakes became popular, and by hiring Monica Lewinsky to do a TV commercial. That angered some of its own counselors, who believed the former intern was too naughty a role model. The chain also blurred its image by aligning itself with doctors who prescribed the drug fen-phen, which proved to have harmful side effects.
Today, the big-gest risk facing the weight-loss business would be a new, effective prescription diet drug. Sales of the two leading drugs, Abbott Laboratories' Meridia and Hoffman-LaRoche's Xenical, have been a disappointment--in part because of the legacy of fen-phen. Doctors are nervous about prescribing obesity drugs because of liability, and the weight loss that today's drugs offer is modest compared with the poundage dieters shed using fen-phen. There are more than a dozen diet drugs in development. But no magic pill is likely anytime soon to put the diet industry on the defensive.
This story appears in the June 16, 2003 print edition of U.S. News & World Report.