Gaining Weight Costs, and For Some, So Does Losing It
Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to an article in the peer reviewed journal, Health Affairs, the medical care costs of obesity in the United States in 2008 were $147 billion. Currently over 1/3 of the adult population of America are obese (defined as having a body mass index greater than 30). If you add in the number of adults who are overweight (BMI > 25) you are now talking about over 2/3 of the adult population. The problem has grown steadily over the last two decades, as displayed in the graphics below.
PERCENT OF ADULTS WITH BMI > 30
The solution is more complicated than telling people to eat less fatty foods and exercise more. There are a myriad of environmental and genetic factors at play here, and banning supersized Coca-Cola (NYSE: KO) products in major cities won't address the underlying issue. The weight loss industry has ballooned to be valued at over $60 billion in 2011, and I'm going to consider two companies looking to take big slices of that pie.
Weight Watchers International (NYSE: WTW) is arguably the most iconic weight management program worldwide, with 1.3 million members attending weekly meetings and 1.5 million online subscribers. The company derives revenues from several sources, including meeting fees (54% of FY2011 total), products sold at meetings (16%), internet subscriptions and ads (22%), and licensing and franchise royalties (8%). Meeting fees suffered in FY's 2009 and 2010 but rebounded in 2011. However, this source of revenue has only grown at an annual rate of 3% since 2007. The real growth driver is WeightWatchers.com, which has grown sales at an annual rate of 27% since 2007. The website is of great significance because it's a key resource for attracting the elusive demographic in weight management services: men. The company began marketing directly to men in 2011 with TV spots featuring Charles Barkley, likely in response to competition from the next company up for discussion.
Nutrisystem Inc (NASDAQ: NTRI) deilvers pre-packaged meals to its customers coupled with online tools and counseling. The simplicity of the system and the absence of membership fees make it a compelling competitor in the market. They were also a first mover in marketing to men, using former NFL players in their ads. While I applaud their effort, the company has been in a steady decline over the last 5 years. Since 2007, sales have dropped nearly 50% and the ratio of marketing expense to sales has increased from 23% to 28%. The company has no diversity in its sources of revenue like Weight Watchers and has not expanded outside of the United States. The stock has been rightly punished over that period, dropping from a high in the low $70s to just $10.50 today. Despite all that, it's still trading at 27 times earnings. The opportunity for growth is there, but they have to show me things are turning around before I consider investing.
But is This Relevant?
While researching this blog post, I almost scrapped the idea because of a misconception I had. I thought that the majority of Americans suffering from obesity are in a lower socioeconomic status, and therefore can't afford weight management programs like Weight Watchers or Nutrisystem. According to a National Center for Health Statistics study released in 2010, that is not entirely true. The study found that among men, those with income levels greater than 130% of the poverty rate made up 71% of the total male obese population. The same income group for women made up 58% of the total female obese population. Even more telling, 33% of the obese male population and 29% of the obese female population had incomes greater than 350% the poverty rate.
Source: NCHS Data Brief No. 50 December 2010
I don't mean to diminish the real threat of obesity prevalence in low income groups. I merely intend to point out there is a significant chunk of higher income people who make up the target demographic for companies like Weight Watchers and Nutrisystem. There are other growth opportunities outside of these individuals in the form of corporate health programs. American Express (NYSE: AXP)announced in January 2012 that it will pay 100% of the cost for its employees to attend Weight Watchers meetings for a year, and also to cover 50% of the cost for dependents. The success of partnerships like this will encourage more companies to make similar investments and expose hoards of new customers to these weight management services. While the future may be bleak for the health of our country, it could be very bright for Weight Watchers and Nutrisystem.
drfrank1 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company. Motley Fool newsletter services recommend American Express Company and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
