A Health Play that Looks Lean and Mean
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One hardly needs statistics to see that the world population is gradually becoming more overweight (although statistics will be provided). More than 65% of Americans over the age of 19 are considered overweight and almost half of these are obese, and due to changing eating patterns and increasingly sedentary lifestyles, an estimated 3 billion people by 2015 will be among the overweight/obese categories.
Despite the increasing number of side effects from overeating, including heart disease, high blood pressure, and Type II diabetes, the general population does seem to understand the need for drastic lifestyle changes. The global weight management industry, commanded by large international players including Weight Watchers (NYSE: WTW), NutriSystem (NASDAQ: NTRI), and Jenny Craig, is now a gigantic, and ever growing, $60 billion behemoth.
Weight Watchers, by far the largest single player in the highly fragmented industry (market cap is nearly 9x larger than NutriSystem), has more than 45 years of industry experience and like other competitors, is continually tweaking its core program to become more applicable to and attract more members. With enough data now collected on its latest PointsPlus program, which was introduced in November 2010, it appears that the corporation has hit a marketing sweet spot that will lead to a long term period of increasing profitability.
Calorie Counting, In Disguise
One of the primary reasons dieters do not stick with most weight loss programs is that the use of strict meal schedules and other guidelines is inherently off-putting. Many studies have been conducted on the fulfillment of New Years’ resolutions (which nearly always contain “weight loss” in the number one or number two spot), and on average 50 – 75% of people drop resolution plans far before the year’s halfway mark.
Weight Watchers’ plan has always differentiated itself from NutriSystem’s scheduled meal platform with the use of a calorie counting system customized to an individual customer’s weight issues and goals, body type, and lifestyle. The new PointsPlus program is a suitable next step to the already successful program, and backs away from strict calorie counting. Under prior Weight Watchers plan rules, for example, the examination of the individual food items’ inherent makeup was not included (a 100 calorie apple and a 100 calorie cookie, essentially, were weighed as being equivalent).
The new program tends to add much more flexibility because, as the program advertises its “Don’t Eat Less, Eat Smart” tagline, members are encouraged to eat more healthy meals than considering the eating of few empty calories per day a success. On the program, a 10 point peanut butter and jelly sandwich with a serving of potato chips is equivalent to a larger meal consisting of a serving of grapes, a whole wheat pasta dish with grape tomatoes, black olives, and an oil/vinegar dressing, and a side bowl of black bean soup. More people will be attracted to such a program due to the lack of strict, unrealistic guidelines, and the ability to lead the semblance of a much more normal lifestyle.
More for You Means More for Us
The new system has not only proven its effectiveness in building Weight Watchers’ worldwide membership base, but it has also proven to be more effective in terms of a profitability standpoint.
Any organization’s goal is always to get more return from the same (or, ideally, less) investment, and for a membership fee-based company this translates into the attracting of a longer-lived customer base. The continual advertising to and attraction of new members who only have intentions of utilizing the program’s benefits for a short period of time will only act to destroy the entity’s cost structure over time – advertising as a percentage of revenues would skyrocket. Conversely, targeting a core base of captivated consumers who feel a connection to the program’s offerings and will utilize, and pay for, the program for an extended period of time will create an almost annuity-like revenue stream. Not only will these captivated customers have a much longer tenure than their counterparts, but they have less advertising costs: they generate annuity-like, as opposed to a short lived pay-as-you-go, revenue streams from X number of targeted advertising messages, and these customers are more likely to spread positive word-of-mouth advertising to friends and family members.
The new PointsPlus system, whether or not customers witness it on the surface, is inherently set-up to create this sort of emotional connection with Weight Watchers. As a modified calorie counting system, PointsPlus is meant to help users lose weight in a healthy, i.e. slow, manner. Simply counting calories and eating a small portion of bad foods may help a customer lose weight simply due to a lack of caloric intake, but the route towards weight loss is unhealthy.
Many fruits and vegetables on the PointsPlus program, for instance, represent little or no points, even if foods like avocados can contain nearly 300-400 calories per fruit. The PointsPlus program is a healthier way for customers to ease into better lifestyles, but the program rules make it a longer route towards weight loss than a traditional crash diet. For Weight Watchers, this means more weekly meeting for customers, more exposure that customers get to the products sold at the meetings (cook books, magazines, food products), and a higher probability that they associate the support that the meetings offer with weight loss success. For example, by exposing members to new friends (with the same weight loss issues), and meeting leaders (who are all past Weight Watchers success stories), the meetings act as a positive reinforcement system that keeps customers increasingly captivated the longer they participate. As mentioned, it is a lot less costly for Weight Watchers to pursue one long-lived customer than it is to capture several “revolving door” customers.
The figures from the new PointsPlus program show that more and more customers are becoming the former. Not only are paid weeks, attendance, and overall revenues from meeting-based fees up, but the purchase of longer term memberships has also drastically increased.
NACO - North American market
The growth in the paid weeks/attendance metric shows that people are paying for more weeks than they have actually used thus far – monthly memberships, as opposed to the pay-as-you-go-route, has become a much more popular option. Investors should not be surprised if revenues and profitability continue their swift increase over the mid-term, as longer term members naturally come with a higher revenue-per-member structure.
The launch of an all new website for the PointsPlus program has unlocked a new level of profitability for the company, as it acts to further captivate and transform consumers into longer-lived members. The website currently attracts more than 8 million visitors per month in the United States market, and the total number of members has increased at a 26% CAGR between 2005 and 2011. The most recent yearly increase, between 2010 and 2011, of more than 50% is after the launch of the PointsPlus program.
Once again, the website not only captivates members and gives them a route to finding new recipes, keeping track of their weight loss, and researching the point values for different foods, but it also represents an increasingly meaningful revenue stream for the corporation.
Gross margin on left axis, % Total Revenues on Right Axis
Internet-based revenues not only represent a larger portion of total revenues than they did in 2004, but gross margins have grown 15 percentage points over the same time period. As the website expands and an increasing level of new members start using its services, the web based services will continue to cost less and less to deliver.
Finding a one-size-fits all approach is naturally the most cost effective way for service providers to deliver their offerings on a worldwide basis – the costs of customization and new employee training to keep up with changing consumer wants/needs is costly. These costs especially hold true in Weight Watchers’ market, as all consumer types are extremely different in their current health state, their long-term health goals, the realism of their long-term health goals, and their different food tastes. The full fiscal year 2011 has shown that the PointsPlus program is the closest thing to a one-size-fits-all approach that fulfills both the wants and needs of the corporation and its membership base. Yes, the program is a much healthier way for consumers to lose weight than many of the alternatives available, but it also is going to provide shareholders with a growing stream of annuity-like revenues and a higher level of profitability that will allow more marginal dollars to fall to the bottom line.
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