Weight Loss Industry a Loser
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In western countries, more and more citizens are becoming like their government...overweight. A diet is required and investors could logically assume that companies that offer weight management aids and services would benefit greatly. But not so fa(s)t.....
Indeed, according to Euromonitor, the weight management industry is a substantial one with annual sales in the $11 billion range. This covers a wide range of sectors as diverse as pharmaceuticals, food, cosmetics and media. The industry though has one major problem. It is rather faddish with customers moving on from wonder pill to wonder pill or celebrity diet to celebrity diet. This makes it very difficult for companies in the sector to maintain steady sales and earnings.
Two companies immediately come to mind when speaking about weight loss: Weight Watchers International (NYSE: WTW) and Jenny Craig, which is owned by the Swiss food giant, Nestle ADR (NASDAQOTH: NSRGY). Both companies are similar in that they combine lower calorie food replacement with classes aimed at promoting behavioral change (eating habits). Both are also alike in that sales tend to fluctuate wildly from year to year. Recent weakness in sales at these firms has been attributed to economic weakness in Europe and the United States.
Next to consider in the sector are pharmaceutical companies. They continue looking for miracle diet pills, but have usually only found money losers. Look at GlaxoSmithKline PLC ADR (NYSE: GSK). The company thought it had a winner with its fat-absorbing drug called Alli. The only problem is that the drug had an unfortunate side effect – the sudden, almost uncontrollable urge to go to the bathroom. GSK has been trying to unload Alli, but manufacturing issues have put that on hold for now.
Of course, the risk can be bigger than just holding onto something for a while that you want to sell. Just ask the maker of the “fen-phen” diet pills, Wyeth (now part of Pfizer), and the $13 billion litigation bill it got after users experienced heart valve problems that were linked to the drug.
Food companies have not fared much better than the pharmaceutical firms. Like Nestle with Jenny Craig, Unilever NV ADR (NYSE: UN) has also struggled making profits from its diet business. Its purchase of SlimFast in 2000 was at the peak of popularity for the Atkins diet, which has since waned. Five years after paying $2.3 billion, Unilever took a large goodwill writedown on that business since it was worth much less. Sales have never rebounded to their past heights either.
The takeaway from all of this is that the weight loss industry is one that is always looking for the next miracle diet or the next miracle pill. The latest silver bullet is supposed to be a drug called Qnexa from Vivus (NASDAQ: VVUS) that is supposed to melt away 10 percent of a users' body weight. Qnexa awaits approval from the US Food and Drug Administration.
The problem is that, despite the hopes of overweight people, no such miracle cure will likely ever be found. This in turn means earnings from the weight loss industry will remain volatile to say the least. This will have little effect on the big players in the drug or food industry like GSK or Nestle.
But companies like Weight Watchers International are not good investments. Just ask their shareholders who have seen the stock drop about a third from its 52-week high. That's not the kind of loss one looks for from the company.
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