The Four Weight Loss Business Models
By John LaRosa, President, Marketdata LLC
In the 30 years that I have tracked the weight loss market as an independent analyst and author of 50+ market research studies about this industry, I have identified five basic business models. Trust me when I say I have seen it all—the successes and the failures, through decades of expansions, recessions, wars, diet fads, government regulatory actions, and shifting consumer trends. This article will define each, pointing out the respective advantages and disadvantages of each model, which may be instructive for entrepreneurs looking to enter the market.
Three of the weight loss models used are commercial in nature, and one is based on a medical orientation. Breaking down these models further, one can also classify them as franchises, company-owned centers, or licensee variations.
The Commercial Brick & Mortar Center Model
This model was used heavily during the high growth years of the United States diet industry – the 1980s and 1990s.Bback then, there was a lot less competition from the Internet, MLM distributors, doctors, apps and other online services. Most of these physical centers, and there were a lot of them, required the dieter to visit the center once per week, to attend a one-to-one counseling meeting with a “consultant” or “coach”, or attend a group meeting.
Jenny Craig use the one-to-one approach, while Weight Watchers used (and still uses) the group meeting approach. These centers were numerous: Jenny Craig operated around 600 of them, NutriSystem had about 500 at one time, Weight Watchers had 4,500 informal meeting sites (800 of which are leased retail locations in strip malls), LA Weight Loss Centers had about 800, and Diet Center at one time had more than 800 sites, plus some smaller chains. That’s about 7,000 centers!
So, what happened? Well, Weight Watchers still uses about 3,500 informal meeting sites (combination of leased retail sites, churches, schools, at-work employer sites, community centers, etc.) and Jenny still has 600 centers, but LA Weight Loss closed virtually all its centers, NutriSystem shifted to a direct-to-consumer virtual model using a TV, online and print advertising approach without in-person counselors, and Diet Center closed nearly all of its centers. Why? Simple, the overhead cost was getting too high, and more efficient delivery methods (i.e. the Internet) were emerging.
Most of the companies above grew their number of centers via franchising. However, franchise owners got more savvy and more rebellious. They formed franchisee associations to challenge corporate ad campaigns and marketing moves. They also got tired of paying ongoing royalties and being restricted in how they could customize their services to local tastes. By the year 2000, franchising was not being used much at all in the diet industry.
In their heyday, commercial brick & mortar diet centers were generating a net profit margin of around 18% of sales, but with more competition this margin began to shrink.
The Commercial Direct-To-Consumer Virtual Model
This weight loss business model does not rely on in-person counseling, nor physical diet centers. This is the model used by NutriSystem and weight loss websites, where dieters can purchase meal replacements and other diet products (i.e. shakes, bars, and supplements). Here, you will not meet with a counselor in person. You may get some support and coaching by phone, email or text messages. Interestingly, NutriSystem reports that despite providing free telephone support by coaches as part of the program, only 20% of customers actually use it.
NutriSystem has been in the weight loss business since the early 1970s, but shifted away from the brick & mortar model soon after the 1990s were over, preferring the less overhead-heavy and more profitable virtual approach. However, the overhead savings were replaced with heavy TV and online advertising. The firm spends more than $200 million annually on such marketing.
Nevertheless, it doesn’t have to worry about negotiating leases on retail strip mall sites, and staffing them with 3-5 people that get paid a salary plus benefits. Their website and phone are open 24/7 to accept orders. Other diet industry competitors that use the virtual model include Atkins, Slim-Fast, Jillian Michaels, The Biggest Loser, and for a while, eDiets (no longer in business).
The Multi-Level Marketing Model
The MLM model has emerged as a significant player in the U.S. diet industry. In fact, companies such as Herbalife have achieved North American weight loss product sales of $600 million per year with this model. Herbalife has literally hundreds of thousands of independent “distributors” that sell its weight loss shakes, bars and supplements. They operate “nutrition clubs”, with meetings held in private residences, similar to what AVON and AMWAY have done for decades.
While some has criticized MLMs as being nothing more than pyramid schemes (note the battel waged against the firm by hedge fund manager Bill Ackman), the FTC and other regulatory bodies failed to find evidence of this. As a result, there are approximately two dozen MLMs operating today in the United States that sell weight loss products. Some, other than Herbalife, have generated substantial revenues, such as Isagenix, USANA and Visalis. Many of these MLMs are headquartered in Utah, where regulations are somewhat lax, and many derive a significant share of their revenues from non-U.S. operations. In fact, most of Herbalife’s $5 billion in sales come from overseas.
Two of the four publicly-owned weight loss companies have grown to significant size via the MLM growth model: Herbalife, already mentioned, and Medifast. Medifast has approximately 19,000 “health coaches” that act as distributors of their weight loss products. The company just reported strong second quarter 2018 results, and is on track to post revenues of $440 million in 2018. This likely equals or surpasses Jenny Craig’s revenues. The Optavia MLM division of the company now accounts for more than 75% of total revenues, with the remainder coming from direct-to-consumer sales and a handful of franchised medical weight loss clinics (a vestige of past operations, being phased out). Jenny Craig is a private company and does not disclose its sales, but Marketdata estimates revenues at $400-450 million based on historical data and its number of centers open.
The MLM model has the obvious advantage of not having to operate brick & mortar weight loss centers with accompanying staff. In addition, since the distributors are classified as independent contractors, they are not paid any benefits. So, savings are incurred on two levels. Multi-level marketing has become an attractive full or part-time employment option for many, since the start-up costs are minimal (a few hundred dollars for a start-up kit and some inventory). No license, degree, or certification of any kind is needed, just the desire to earn money. Training is provided by the company. And, you do not have to purchase a franchise or license. As a result, its easy to recruit large numbers of distributors.
The Medical Brick & Mortar Model
This weight loss business model is now being used by physicians, nurses in private practice, by weight loss clinics, and by hospitals. Here, the dieter does visit an MD’s office or clinic in person, gets counseled, picks up diet foods, supplements or meal replacements, and they may obtain appetite suppressing medications. The patient usually comes in once a week and sees an MD, Physician Assistant, Registered Dietician or Nurse.
There are a significant number of chains or multi-site operations using this model: Lindora Clinics, Medi-WeightLoss Centers, Ideal Protein, Physicians Weight Loss, Smart For Life, Let’s Lose, Nuviva, The Centers for Medical Weight Loss, JumpStart MD, Dr. G’s, and others. Most of these operations have 50 centers or less. Most are also franchises.
Physicians have more recently discovered that weight loss programs can be lucrative. As American obesity levels remain constant or increase, more patients are in need of higher level staff (medical professionals) that can handle high cholesterol, diabetes, pre-diabetes, food allergies, medication-induced weight gain, thyroid issues, and hormonal imbalance due to menopause. The commercial chains can’t deal with these issues.
Since MDs are newer to the weight loss industry than their commercial counterparts, there is a learning curve involved, related to obtaining basic business and marketing skills. MDs simply don’t possess them. Therefore, they are more likely to choose a turnkey program such as a license or franchise, where the tasks and strategies have been standardized for them. Thus, the franchise model is likely to be used by medical professionals probably for the next ten years at least. They are playing catch-up.
In addition, resources are very scarce for MDs that want to add a weight loss program to their practice, should an MD want to go it alone, without a franchise. There are virtually NO training programs in how to set up a medical weight loss program and operate it profitably offered by the AMA, the Obesity Medicine Society, or any other clinical groups. To our knowledge, there are no seminars, workshops, online courses, or webinars on this topic either. Marketdata, which does provide such training, is only aware of two other consultants nationwide that provide step-by-step weight loss business training for medical professionals.
Consequently, most medical pros are left to fend for themselves or go the franchise route. Too bad, since many MDs are looking for a career shift or extra income, and adding a medical weight loss program can add $250,000 per year for a part-time venture, and realistically add $1 million or more for a full-time operation. This lack of training in business for MDs is expected to slowly change, as more obese consumers demand medical weight loss services.
One of the main advantages of the medical weight loss model is that physicians have an already-established database of patients. They likely have been seeing patients for years and have their trust and rapport. So, physicians don’t have to spend a lot of money on marketing to attract customers. Rather, once they have their ducks in a row, they just inform patients by email or printed brochures, or a waiting room video, that their practice has added a weight loss program. This represents a major savings.
By now, it should be apparent that there are several models to achieve success in the weight loss industry, each with their own advantages and drawbacks. Weight Watchers has become the leading weight loss company with its group meeting model, with sales of $1.3 billion. NutriSystem uses the virtual model with no centers to post sales of nearly $700 million. Jenny Craig uses the one-to-one brick & mortar model to post estimated revenues of $400-450 million. Herbalife uses the MLM model to generate weight loss sales of about $600 million, and Medifast uses the MLM model as well to generate $400+ million in annual sales.
It should also be clear that what most of these business approaches have in common is a flexible or low-overhead model. It’s simply more difficult and less profitable today to operate brick & mortar weight loss centers. The Internet has changed the delivery system for so many services, and weight loss is one such example.
What is also true is the fact that just choosing one of these models is no guarantee of success. In the weight loss market, the most important determinant of success is the quality of top management. Without a strong CEO and top management that truly understands weight loss and the importance of being innovative and customer-driven, with a marketing orientation, there is little chance of long-term success. The program must deliver, be easy to use, be competitively priced, and be convenient and easily accessible for consumers.
The weight loss market is littered with failed companies. In virtually all these cases, bad management was the cause of the downfall. LA Weight Loss, for example, used deceptive ad campaigns. It advertised on TV that customers only had to pay $7 per week. Sounds cheap, right? What they didn’t mention is that they wanted you to pay for all 52 weeks of the year up front – or $350. In addition, they neglected to disclose that high-priced supplements were a big part of the plan. The total cost of the program ballooned to an average of $800+. So much for transparency. You can only fool people for so long. The negative comments on the Internet spread, resulting in the steady decline and closure of their centers.
eDiets went downhill when their long-time CEO, David Humble, left the company in 2005, along with many other top managers that knew the business well. They had forged affiliate branding relationships with many strong brand names (Atkins, Dr. Perricone, Slim-Fast, Bob Greene), but failed to renew these ties. At the same time, more competing weight loss websites began to appear that provided advice and meal plans, many for free (Sparkpeople.com). It’s tough to compete with free. This combination led to the company’s decline. Diet Center held onto the costly brick & mortar model too long and didn’t go online fast enough. In addition, many of their centers were run by part-timers that were dabbling in the business but who were not fully committed.
About The Author
John LaRosa, BS, MBA, is a 29-year year weight loss market analyst since 1989, consultant, author and speaker, and is President and Research Director at Marketdata, LLC, Tampa, FL. He is the author of 50+ in-depth weight loss industry studies, and Marketdata operates the free weight loss news website called DietBusinessWatch.com. He can be reached by email at: firstname.lastname@example.org, or by phone: 813-971-8080. The Marketdata website is: marketdataenterprises.com, where John has a business blog.
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