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The American Weight Loss Industry: Built By Entrepreneurs

August 2018

 The American Weight Loss Industry: Built By Entrepreneurs

By John LaRosa, President, Marketdata LLC

August 2018

Summary

What do a New York housewife, a Philadelphia vacuum cleaner distributor, and Australian couple that ran a women’s fitness center, a New York doctor, an Idaho couple, an itch powder salesman, and a retail tech expert have in common? Hint: they all became very rich and founded companies that constitute a good part of today weight loss market, with sales of $2.7 billion.

The New York housewife was Jean Nidetch (founder of Weight Watchers). The vacuum cleaner distributor was Harold Katz (founder of NutriSystem). The Australian couple was Sid & Jenny Craig (founders of Jenny Craig). The New York doctor was Dr. Robert Atkins (founder of Atkins Nutritionals). The itch powder salesman was Daniel Abraham (founder of Slim-Fast). The Idaho couple was Sybil and Roger Ferguson (founders of Diet Center). The retail expert was David Humble (founder of eDiets.com).

Like so many other U.S. industries, the weight loss market was built by insightful and risk-taking entrepreneurs determined to build their personal brand and leave their imprint on the world. The diet market was not built by large corporations. That came later, to the point where the largest competitors now in this space are corporations and companies run by private equity firms. Rather, beginning in the 1960s and 1970s, the major weight loss companies were started by individuals.

This article will provide some profiles of these founding entrepreneurs, and how they shaped what is now a $68 billion business.

The Pioneers

Weight Watchers – Jean Nidetch

The company was founded in May, 1963 by Jean Nidetch, a housewife who began by holding meetings in her home and those of friends, in Queens, New York. The company became a publicly-held corporation in September, 1968, and 10 years later became a wholly-owned subsidiary of the H.J. Heinz Company.

Nidetch was born to ann American Jewish family in Brooklyn, NY, to David Slutsky, a cab driver, and Mae Slutsky, a manicurist. A graduate of Girl’s High School, Nidetch received a partial scholarship too Long Island University but was unable to attend due to a lack of financial resources. Instead, she enrolled in a business course at City College of New York.  When her father died in 1942, Nidetch dropped out and started working.

Nidetch's first job was at the Mullin Furniture Company in Jamaica, NY.  She later worked for Man O'War Publishing Company and the IRS.   Nidetch met her husband at the IRS.

As an overweight housewife with a self-confessed obsession for eating cookies, Nidetch had experimented with numerous fad diets before she followed a regimen prescribed by a diet clinic sponsored by the New York City Board of Health in 1961. After losing 20 pounds (9.07 kg), and finding her resolve weakening, she contacted several overweight friends and founded a support group which developed into weekly classes, and incorporated on May 15, 1963 into the Weight Watchers organization.

Weight Watchers was incorporated in 1963. With a system of point values assigned to foods, weekly weigh-ins, and rewards for pounds shed, the company grew exponentially. Nidetch became a celebrity, appearing on TV talk shows and running large meetings. By the time the Weight Watchers 10th-anniversary gala took place in Madison Square Garden in New York City, attended by some 16,000 members, the company had hundreds of franchises in countries throughout the world. Nidetch remained the company’s spokesperson and public face until her retirement in 1984.

"Food is not your remedy for problems. Food is not going to change your life. ... If you're going to lose weight, you have to do it by changing your way of thinking about food. It cannot be the highlight of your life."

In 1978, Weight Watchers was sold to the H. J. Heinz Company. She died on April 29, 2015, at her home in Parkland, Florida. at the age of 91

Once a completely franchised business, today franchisees account for less than 40% of system attendance.  While 30+ separate franchisees still operate in North America (and 16 in international markets), a few franchisees contribute most of the revenues.

The company operates a “closed” system--no outsiders can buy a Weight Watchers franchise.  It must be bought by the parent or by another franchise owner, and the cost, while not specified, is said to be in the millions.

Many franchisees in this system have perpetual contracts, going back to the 1960s.  In these cases, the franchise often is passed along to the children, or sold back to the parent firm.  The parent has the right of first refusal. Many franchises are said to be “family businesses” that typically incur smaller overheads than company-owned territories.

Weight Watchers in 2017 had sales of $1.3 billion, and it is the largest weight management company in the world.

NutriSystem – Harold Katz

Harold Katz was an entrepreneur from the Philadelphia area. He bought the Philadelphia 76ers of the NBA from Fitz Eugene Dixon Jr. in 1981. During his ownership, he brought the 76ers to their NBA Championship win in the 1982-1983 season. He sold the team to Comcast Spectacor in April 1996. Mr. Katz is also the founder and former owner of NutriSystem, and founder of the private equity firm H. Katz Capital Group.

Harold Katz began his career in the weight loss market in 1972 when he invested $20,000 to develop and open the first NutriSystem Center in Willow Grove, a suburb of Philadelphia, and a second shortly thereafter. When those two ventures proved successful, he made his move into franchising.

Way back when, Harold Katz was a vacuum cleaner distributor. Shape Up, as the Willow Grove, PA. diet center was then known, started franchising a year later. Weight Watchers had started a decade earlier offering AA-like support groups for membership fees. Katz wanted to sell products. He sold liquid protein served by a staff of doctors and nurses. However, liquid protein diets fell out of favor after some crash dieters developed fatal heart rhythms. Mr. Katz moved on. In 1977 he changed the name to NutriSystem and recruited Jay Satz, a Ph.D. in microbiology who worked for the Pennsylvania state department of health. Satz designed a line called "NutriSystem Foods of the Future 2000." Half the calories came from carbs, the rest from protein and fat. "

Mr. Katz, emboldened by his past franchising success, got into gyms, executive recruiting, dentistry, hair salons and cosmetics. The diversification, along with a bunch of franchisee lawsuits over excessively marked-up food, forced Katz to bail out. The second in charge, Donald McCulloch, led a leveraged buyout in 1986 for $74 million. McCulloch kept the food and centers and got rid of the rest. By 1990 NutriSystem generated $1.2 billion in sales.

In 1977, sales tripled when Mr. Katz developed a line of nutritionally-sound, pre-packaged, pre-measured diet foods to be sold exclusively to Nutri/System center clients. In January 1980, Mr. Katz brought the company public, and listed it on the New York Stock Exchange. Mr. Katz sold Nutri/System in 1986. At the time it was the largest medically-supervised weight control company in the world, with over 700 company owned and franchised centers nationwide.

The company's major breakthrough took place during 1978, when the Nu System Cuisine foods were introduced. The use of retort pouch and microwave technology allowed NutriSystem clients to enjoy full-flavored, fresh entrees that take minutes to prepare. This simplified the diet process significantly and spurred the company on to strong growth.

The company now sells its program directly to consumers via TV ads, print ads, and the Internet. Unlike Weight Watchers and Jenny Craig, it does not hold meetings in informal locations or in retail sites. Counselors do not serve customers in person but via phone and online chat. This is a major operational strategy distinction.

Savvy advertising and relentless data-crunching now fuel this lean company. AT&T runs its computers. An outside logistics outfit operates its five warehouses. A rotating cast of companies, including Hormel and Truitt Bros., make the food. In the past NutriSystem worked through franchises and retailers.

 

Jenny Craig – Sid & Jenny Craig

Jenny Craig is still one the largest U.S.- based commercial weight loss chains, in terms of sales and number of centers—600 franchised and company-owned centers worldwide and estimated revenues of $400-450 million.

The company was founded by Jenny and Sid Craig of Australia. Jenny Craig held several executive positions with Body Contour, Inc. and Gloria Marshall Figure Salons between 1970 and 1982. Sid Craig founded Body Contour, a weight loss and fitness center. In 1982, after building his company into a 200-center chain listed on the New York Stock Exchange, he sold the firm and with his wife, went to Australia to found Jenny Craig Intl. in 1983.

Sid and Jenny Craig relocated to Carlsbad, CA in 1985, and cut their last ties with the company. Sid Craig passed away in 2012. They kept control of 20% of the business in May 2002 when equity investors ACI Capital and Mid Ocean Partners came in to attempt a turnaround.

On June 20, 2006, Jenny Craig was sold to Swiss chocolate maker Nestle. It was a $600 million deal. Jenny Craig became a part of Nestle Nutrition, a division of the parent food company based in Switzerland, that sells baby food, energy bars and nutritional supplements. Jenny Craig’s financial success at that time made the company an attractive acquisition target.

Jenny Craig used to be a public-owned company but was acquired by an investment group, and taken private in 2010.  DB Capital Partners, the private equity arm of Deutsche Bank, was ACI Capital’s partner in the transaction.

When Jenny Craig and the Curves women’s fitness chain of 6,000 clubs merged in 2014, the transaction created a new company initiative that offers both fitness and wellness brands under one roof. However, the two brands operate independently. North Castle Partners, a private equity firm in Greenwich, CT, acquired the chain in 2012 for a tightly held sum. New owners Monty Sharma and Jonathan Canarick have a turnaround plan that involves strengthening existing circuit-training and weight-loss programs.

 

Diet Center – Sybil Ferguson

The Diet Center commercial chain was founded in 1970 by Sybil and Roger Ferguson of Rexburg, Idaho, and the first company franchise was sold in 1973.

Diet Center was in late 1993 operated by the parent firm American Health Companies of Pittsburgh.  The company was taken private on September 13, 1988 by the Thomas H. Lee Co. of Boston.  When Thomas H. Lee took over, it implemented a royalty structure that essentially split the company into two camps, a very destructive move.

Like several weight loss companies in recent years, this chain has been pared down as well. In 1988, Diet Center had more than 2,300 franchised locations--2,137 in the United States and 178 in Canada. By 1991, this number declined to about 1,200.

Most centers were located in professional office buildings, but some opened in retail "strip" malls as well.  Typically, a center was run by two people--one full-timer and one assistant.

Ms. Ferguson made millions by collecting royalties from the sale of supplements used in the program.  The program involved buying “cards” that contain supplements -- eight B-12 vitamins.  Apparently, Ms. Ferguson didn’t think it was acceptable for the franchisees to make a decent living, and many did not, ultimately exiting the system. This was one issue.

Another problem was that many contracts that existed were NOT written by Diet Center, but by sub-franchisors and their individual lawyers - a nightmare of inconsistency.  Pieces of territories were sold by the original owner to new ones, and no territory protection was available.  I guess you could file this company’s decline under mismanagement.

 

Slim-Fast – Daniel Abraham

The meal replacement Slim-Fast was first marketed in 1977 by the Thompson Medical Company. The meal replacement powder was the brainchild of S. Daniel Abraham, a former itch-powder salesman.  Slim-Fast became a huge hit after Wal-Mart Stores, among others, stocked it.

The biggest development in the meal replacements market in 2000 had to be the acquisition of privately held Slim-Fast Foods Company, the dominant player in this segment of the weight loss market.  Slim-Fast, based in West Palm Beach, Florida, was bought by Unilever for the huge sum of $2.3 billion, making Abraham a very rich man.  Only 6% of Slim-Fast sales at that time came from outside North America, offering Unilever an opportunity to push the brand through its global distribution and sales network.  It didn’t work. Unilever failed to support the brand with adequate marketing, coupled with the Atkins/South Beach Diet low carb frenzy of 2003-2005.  The decline was too much for Unilever, and it unloaded the brand to a private equity firm, Kainos Capital, for a lot less than the $2.3 billion it had paid.

Even before that, Metabolife was making a big competitive splash in the market with its Metabolife 356 diet pills, copied by a host of other firms. Retail sales of Slim-Fast in 2001 were as high as $627 million. Slim-Fast then controlled at least 45% of the U.S. meal replacements market. With a product line of ready-to-drink nutritional supplements, powders and bars, the company was a major player in the U.S. nutritional-supplement/meal replacement category.  The latest estimate for U.S. sales of the Slim-Fast brand is for $130 million (Chain Drug Review/IRI).

Slim-Fast sales more than doubled after Oprah Winfrey in 1988 used a medically supervised meal replacement, Optifast, and lost more than 50 pounds. Capitalizing on that momentum, the company hired a line of celebrities, including former New York Mayor Ed Koch and entertainer Kathie Lee Gifford to sell Slim-Fast.

There is no other segment of the U.S. weight loss market that has fluctuated so wildly and been so cyclical as “meal replacements” and “appetite suppressants”.  The market exploded in 1989, after Oprah Winfrey popularized liquid protein diets with Optifast, resulting in a spin-off effect into non-prescription, inexpensive products such as Ultra Slim-Fast, DynaTrim, and other brands.  Then the market contracted substantially in 1992, remaining flat basically until 1997, when sales took off again as Metabolife and other companies injected new life into the category and as dieters shunned Redux and phen/fen prescription diet meds in favor of do-it-yourself retail and mail order products.

 

Atkins Nutritionals  – Dr. Robert Atkins

Dr. Robert C. Atkins, one of the pioneers of complementary medicine in the United States and one of the most famous, successful and enduring nutrition experts of the last 40 years, died on April 17, 2003 in New York City at the age of 72, falling on an icy street in New York City and incurring a head injury, from which he ultimately died of complications.

Dr. Atkins was the founder of The Atkins Center for Complementary Medicine, in New York City, and Atkins Nutritionals, Inc. He also authored more than a dozen health and nutrition books, including: Dr. Atkins’ New Diet Revolution, one of the 50 best-selling books of all time, and Atkins for Life.

Dr. Atkins was born and raised in Ohio and majored in pre-med at the University of Michigan. He then received his medical degree from Cornell University Medical School in 1955. After a residency in cardiology, he moved to New York City where he later founded The Atkins Center for Complementary Medicine, one of the largest facilities of its kind in the world.

The low-carb philosophy actually dates back as far as 1972 when Dr. Atkins published his bestselling book, “Dr. Atkins New Diet Revolution”. However, the “movement” really began to take hold in 2002 and accelerated after his death. As Atkins Nutritionals grew, it poured more funds into R&D, introducing many new products to retailers. From its roots in mainly health food stores, Atkins branched out to mainstream retailers. Then, a flood of other low-carb products were introduced as manufacturers scrambled to take advantage of the hot trend. The peak of the low carb eating trend was reached in August 2004. Low-carb diets such as Atkins had become so popular because dieters tend to lose more weight more rapidly in the early “induction phase” than other plans. This is what most dieters want—quick results that motivate them. Such dieters tend to be encouraged by their quick success and continue with the diets over the next several weeks and months7.  In 1989, Dr. Atkins founded Atkins Complementary Formulations (changed to Atkins Nutritionals, Inc. in 1998).

Roark Capital bought Denver-based Atkins Nutritionals for an undisclosed sum in Dec. 2010, purchased from North Castle Partners. Previously, Atkins Nutritionals was acquired by Parthenon Capital and Goldman Sachs Capital Partners in 2003, for about $460 million. Atkins Nutritionals was then the marketing arm of a corporate organization that included the New York-based Atkins Center for Complementary Medicine, established in 1976, and the non-profit Dr. Robert C. Atkins Foundation, established in 1999.

No company presents such a vivid case study of how a diet company’s fortunes can rise and fall so quickly. Dr. Atkins has been writing books and espousing his controversial low-carb eating theories since the 1970s. He had followers for decades.  But, low-carb enjoyed a renewed interest and tens of millions of followers in 2004, after several high profile scientific studies were released that endorsed low-carb/high-fat diets.

The company’s product line grew and Atkins low-carb products began appearing in supermarkets and grocery stores, as well as via “Atkins Certified Retailers”. Low-carb eating became an international phenomenon, affecting bakeries and growers of rice and potatoes in the United States and worldwide. In addition, most of the large commercial diet chains such as Weight Watchers saw their enrollments decline. Meal replacements sales by Slim-Fast were hit very hard.

How fast things can change. Analysts estimated that the number of low-carb dieters peaked at 9% of all adults in February 2004, and fell to just 2.2% by mid-2005. Atkins Nutritionals laid off hundreds of employees and reported a net loss of $340 million in 2004. At one point, things were so bad that unsold food products had to be donated to charity.

Finally, with $300 million in accumulated debt, the firm filed for bankruptcy in August 2005, blaming the rash of low-carb products released by large food manufacturer competitors.

Nutrition Business Journal had estimated the company’s sales as high as $550 million in 2005, falling to $180 million in 2006 and $170 million by 2007. Published articles estimate 2016 sales of $130 million.

 

eDiets – David Humble

eDiets.com, Inc. was one of the first companies to “digitize” weight loss programs – an online service offering professional dietary, nutritional, and exercise advice. The company was formed in 1997, just a few years after the Internet went mainstream with the general public. Originally called Practi-cal, the original 12-week weight management program was based on Weighting For Wellness, written by Donna DeCunzo, RD. The program incorporated nutrition, fitness, behavior modification and stress management as part of its tenets. Steve Johnson programmed the database and Dave Humble wrote the business plan. eDiets based customer programs on a large diet and food information database which allowed customers to personalize diet plans to their own preferences.

In 2006, a 45% stake in eDiets was purchased by Prides Capital, a special investment firm that invests in companies poised for rapid growth. eDiets also announced the launch of a meal delivery service called Deliciously Yours.

Many credit Mr. Humble for eDiets success. Not only did he have the tech background, but he managed to attract very competent staff in marketing, operations and other disciplines. One of the key features of eDiets was the online community (forums, groups). Here. Dieters would share their obstacles, goals, and achievements with other like-minded women. The diet plans almost became secondary in importance. This took place at a time when Facebook was just emerging as a social media vehicle (late 1990s-early 2000s).

David R. Humble served as Chairman of the Board of the now defunct diet company since November 1999 and as CEO of the company from November 1999 until December 2005 except for the period from August through December 2000 when David J. Schofield was the Chief Executive Officer.

From 1985 to 1987, he was the President, CEO and Director of CheckRobot, Inc., which developed a self-service checkout system for supermarkets. From 1968 to 1985, he served in a number of marketing and operations capacities with Sensormatic Electronics, which develops and markets electronic security and surveillance products, including V.P. Manufacturing and V.P. Future Products. Mr. Humble holds a number of technology patents, including the original electronics security tag found on garments in retail stores worldwide to protect against shoplifting.

 

Physician’s Weight Loss Centers – Charles Sekeres

The Health Management Group is a “triad” of companies that is owned and operated under an umbrella parent company. It consists of three weight loss chains: Physician’s Weight Loss, Diet Center, and Formu-3 International.

Physicians Weight Loss Centers was founded in 1979, by Charles Sekeres, who felt that the credibility of a medically supervised diet, combined with daily attendance and supervision, set his centers apart from the rest. It may also have contributed to the company’s bad fortunes, since medical supervision means higher costs to clients (which hurt during the last recession). This chain now consists of only 50 or so clinics.

Mr. Sekeres has always been the dominant force in running this privately-held organization and setting its policy and strategy.  He created an “umbrella” firm (Wellness Group Acquisition Co.), under his ownership, to expand and take over the operations of Diet Center, which was in trouble. Mr. Sekeres, President of the then rival 100-unit Physician’s Weight Loss Centers chain, completed a deal on Dec. 9, 1994 whereby an “interim” company called Wellness Group.

Acquisition Co. purchased the franchise rights, trademarks, and intellectual property (such as program names, etc.) of Diet Center, Inc. The deal was for an unspecified amount of cash.

Apparently, Sekeres had a sizeable cash hoard left over from the 1980s. He was at one time also in the picture for the public auction for NutriSystem.  Sekeres also had at one time a company in Florida to market a private label line of Gourmet Fresh Foods.

 

Conclusions

Today’s American weight loss market came into being from a handful of entrepreneurs that formed diet companies mostly in the 1970s. They saw a growing need for women to manage their weight and health better, and they each had their own idea of how to help them do it. Some came from the medical side, but most were oriented to retail and commercial ventures. They had widely varied backgrounds, but most of these pioneers seem to have come from the Northeast United States.

All became multi-millionaires and at least one became a billionaire. National retail sales of diet products was the ticket for some, and growth by franchising was the golden goose for others. Most of these titans also had very large egos and were fiercely competitive. Perhaps that’s why the weight loss industry has yet to form a national trade association.

Some of these pioneers basked in the limelight of the media, freely granting interviews and embracing their public exposure: Jenny Craig, Dr. Robert Atkins, Jean Nidetch. Others chose to remain in the background, rarely granting interviews and shunning the media: Charles Sekeres, Sybil Ferguson, Daniel Abraham, Harold Katz.

The companies that this group of entrepreneurs founded are today either large public corporations or they are owned by private equity firms. However, as history has proven in the dynamic weight loss market, size does guarantee success. Some iconic weight loss brands have been run into the ground once acquired by conglomerates. Witness Nestle’s failure with Jenny Craig and Unilever’s fiasco with Slim-Fast. And some have lost their way periodically, as less-than-able CEOs steered the company in the wrong direction or did not change with the market or their customers. Even the leader, Weight Watches, is not immune to such derailments, as it stumbled and lost revenues and subscribers from 2013 to 2016, under a new CEO Jim Chambers, after the departure of former CEO David Kirchoff.

Many times, the most innovative and well-run organizations are run by entrepreneurs that have a passion for what they do, run lean organizations, attract the best talent, and who respond to the needs of the customer.

 

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: john@marketdataenterprises.com, or by phone: 813-971-8080. The Marketdata website is: marketdataenterprises.com, where John has a business blog.

References

“The U.S. Weight Loss & Diet Control Market”, May 2017, market research report by Marketdata LLC (marketdataenterprises.com), and 12 prior editions dating back to 1989

10Ks and Annual Reports of public weight loss companies (stock symbols: WTW, MED, HLF, NTRI)

Quarterly Conference calls with stock analysts, public weight loss companies

Wikipedia

Company Franchise Disclosure Documents, Frandata

Forbes Magazine

Published articles and Internet searches, Press Releases

Nutrition Business Journal

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