How NutriSystem Got Fat And Happy

A Web-centric approach, real-people ads, and less real estate have profits taking off

Sheila Duren is about to make her television debut. After losing 72 pounds in six months on food she purchased from NutriSystem Inc. (NTRI ), the 37-year-old Dallas resident responded to a company-sponsored contest and became one of NutriSystem's newest models. In a series of TV ads that began airing this month, Duren is seen catching a bouquet at a mock wedding -- wearing nothing but a bikini and high heels. "It's been a long time since that many people have seen me in that little clothing," Duren says.

It's been a while since NutriSystem felt that sexy, too. The veteran diet-industry player was bankrupt a decade ago, then reinvented itself as an Internet distributor in 1999, struggling to sell its prepackaged meals through banner ads on Web sites. It took Net entrepreneur Michael J. Hagan to turn things around, ironically by shifting NutriSystem's ad budget from the Web to traditional media.

That's right: In an era when the market value of Google (GOOG ) outstrips that of Gannett (GCI ), Washington Post Co. (WPO ), and New York Times Co. (NYT ) combined, traditional media are still a powerful marketing tool. This year over 80% of NutriSystem's $35 million advertising budget will be spent on TV, radio, and print, even as an equal-size portion of its food orders comes in over the Web. "The Internet can make you a low-cost distributor," says Hagan. "But to create the urgency to order now, you need the imagery of TV and print."

The results have been as dramatic as Sheila Duren's weight loss. This year, NutriSystem sales are expected to hit $150 million, up from just $27 million in 2002 and passing Wall Street expectations from early in the year by 75%. The company should generate about $14 million in net profit this year. While many weight-loss players are feeding on the public's growing awareness of the perils of obesity, few are expanding as quickly as NutriSystem. Shares in the Horsham (Pa.) business have risen from $1.39 to almost $23 in the past year, making it one of the best-performing stocks on the NASDAQ.


Hagan, 42, is an unlikely evangelist for traditional media. He co-founded VerticalNet Inc. (VERT ), an operator of e-commerce sites for industries such as steel and wastewater treatment, in 1995. VerticalNet was briefly worth $11 billion in the late 1990s before falling to its current value of $30 million. "Volume didn't take off," he says, "because distributors and manufacturers' sales reps play such an important role [in corporate purchases]."

Founded as a diet centered on low-calorie protein drinks in 1972, NutriSystem once had 1,500 weight-loss centers in the U.S. before competition and overexpansion forced it into bankruptcy. Taken over by Chicago-based financier Michael E. Heisley, it began closing centers and shifting to a Web-based model -- but with limited success. Hagan heard Heisley was looking to get out and swooped in with an investor group that bought a 58% stake for $10 million in 2002.

Hagan focused on quality and convenience. Jay Satz, one of NutriSystem's original dietitians, was hired to revamp the menu. And instead of slogging to one of 1,200 strip-mall locations for a weigh-in and to buy the food, customers for $279 per month get the food delivered to their door and track progress online. It's the convenience customers respond to, says Hagan. "It's just an easy, breezy program!" coos one satisfied client in a new print ad.

NutriSystem has tapped into the mindset of the constant dieter. Not many want to spend time in group therapy or even be counseled one-on-one. Counselors are available by phone or online chat, but less than 20% of clients use them. Most seek support on the message boards of the company's Web site. Dieters on portion-control plans like NutriSystem's lose 5% of body weight after one year if they stick to it, according to many studies.

But of course, most don't. The average customer stays on the program just 10 weeks and loses about 2 pounds per week. About one-third come back within a year, many having regained the weight. "It's a sad thing from the consumer's standpoint," Hagan says candidly. "But it makes a very attractive business model."

Unlike competitors, Hagan steers clear of celebrity endorsers. Weight Watchers International (WTW ) features Duchess of York Sarah Ferguson, and Jenny Craig recently embraced Fat Actress star Kirstie Alley. NutriSystem's ads feature actual customers, such as Duren, who have shed pounds. "Celebrities are risky," Hagan says. "If they don't lose the weight [or relapse] it can work against you."

Hagan eats NutriSystem food at the office, but he's no zealot. He bought NutriSystem because he saw a valuable but underutilized brand. Hagan's not completely against brick-and-mortar assets, either. He recently purchased the 120-unit Slim & Tone fitness-center franchise and plans to expand it in part as a way to cross-sell the NutriSystem plan. After all, you can't run on a treadmill online.

By Christopher Palmeri in Los Angeles

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