Key Points:
1. Conventional wisdom tells us the down economy should negatively impact Weight Watchers International and businesses in its category.
2. However, Weight Watchers has positioned itself ideally in the public mind and within the medical community.
3. When the time comes (sooner than we think) for sliding-scale, health-impact pricing, Weight Watchers will benefit from insurance plans that adjust premiums based on health metrics.
We all know what is supposed to happen in a “down” economy.
We all know discretionary purchases will take a hit. We all know recurring monthly fees in the household budget will get another look. We all know people will forgo expensive healthy food in favor of cheaper options and greasy comfort food.
Apparently, investors and analysts also know those things and have pummeled Weight Watchers International stock (NYSE:WTW) over the past six months; it’s down some 40 percent.
All of that begs the question: Are the analysts correct?
Perhaps. First, Weight Watchers serves a “discretionary” niche market. Diet plans—as a segment—do well when the economy does well. As people have extra money, and also feel secure in their finances, they are more likely to engage in self-actualization behaviors. Weight loss is one of those. While we might think weight loss is a goal for many people, trend watchers know that in a macroeconomic sense, we need to be in a good collective mood to get started.
That feeling of psychological stress that comes from a tough economy leads directly to the second reason the Wall Street intelligentsia is down on WTW. Discretionary income issues aside, when people are stressed, they head to comfort foods. Those same analysts have boosted the stocks for snack cakes, fast food, and soft drinks.
Finally (and perhaps some consolation to the Weight Watchers board of directors), many major stocks are in the tank, and many for little or no good reason.
Let’s stop there for a moment. Does this just seem like a more detailed recitation of what we all know? Aren’t the analysts supposed to know things we don’t know?
Do we need to look a bit deeper? Perhaps beyond what we know?
I think we do. Three things come to mind in this case: The first relies on business fundamentals, the second on brand positioning, and the third on a fundamental shift in the health insurance business model.
Let’s start (briefly) at the beginning.
Founded in 1963 by Brooklyn homemaker Jean Nidetch, the now-public Weight Watchers International employs over 45,000 people in over 30 countries. Back then, we really didn’t measure BMI (body mass index) as a public health metric, and few outside of the medical community understood the technical definition of “obese.” Those were the days before TV dinners and before McDonald’s hit every street corner.
Weight Watchers clearly was ahead of its time. The 1960s and 1970s saw an explosion in food choices—few for the better. Without good ways to understand how these new options impacted health and weight, people were unprepared for the consequences of a fast-food lifestyle.
Weight Watchers taught people how to eat. It invented a points system as an easy way for the average person to keep track of food intake. It borrowed the “group approach” that was so successful as a treatment model at AA and refined it for its use. It built a community of “Lifetime Members” who no longer pay to belong, but continue to return and encourage new members.
Fad diets come and go, but the Weight Watchers formula simply worked. In other words: good fundamentals.
Let’s move on to a quick market positioning analysis. In my simple example, place “importance of group meetings” on one axis and “focus on selling food” on the other. Weight Watchers “owns” the space where the group is very important, but selling food is less important. That is, as opposed to a program such as “Jenny Craig,” where group meetings are less important and purchasing food is very important. That’s not to say that you cannot follow Weight Watchers alone (you can, online), or that you cannot buy Weight Watchers branded food products (you can, in any grocery store). But the company understands—through its history—what the most effective formula is. And it monopolizes that market position. No one else can touch it there.
So what does this have to do with the future of the company? Here’s where it gets interesting.
The academic and physician community also believes Weight Watchers has the right formula. It knows that a diet that focuses on forcing people to eat a specific diet, or pre-prescribed food, is doomed to fail for most people in the long run. It also knows the psychological impact of the group on initial motivation and long-term success.
We all know the cost of health care is too high. And it is only going higher. And a national obesity epidemic is making the problem markedly worse.
In an effort to begin trimming costs, health plans have begun to experiment with health-impact pricing. Yes, we’ve seen this before. If you are a smoker, you might pay a higher rate. On the positive reinforcement side, you may get a discount to belong to —and regularly attend—your local health club.
But what I am referring to is a much more specific future. Imagine a scenario in which a health plan takes a look at more than just age and basic family history. Imagine a sliding scale of pricing based on weight, height, BMI, cholesterol, fasting blood sugar, and about 10 other blood chemistry metrics. These factors can be a powerful predictor of cost in the health care system, and health plans will need to do something about it.
With some of the “buy-it-on-your-own” plans, that day has already arrived. It is coming fast for the rest of us.
So, in that brave new world where your health plan will begin charging you for an out-of-whack BMI, consumers will have a direct financial incentive to do something about it.
And what company already has the credibility within the general public as well as the medical community to make that happen? Or, more to the point, which company has already positioned itself to be ready for the inevitable?
You already know the answer: Weight Watchers.
Related Links:
Weight Watchers International
NYSE: WTW
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