GLGi: (NYC) The US Diet Market Outlook - 2008 and Beyond

GLGi: (NYC) The US Diet Market Outlook - 2008 and Beyond

Dirk AschmoneitMarch 11, 2008

New York

► Council Member Biography

► Dirk Aschmoneit is currently a Director of Marketing, Food & Retail at Jenny Craig - a division of Nestle Nutrition, where he has worked since 2004. He manages a $500 million group of food and non-food products. His duties include product development, assortment, merchandising for 500+ stores in the US & CAN, and maximizing revenue & profit growth. Mr. Aschmoneit directs overall strategy for food & non-food products to create a strategic competitive advantage and a calendar of supportive marketing efforts. Previously Mr. Aschmoneit was a Director of Marketing Operations at Metabolife International, from 1998 to 2004. He was instrumental in taking the company from a network marketing to a $355 million consumer packaged goods company. In addition to maintaining the company’s competitive position by evaluating new product concepts, Mr. Aschmoneit was frequently featured as an expert speaker at Sport, Weight Loss, and Condition Specific Supplement industry events.

► Topics

► Overview of market share, segmentation and positioning strategy

► Barriers to entry and regulatory considerations in the diet category

► Analysis of major players including NTRI, WTW, alli (GSK), HLF, MED, DIET

► Market outlook for next 3 to 5 years based on emerging trends and key issues

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7

The US Diet Market Outlook: 2008 & Beyond

Agenda:

Overview of Market Share, Segmentation, and Marketing Strategy

Barriers to entry and regulatory considerations

Analysis of major players: WTW, NTRI, alli

Market outlook 2008 to 2010

8

Diet Category – Size

A growing category 66% of US population is obese and/or overweight Every 3rd person or 75 mil people in the US are on a diet at any given time YOY growth is estimated at 3 to 4% 1990s: Size of WL category flat around $30 billion 2000s: Category grew to $49 billion by 2005 2007 estimated sales around $55 billion US owns an estimated 70% of the global diet $ spend Rise in childhood obesity is an indicator of future category growth Growing obesity trends will supply dieters for years to come

9

Diet Category – Share

Highly fragmented and volatile category can shift rapidly Typical dieter starts at the age of 20+ and continues until 60+ Dieting behavior is predominately driven by life events and social events The typical dieter will try several diets a year Fad diets condition dieter and cause erratic diet behavior Average weight loss goal is 40 lbs and average time on diet is 10 wks Failure rate is extremely high Premium brands experience high repeat dieters Estimated share of market 2007 – always a moving target

• DIY sub category attracts 50 mil dieters

• “Seeking Professional Help” sub category attracts 10 to 20 mil dieters

• OTC diet pills, MRP’s and Weight Loss Centers at 12 – 18% each

• Medical Programs, Diet Drugs and Bariatric Surgery at 2 – 6% each

• Fads (e.g., Atkins with 12%+ at peak) don’t grow category but cannibalize others

10

Diet Category – Segmentation

Low cost/

Commitment

High Cost/

Commitment

MRPs

Diet Programs

Exercise

WL Centers

Medical Programs

Diet Drugs

Bariatric Surgery

OTC Diet Pills

Diet Food

50 M Do It Yourself 10 - 20 M Seeking Professional Help

Retention Rates: 8 to 12 weeks

Highly Female Demographic

Diet Soda

Vs.

Soda

Slim Fast

Ensure

EAS

alli

Trim Spa

Xenadrine

Metabolife

Nutrisystem

eDiets

24 Hour Fitness

Bally

Crunch

Medifast

Optifast Surgery

Weight Watchers

Jenny Craig

La Weight Loss

Xenical

Meridia

Accomplia

11

Diet Category – Strategy

Brand image is critical in an emotional category Diet category is based on emotional vs. rational purchase behavior “Before and After” and Celebrity campaigns drive leads Male and Female overweight % are roughly at a 50/50 split However, category is highly female Average weight loss goal varies by entry point (e.g. college 20 lb, mother 40 lb) Target group is 20 to 55 years of age for most diet companies Weight-Loss follows emotional versus rational purchase patterns

Vanity is more important than health

Brand is only as good as last “collection”

Similar dynamics as in the fashion industry

PR and newness are critical in this category

“alli”: The only FDA approved OTC weight loss product

NTRI: Most affordable and convenient prepared food program

WTW: “Stop Dieting, Start Living” – Teaching good eating habits via “Points”

12

Diet Category – Barriers of Entry

Low barriers of entry and high rewards keep category dynamics high “alli” is the classic example of how it can be, but shouldn’t be done Frivolous claims cause high trial and abandonment rates Serious dieter is getting distracted and is constantly in a spin Old guard (e.g., WTW) is watched closely and has to follow rules New kids on the block have aggressive entry strategy, get rich fast, get slapped

on the wrist, start over… CASE STUDY:

• 1994, DSHEA law implemented. Created $20 B dietary supplement industry by 2005

• Industry driven by weight loss and energy supplements

• Low COG & high margins, lack of regulations & non substantiated claims allow for fast development of a profitable business

• Many companies fly below the radar but achieve billions in sales

• Only time we hear about their success is when FTC steps in

13

Diet Category – NTRI

Roller Coaster Ride Warned in March of ‘07 about Q3, Q4 ‘07 performance (reach maturity) “alli” excuse for Q3 was a handy one, but only one part of the total picture Missing YOY marketing campaign & WTW TRP’s plus new ad campaign caused

7% Q3 shortfall CAC focus is short term metric and NTRI announced change of key metrics Reactivation Rate is long term metric and could be 40% + of REV by 2010*

Attractive EBITDA margin for reactivation population Q4 performance was expected to be bad due to investment spending for Q1 $252 CAC and lower guidance for 08 sent stock down +25% New “Advanced” product line is not different enough to pull leads and/or

reactivations NTRI lost the opportunity for potentially one of the best celebrity campaigns,

when Tori Spelling got pregnant shortly after reaching goal weight True innovation is needed and frozen food launch could bring improvements

*Based on 2007 reactivation REV of $97 mil and estimated $500 spending per reactivation.

14

Diet Category – NTRI continued

Key Metrics Review CAC, LTV, Retention, and Reactivation are all critical Metrics interact and can’t be viewed independently CAC at around $184 for 2007 follows industry standards Retention rate is a short term growth indicator Retention at 10 weeks resides at the low end of industry standard especially

considering artificial inflation via Auto Ship and aggressive discounting True retention rates might be closer to 5 weeks w/o Auto Ship Actual cost of food might cause early exit of clients (Forbes: $113.52) 55% of diet program calories provided might be another factor for early exit Taste of food might cause early abandonment Reactivation is long term growth metric At 17% annual reactivation annual contribution from reactivation is 26% in 2008

and 32% in 2009 At 20 to 25% annual reactivation annual contribution from reactivation is 41% in

2009

15

Diet Category – WTW

WTW is trying to reinvent itself Poor creative execution P 3 to 4 years opened door for competition Lack in creative strategy will keep company from true growth Q3 ’07 with new ad campaign and adjusted ad spending Q1 ’08 another new campaign…educating the consumer!? Monthly Pass is driving revenue and attendance rates up WTW looks more like NTRI and their Auto ship and Free Weeks of Food offer

than a truly fixed business… Still offers attractive margins and is leading brand in the category CE has 50% market share and is lacking in performance compared to NA Other diet players will enter CE and go for a piece of the market WTW remains an attractive brand since it creates customers for life

16

Diet Category – OTC / Drugs

“alli” generated impressive trial results Launched in 06/07, “alli” generated $300 mil+ in 2007 2 mil consumers for “alli” in Q3 ’07 = NTRI new customers 2003 to 2007 Cannibalized other players in the diet space The closer the competitors are to “alli” the bigger the impact Q1 and Q2 ’08 will be good quarters for GSK, after that it will go flat & down Side effects, minimal weight loss, and required life style changes will turn

consumers off Recent co-op marketing strategy with eDiets is meaningless

Sanofi Aventis most likely “in-market-scenario” is 2010 FDA rejected drug in 6/07 because of associated increase of depression Results in Europe are not very promising However, once client stays on product past initial loading phase, results seem ok Loading phase requirements will be a challenge for US customers Mexican pharmacies sell product to US customers – if requested

17

Diet Category – Outlook 2008 to 2010/12

Category will stabilize DSHEA implementation in 1995 caused significant disturbance in the category Atkins followed in early 2000’s and crashed abruptly Nutrisystem picked up the pieces once Atkins was down and grew fast & furious “alli” caused lots of PR but significant disturbance is questionable No new diet on the horizon but since barrier of entry is so extremely low there could

be always a surprise around the corner WTW is the trusted brand in the category but don’t expect miracles New “brand shifting” ad campaign is not convincing…they have to try harder! NTRI made some significant strategic mistakes in Q3 ’07 Increasing pressure from the competition, bad luck celebrities and poor execution of

new product concepts will hurt the company in 2008 New frozen food line could bring new momentum in 2009 and 2010 International expansion is critical and Japan is 2nd largest diet market in the world*

“alli” is a fad and will fade after Q2 ’08

*Source: New NutritionBusiness Dec 07/Jan 08. $2 bil/Y in weight management products.