How apps and wearables upended Weight Watchers

Weight Watchers on the surface had a near perfect business model---recurring revenue and a large market of overweight people. Then came wearables, apps and digital competitors. Can Weight Watchers come back?

Weight Watchers' business has been disrupted and derailed in large part because apps and wearables have yanked potential customers away.

As Weight Watchers shares have been pressured by debt concerns and a decline in business, it's also worth noting the impact of the wearable device and app trend. It's quite a turnaround for Weight Watchers, which on the surface had a near perfect business model. Every January the company could land overweight people with New Year's resolutions and recurring revenue from dieters.

But wearables and apps disrupted what appeared to be a bullet proof business model.

Weight Watchers' revenue declines track the popularity of wearable fitness devices and the apps that went with them. For instance, Fitbit and Jawbone launched fitness trackers in 2012 and continued to iterate. In addition, other options also emerged. By taking fitness data and combining it with applications such as MyFitnessPal, diet and activity tracking became easier via a smartphone. A recent development is Under Armour and Nike getting into the health and nutrition game.

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Meanwhile, Weight Watchers revenue started to head south as fitness trackers launched. For 2012, Weight Watchers reported revenue of $1.83 billion. For 2014, Weight Watchers revenue fell to $1.28 billion. For 2015 and 2016, analysts are projecting sales of $1.2 billion and $1.16 billion, respectively.

Sure, there were marketing miscues from Weight Watchers, but the big trend was that consumers worried about their weight were opting for apps, wearables and free tools. Weight Watchers countered with personal coaching---something Nutrisystem also tried---but what the company needed was more interactive tools to create a base of customers that could be upgraded.

From a brand perspective, Weight Watchers was associated with dieting and calorie counting, but not fitness. With application programming interfaces connecting various devices and apps, the food intake and fitness effectively merged. In fact, working out became the No. 1 New Year's resolution followed by being happy and losing weight.

The big question is whether Weight Watchers has what it takes to become part of the wearable and app ecosystem.

Also: Will Under Armour's big data, app experiment pay off? | How Nike thinks about app development: Lots of micro services

In a research note, Credit Suisse analyst Glen Santangelo downgraded Weight Watchers over concerns about a $300 million debt payment in 2016 and a $2.1 billion payment in 2020. Weight Watchers expects to have $350 million in cash and equivalents at the end of 2015. Santangelo said:

With the proliferation of free weight loss applications (and smart phones), wearables that track fitness activity, and the combination of the two, people interested in weight loss now have more options than ever to try to lose weight on their own/for free. Instead of spending at least $19.95 a month (cheapest Weight Watchers option not including promotional deals), one could choose any number of free weight loss applications or purchase a wearable for a one-time cost and attempt to lose weight without making the financial, physical and time commitment to a program like Weight Watchers.
Even though Weight Watchers is one of the best clinically-proven weight loss programs (and considered more effective than trying to lose weight on your own), these free options continue to capture share of the weight loss market away from Weight Watchers, particularly amongst new trial activity.

Now what?

It's not like Weight Watchers doesn't have a plan. The company has online support, a program that serves dieters well and a large demographic to target.

After all, it's not like people are getting slimmer. The Center for Disease Control reports that more than a third of U.S. adults are obese. A market of 78.6 million adults is still a nice market.

Jim Chambers, CEO of Weight Watchers, said on the company's fourth quarter earnings conference call that it's unlikely that there will be revenue growth in 2015.

When we unveiled our multi-year transformation plan, we knew that 2014 would be a challenging year, but we hoped to achieve positive recruitment sometime during 2015, leading to revenue growth in 2016. Our plan was based on strong cost management, repositioning our brand, improving our product offer, and targeting new channel growth in healthcare.

While we still believe firmly in our underlying strategies, our execution at start of year was not what we had hoped for, and I'm disappointed to say that we are not yet where we expected to be and that our turnaround will take longer than we had anticipated. That's why we are taking aggressive steps to adjust our marketing, to continue to improve our consumer offerings in both meetings and online, and to right-size our cost structure.

Here's what has Chambers worried: At the end of 2014, global actives on the network fell 15 percent from the year before to 2.5 million. Of that sum, 1.5 million are online members.

To combat those declines, Weight Watchers launched improved search, easier food and activity tracking and a larger database of nutritional options. More importantly, Weight Watchers is targeting healthcare alliances to link membership with health plans. The catch is that model is also being pursued by wearable makers such as Jawbone, which in December launched an enterprise friendly feature called Groups.

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The initial plan was to take those new Weight Watchers features and market them. The issue was that the marketing campaign drove conversation but didn't raise awareness for new offerings. In addition, Chambers noted that "some technical and execution issues on our sign-up website associated with the transition to our new offerings contributed to the significant fall off in recruitments during the last week of 2014 and the first three weeks of January."

That glitch illustrates how Weight Watchers still doesn't quite get the digital game. Chambers is hopeful that Weight Watchers can execute better in the future.

He said:

We introduced several new platforms that have a lot of potential, but we are still clearly in the learning phase. In mid-December in the US, we launched a premium Personal Coaching product, and added 24/7 Expert Chat, providing one-on-one personal advice from Weight Watchers experts to online members for the first time, and an additional touch point between meetings for meetings members.

These offerings are targeted to leverage in the digital realm, the increased motivation and accountability that results from the interaction and support that takes place between our members and service providers, that have been consistently validated in our meetings business.

Chambers also said that the Weight Watchers brand can play in the fitness space too, even though its heritage revolves around dieting.

Also see: A look at Nutrisystem's digital strategy: In pursuit of apps, DIY dieters

"Fitness needs become a more important part of what we offer. For the vast majority of our target members, fitness is not about training for a triathlon, it's about taking small steps on a guided journey to incorporate activity into the fabric of their daily lives," said Chambers. "While this does not represent a new strategy, it is clear that our members are looking to incorporate activity and fitness into their weight loss programs. As example of this, hundreds of thousands of our members are already syncing Fitbit and other activity devices with their Weight Watchers experience through our API strategy implemented late last year."

Overall, Weight Watchers plan looks fairly solid---albeit a bit late. What's unclear is whether the company's marketing cutbacks to conserve cash will help it battle and increasingly crowded field.

Stifel analyst Jerry Herman said that "liquidity and cash preservation have become a more important priority which reduces financial flexibility to restore growth through investment and/or acquisitions." Simply put, Weight Watchers' best course may have been to acquire popular health and fitness apps. Companies like Under Armour beat Weight Watchers to the punch.

Now it's up to Weight Watchers to right the business model or become a disruption footnote.

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