Weight Watchers (NYSE:WTW) is a business facing some severe challenges: falling revenues, falling attendance, and falling expectations. Earlier this year, a new CEO, James Chambers, was brought in. A new strategy has been in the works for the last few months and Weight Watchers held a conference yesterday outlining this plan for investors.
The headlines will naturally be on the company's financial projections for the next few years. These were pretty bleak as the company expects all the recent turmoil to continue into 2014. The source of future growth will be the health solutions business. By 2018, the company expects sales of at least $2 billion, with B2B representing 15%-25%. Management does expect any growth in the consumer business before 2016.
My interpretation of these projections, something borne out slightly in the Q&A at the end of the Investor Day, is that management really has no idea what is going to happen. The strategic plan for the B2C business is largely incongruous with these projections. The company is implementing changes to marketing and products already and highlights several times how responsive this category can be. All this does not really fit with having to wait until 2016 to see recovery.
Seeing as 40% of recruitment happens in Q1 and none of these new products are tested, I think that management is just forecasting the worst-case scenario going forward. Given the poor reputation the company has for meeting expectations, this is probably the right strategy. I am not going to give these projections much weight for these reasons.
The New Strategy
For me, the interesting bit was what changes the company will make to strategy. I've done analysis of the company before, and I focused my criticism on two points. First, the company appears to have a pretty poor culture, led by disinterested management. The solutions here are tough, but management has made some steps in the right direction.
Second, the combination of meeting and online makes for a confusing offering. Are they substitutes or complementary? If online is effective, why is there meeting business? If online is not effective, why is the business so big? I don't really buy the "free apps" explanation, but the company really has not explained how this is all going to fit together. The Investor Day answered a lot of these questions.
One of the interesting things about Weight Watchers is how the executive level appears to operate in complete isolation to the rest of the business. Most of the executives you can find on LinkedIn have backgrounds in management consultancy or have MBAs. No internal people, all outsiders. One audience member at the Investor Day pointed out how few women there were at the top. At the very top, this criticism is certainly justified. If you look at employee reviews of the company on Glassdoor.com, you find people who are enthusiastic about helping people lose weight but unhappy with the way they get treated.
Some of these issues have been dealt with. A round of firings got rid of some weak links, the previous head of APAC being the most obvious. My guess is that there is still a long way to go. The company highlighted they spent $100 million last year on professional fees -- this was 25% of that year's operating income. For a company that has so many management "experts," it is pretty amazing that this happened. Seems as if the only thing management experts are good at is hiring more experts to tell them what to do. The CFO is clamping down on this with all new professional service spending going through him.
For investors, what is more worrying is that this huge sum was spent while complaints from leaders were building up. The leaders are the cornerstone of this business, they are the people who actually interact with the customers, and are most enthusiastic about the Weight Watchers brand having used to be successful themselves. At the Investor Day, the company announced a new compensation initiative for leaders worth $23 million this year and an incremental $14 million next year. I suspect that more change will be needed here, but this is a start.
Overall, there is probably a limit to how far this can go but management has clearly adopted a slightly new attitude. People have been let go, problems have been clearly identified and dealt with. Part of this is simply the need to keep costs low while the company is changing but hopefully this is a start of a move towards a slightly more collaborative and stable culture.
Combining Meetings/Online and the "Free Apps" Dilemma
The most controversial aspect of Weight Watchers' current predicament is the "free apps" issue. The essence of this argument is that there are no differences between the Weight Watchers' online product or the free app, apart from the price. This argument extends to the meetings business, where most of the problems have been.
I should state upfront that I don't really buy this. If free apps are so effective, why did not the online problems at Weight Watchers emerge sooner? Free apps don't appear to fundamentally change the weight loss "experience" -- they are, generally, recording devices like diaries. Tracking what you eat is an effective weight-loss method, but this was known before free apps turned up. Consumers in this category are highly fickle and will pick up anything just to try it, especially if it is free. Using a free app does not necessarily reflect the motivation to lose weight either as it is a costless transaction.
If online products are not effective, why has Weight Watchers been so successful in this area? If they are effective, then why is there still a meetings business? Management argued that their problem has been keeping pace with changing consumer tastes. The meetings product is still as good as it always was, they argued, and still works for the people who want that thing. The aim of the new strategy is to move to the consumer's point of view and build from there. Research showed that consumers thought Weight Watchers was too complex, too judgmental, and too rigid. Instead, consumers, according to management, want a more personalized solution that fits in with their schedule and their goals. Building on capabilities they have and improving their innovation process (by reducing producing product development cycles), they can devise a new set of products that serve this new attitude better.
Perhaps most importantly, the company argued that there is no difference between online and the meeting business in terms of efficacy. The methodology and the science is not affected by the delivery channel. Parts of this argument are convincing. The idea that people are turning away from Weight Watchers in favor of free apps, which more closely meet their expectations, is convincing. Different people probably do find different methods effective. Does this explain the mass exodus of people away from meetings, though? Maybe consumers are clearly fickle in this category. Making the meeting and online business more complementary sounds like an interesting way to try and solve this. I also agree that the brand and capabilities Weight Watchers have built up are valuable.
Not all of this is convincing, though. For example, the company did not really have any evidence to support the claim that the delivery channel was irrelevant to the end result. The use of multiple products and time spent using the online product did apparently correlate with weight loss, but there was no solid evidence. Equally, when interrogated about what made the online product different from free apps, management only talked about capabilities and what they planned to do.
It is impossible to cover everything but these are the key points. Incoming management clearly has tried to understand consumers, what their views about Weight Watchers are, and how people lose weight. I do buy their story about the strength of the brand and moving away from a one size fits all product. Management has been overly vague at some points, and there does seem to be this implication, at times, that the number of people who find the meetings product effective has dramatically changed.
Overall, I am still broadly positive but significantly more cautious. Weight Watchers is a strong brand with a lot of latent potential. Insights about the current product being too rigid and prescriptive look useful and, quite simply, it is good that management is going to try something new.
At the same time, it is not inconceivable that Weight Watchers will continue to struggle along without making any progress. The most worrying scenario is that the meetings business proves to be, for whatever reason, in some kind of secular decline. Management is heavily focused on health solutions and the online business, but when you are operating with WTW's debt burden you really cannot ignore the meetings business. Moving to a lower cost structure is certainly helpful, but properly diagnosing the issues in meetings and solving it needs to happen as well. For this reason, investors should continue to show caution. The next milestone is the winter marketing campaign and Q1 2014.
Disclosure: I am long WTW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.