Dear Investors,

I read an article the other day about Eastman Kodak and it struck me that in many ways the story of Kodak might be playing out right now at Weight Watchers. If you recall, I wrote a couple months ago about how we were considering purchasing Weight Watchers and Outerwall. We bought Outerwall but decided not to purchase Weight Watchers.

Many of you were kind enough to write me with your thoughts on both companies, and some of you asked me to get back to you when I finished my research on Weight Watchers. I never got back to you partially because up until I read the article about Kodak, I couldn’t really put my finger on what exactly I thought was “off” at Weight Watchers. Now I believe I know.

Kodak’s cash cow was the sale of film and film processing. Kodak believed its brand was so strong and consumers were so loyal that it did little to adapt to the threat posed by competitor Fuji. While competition from Fuji weakened Kodak, it was the shift to digital that delivered the killing blow. Believe it or not, Kodak actually invented the digital camera. The company did next to nothing, however, to bring it to consumers for fear of undermining film sales. (Perhaps a better way to say it is that the powerful film division and film centric culture of Kodak undermined promotion attempts by the digital division.)

A similar situation may be playing out with Weight Watchers. In this case, the in-person meetings are the most important business unit. (Meeting fees plus in-meeting sales made up 62% of Weight Watchers revenue for FY2013.) This in-person, face-to-face business model is being threatened by both digital or online weight loss communities (for lack of a better term) and by the new fad of fitness trackers.

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After listening to Weight Watchers conference calls and reading management’s comments, I believe that, just like Kodak, they are underestimating the competitive threat posed by those new products. I can’t help but wonder if, just like Kodak,  a corporate culture centered around yesterday’s product is causing the company to react too slowly to change.

For instance, just a week or so ago, Weight Watchers recently released their full year result for 2014 and guidance for 2015. The stock tanked over 30%. Weight Watchers has gone from a high of $85 a few years ago to a low of less than $11 as of this writing.

The company’s earnings press release had this telling statement by Jim Chambers, the company’s President and Chief Executive Officer: “While we still believe in our underlying strategies, I am disappointed that we are not yet where we hoped to be and our turnaround will take longer than we had anticipated. Therefore, as we continue to enhance our consumer offerings, we are taking more aggressive steps to right-size our cost structure with a $100 million cost-savings initiative.”

If I were a stock holder, this statement would scare the pants off me! This (FY2014) was the fourth straight year of declining meeting sales. How many years of declining sales does the company need before they stop believing in their current strategy?

Much like Kodak, Weight Watchers has a great product and a superb brand name that is slowly being eroded.

Here are three things I would want to see at Weight Watchers before I consider investing. Weight Watchers is already undertaking some of these changes, but I believe they need to accelerate the pace and place more importance on some of them.

1. Go Big Online

Weight Watchers needs to embrace the digital age in a big way. Yes, this might continue to cannibalize in-person meeting fees but it’s better to erode your own sales then have a competitor do it.

When I say “go big online,” I mean I’d like to see Weight Watchers give consumers the option to move their entire meeting experience online. Let consumers attend the meetings online. Focus on creating digital or electronic communities. Make sure that everything a person gets from an in-person meeting can be accomplished online. I like what Weight Watchers is starting to roll out: one-on-one support such as virtual fitness coaches and nutritionists.

Weight Watchers needs to offer consumers what they want, not just “educate” consumers. Weight Watchers says they are doing this. From their 2013 annual report:

The second strategic pillar is re-imagining our consumer offering. To maintain our leadership position and return to growth, we need to innovate in a changing market, leveraging a deep understanding of consumer needs. We are moving away from a hard distinction between our meetings business and online business, and we are combining our assets to solve for the consumer’s weight management needs on his or her terms. This will require the creation of new fundamental capabilities in innovation and investments in our insights and product development processes. Finally, this implies evolving our brand positioning as well, building on the incredible brand awareness of Weight Watchers to make our brand more inclusive and capable of playing a broader role in consumer wellness to attract a wider range of consumer segments.

I have my doubts about how far they are willing to go. They have a lot of content and educational material online, but to the best of my knowledge they have not attempted to replicate the social aspect of meetings online. To me, this is the most crucial part of the Weight Watchers experience and its value-add over other competitors.

2. Embrace the Wearables Fad

Don’t get me wrong, Weight Watchers is trying to embrace the wearables fad. The have their own wearable device called the ActiveLink.  Here is a line-up of four wearables. See if you can guess which one is Weight Watchers?

Weight Watchers (WTW): Why We Passed On The Stock

The first one is the Up by Jawbone. (No, I do not know how they came up with the name for it or the name for their company for that matter.) The middle two are FitBits in clip and watch form, respectively. The weird pod thing on the end is Weight Watchers’ product.

The first one is funky and cool. I know what you’re thinking what does a 30-something man sitting in an office in Lancaster County know about cool? Well, my intern has informed me that all the girls in his girlfriend’s sorority have one so I’m taking their word for it. My intern also reports that true wearables (in watch or preferably bracelet form) are the most popular. The middle two are small and sleek and convenient. Weight Watchers’ product is just a giant misshapen marshmallow.

But here’s the kicker. Weight Watchers wants to use it to get people into their meetings programs (online or in person). You need to pay for some type of Weight Watchers program in order to use the tracker.

C’mon Weight Watchers! Give consumers what they want. Make a nice sleek product and let consumers use it without having to pay or sign up for a Weight Watchers’ account. Weight Watchers has been successful in licensing their brand to various food products. It’s time to apply that same brand savvy to wearables.

3. Corporate Healthcare

Weight Watchers is already doing a lot with corporate healthcare, and I think this is one of the areas that will benefit the company and shareholders the most. Weight Watchers is a doubly cyclical business. First, it is subject economic cycles as weight loss programs are one of the first expenditures consumers will cut in a downturn. Second, the company is subject to the fitness fad cycle. The low carb diet phase took a big chunk out of Weight Watchers enrollment numbers just like a recession would.

Corporate healthcare contracts represent a way for Weight Watchers to smooth out revenue (and, boy, does Wall Street love smooth revenue and earnings!). Corporate contracts are likely to be stickier during recessions and should be unaffected by the latest dieting, exercise, or gizmo fad. (I highly doubt you’d see General Motors signing up its employees to take Tae Bo classes with Billy Blanks.)

Until Weight Watchers fully embraces wearables and online meetings, I’m going to stay on the sidelines. With Weight Watchers down 60% year to date, I’m sure my clients have appreciated that decision.

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Weight Watchers

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