The Fifty-million-dollar Diet
My mother was grossly overweight," says Harold Katz. "She was seeing a doctor, who had recommended behavioral counselling. And she was visiting a spa and was buying special food. One evening I asked her, 'Mama, you spend approximately how much on dieting?"
The answer was $35 to $60 per week. "I realized then that if you could put all of that under one roof, you'd have a fantastic business," says Katz. "I had no doubts about it."
Katz, 45, is a risk-taker who has parlayed an initial investment of $20,000 into a personal worth of around $100 million. Now, 10 years after that fateful conversation with his mother, he heads Nutri/System Inc., a company based in Huntingdon Valley, Pa., that owns and franchises 496 weight-loss centers. On this year's INC. 100 list of the fastest-growing small companies, it is number 26.The firm had revenues of $23.2 million in fiscal 1980, earning profits of $3.81 million and a return on equity of 97%.During 1981, Nutri/System recorded $49.2 million in revenues, with earnings of over $9 million.
"I'm a gambler," says Katz. "I shoot dice, play gin. I gamble for the excitement -- I like the action of it, not the winning or losing."
Once a week, Katz and some friends gather at his home for a game of poker, and, when he has the chance, he does some high rolling in Las Vegas. "I like the craps tables," he explains. "Most businessmen who have made some money are gamblers at heart. You have to roll the dice in business."
Katz looks as though most of his bets have paid off. He favors expensive European suits, wears a gold bracelet with an "H" monogrammed in diamonds, and drives a new $56,000 customized Cadillac Seville. The plates on the car read "76ers," a reference to a recent purchase. In July 1981 Katz bought the Philadelphia basketball team for a total of $12 million, including all liabilities and deferred payments.
His office, a corner suite in his company's spanking new, 26,000-square-foot headquarters, mirrors his style and taste; it is expansive but neat, flashy with glass and chrome, subtle with cream carpets, cocoa walls, and plum-colored chairs. A huge stuffed doll of an obese woman sits on a credenza.
Katz has taken a business opportunity with promise but problems, and solved the problems skillfully. He's playing with a money-making machine and the only significant problem he now faces is keeping pace with Nutri/System's remarkable growth.
When Katz was 17, his father died, leaving him to run the family business, a grocery store in the Germantown section of Philadelphia. "It was a fair-sized market at the time," Katz recalls. "It was fairly successful, but I hated the business."
After two and a half years of managing the store, he left to seek his fortune. First he sold insurance for John Hancock. After a while, he went into business for himself, setting up a burglar/fire alarm and intercom company.
R&S Safety Corp. succeeded, with annual sales of $300,000, and was eventually incorporated into a specialty sales business, Modern Trend Associates. That company was active until the advent of Nutri/System in 1971.
Katz, whose ambition was unfulfilled by Modern Trend, wanted to launch a national business and had been studying the franchise field. He had been looking in vain for a promising service that he could turn into a semblance of Ray Kroc's success with McDonald's, when his conversation with his mother provided a revelation.
Sophie Katz was paying three or four people as much as $60 per week to help her lose weight, and she had been trying to lose weight for as long as Harold Katz could remember.
Katz knew that millions of Americans were as interested as his mother was in slimming down.
Unfortunately, the weight-loss business had little other than a large market to recommend it. At the time, it was composed for the most part of small health spas, which had acquired a bad reputation for high-pressure pitches, lifetime contracts, and a disturbing tendency to disappear overnight. It was also a field that the medical profession viewed with both distrust and a proprietary interest.
Weight Watchers International had been around since 1963, but it wasn't providing the type of service Katz wanted to, and it wasn't exploiting the financial opportunities he saw. Other weight-loss programs -- TOPS, Weight Loss Clinics, Overeaters Anonymous -- had adopted piecemeal approaches.
Katz didn't research the business much -- he didn't do extensive market studies or call in consultants.After a brief look at the field and serious talks with his attorneys, he just opened a clinic. All that he needed to know was that there were a lot of overweight people in the United States who were willing to invest in a more attractive physique.
Katz designed, refined, packaged, and sold a weight-loss program that made it virtually impossible for a customer to spend money elsewhere. Under one roof he offered medical supervision, a diet, behavioral counseling, exercise, and low-calorie foods.
In December 1971, a year after the conversation with his mother gave him the idea, Katz opened his first center in an office building in Willow Grove, a Philadelphia suburb. The office, with a staff of four including Katz, was financed with $20,000 in savings and a $20,000 loan on his house. During its first year, it grossed $180,000.
He opened the second center a few months later. And a third, the first one sold to a franchisee, made its debut in center-city Philadelphia in September 1972. By the end of fiscal '75, the number had jumped to 16. Two years later, there were 55.
In order to give his centers respect-ability, Katz hired physicians to do physicals and, where it was possible, psychiatrists to do behavioral counseling. Both were lured by high hourly fees and worked at the centers part-time. Nurses were present full-time. The airy and attractively furnished centers, resembling the offices of a successful doctor, contributed to the professional impression.
When a person signs up with Nutri/System (85%-90% are women), her age, height, weight, and other vital statistics are fed into a computer, which then indicates how much weight should be lost over what period of time, the patient's daily metabolic requirement, and other aspects of the diet. For a $90 fee, patients receive a physical, blood tests, and an electrocardiogram at the medical centers; nonmedical centers, which operate with nurses only, were set up in 1978, and now account for 35% of all centers.
Clients are given exercise instruction, have access to exercise equipment at some centers, and attend weekly behavioral modification lessons. Most important, they are placed on a mandatory diet -- they are required to eat designated meals prepared from Nutri/System products five to seven days a week. The Nutri/System 2000 Foods of the Future, provided by 15 major suppliers, are sold at the centers; they include 41 separate items bearing such names as Nebula Nectar, Seafood Aurora, Solar Soup, and Jupiter Gel Fruitreat, which can be used to prepare more than 100 meals. The diet may also include vitamin and mineral supplements.
The customer spends an average of $300 to lose 30 pounds, plus $8.50 for each pound thereafter, and pays for the program in advance, a policy that creates an incentive as well as a healthy cash flow. She also spends some $28 to $33 per week on Nutri/System food. There is a money-back incentive if the customer maintains her weight loss, but in order to qualify, she must continue eating the firm's food two days a week. "There's some profitability in that," notes Norman Amster, Nutri/System's marketing director.
The typical client is 40 years old and has already tried at least one other weight-loss program. Some 67% of the clients are working women, and the median family income is more than $20,000. Customers part with an average of $680.
The Nutri/System program has proven popular with franchisees. Of the 496 centers, 395 are franchise operations. The franchisee pays a fee predicated on the size of the market, ranging from $31,500 in communities of less than 125,000 to the dollar equivalent of 17% of the population in trading areas larger than 260,000. Each center is also subject to a royalty fee of 7% and contributes 2% toward national advertising. Leasehold improvements and other start-up costs average $25,000 to $30,000 per office, which means that a center can be opened for about $60,000.
No one has ever complained about the price. "The average repay is six months," Katz explains. Beyond that, the franchisee can expect pretax earnings of around 20%.
Customers seem equally satisfied. The high cost of the program, the compulsory nature of the diet, the medical monitoring, and the behavioral counseling help them take off weight effectively; an extremely overweight client can expect a weight loss of a pound per day for the first few weeks. And the fact that 85% of them eventually regain some weight doesn't bother them. Federal statistics indicate that, nationally, 95% of all dieters regain some weight.
"We have people who come in March, lose 30 pounds to look good for the summer, and then show up the following year to do it again," explains the manager of one center, who has herself lost 30 pounds on the program. "They consider it money well spent."
Sophie Katz has, by her son's estimate, been through the Nutri/System regimen at least 20 times. Though she's 70, she hasn't given up -- she's presently enrolled in the program again. The repeat business, marketing director Amster confides, "adds to the profitability."
The first Nutri/System office went into the black during its first year, and the company has stayed there ever since. "Cash has never been a problem," observes Katz. "This business is like a machine. It prints money, just turns it over."
Managing the growth has been primarily a matter of refining the program -- of pinpointing problems, correcting them, improving upon the diet, adding new foods, strengthening management -- and then finding ways to make the best use of earnings.
The subject of doctors, Katz recalls, was one of the first items to require attention. "At the start, we hired psychiatrists to do behavioral counseling," explains Amster. "That was a mistake for us; they dealt with all of a person's problems rather than the behavioral problems related to eating." Psychoanalysis was a poor use of time, so most of the centers now employ people with a master's degree in psychology.
Though 65% of the centers still have part-time physicians, for the past three years, all the offices opened west of the Rockies have been nonmedical centers. "The business operates a lot smoother without physicians," notes Amster. "When we've got a doctor here, every earache and headache becomes a diet-related problem in the mind of the consumer. Without a doctor, the program is equally salable and more profitable."
Another profit refinement was the development, three years ago, of Nutri/System's own brand of canned and dried foods, which replaced frozen food. "We'd had a severe problem getting the frozen food to the offices," Katz says. "Trucks would break down, and it would come through spoiled." Annually, over $60 million worth of the Foods of the Future are sold by Nutri/System and its franchisees.
The company's first major challenge came in 1977. "We jumped 40 franchises, from 11 to 51," Katz says, "and we weren't geared for the influx." He knew he would have to think twice before adding any more franchises.
Faced with a choice between passing or upping the ante, Katz, the inveterate poker player, decided to bet everything he'd won so far. The options were clear: He could either keep the rate of growth down, letting his company mature at a sensible pace, or he could try to expand the company quickly enough to exploit what seemed to be a virtually untapped market.
Katz took the chance. He imposed a six-month moratorium on selling franchises and used the time to fine-tune and beef up his operation. Area and nursing supervisors were hired to over-see and upgrade the quality of service offered by local centers; the training period for owners and their employees was increased from three to five days; operating manuals were revised; an office was set up to deal with franchisees' problems and questions; and management and middle-management officers were added at a brisk pace.
Later in 1977, the sale of franchises resumed. The bet paid off. "Since then," Katz says, "it's been an absolute bonanza." During the following year, the number of Nutri/System offices more than doubled, jumping from 55 to 111. The feat was repeated by the end of fiscal 1980, when there were 248 centers in operation. Since then the number of centers has doubled again. Recently, as the remaining gaps in the marketplace have been filled (Nutri/System now has offices in every state), the rate of growth has begun to slow.
"The maximum number of centers in this country will probably be another 200," says Amster quickly adding, "we recognized the saturation potential about two years ago."
Katz is determined not to let his expertise and resources go to waste. This time it's a matter of finding new action -- weight control is not the only game in town.
"The growth has been my principal satisfaction," Katz observes, "but we won't be able to maintain the pace -- there aren't that many markets left. In 5 to 10 years, we'll be a conglomerate in the field of service."
Katz took Nutri/System public in January 1981; the stock, of which he retains 67%, split in August and has performed well despite the recent bear market. Of the $17 million raised by the issue, around $2 million has helped finance construction of the company's new headquarters and development of its new venture, Tele-Cut, a unique hair styling salon. Since August, Nutri/System has also acquired three existing companies, including Fox-Morris Associates, an executive placement firm based in Philadelphia.
"Fox-Morris is one of the top five in the country in terms of executive placement," Katz says, "but they've been run conservatively. I feel that we can triple their business in a year and a half."
As he speaks, Katz's voice grows animated with excitement. It is obvious that, for him, each of the new ventures is a Nutri/System in the rough. Like a pair of hot dice or a hand of cards that shows promise, they require only instinct, intelligence, and style to turn them into big winners.
And Harold Katz is betting that he can do it.
THE NUTRI/SYSTEM MONEY MACHINE
Fiscal year (ends 7/1) 1977 1978 1979 1980 1981
Revenues ($ mil.) 2.4 6.1 15.0 23.2 49.2
Net earnings ($ mil.) .4 .6 2.9 3.8 9.2
Net earnings (% Revenues) 18 10 19 16 19
Current assets ($ mil.) 2.0 2.6 7.6 10.6 24.4
Current liabilities ($ mil.) 1.2 1.5 3.9 5.7 12.3
Working capital ($ mil.) 8 1.1 3.7 4.9 12.1
Return on equity (%) 484 110 268 97 131
Company-owned centers 4 11 16 38 58
Franchised centers 51 100 151 210 350
"This business is like a machine," says Nutri/System's Harold Katz. "It prints money." That claim is clearly supported by the company's operating results for the last five years, which show a steady rise in revenues, profits, and assets. In January 1981, Nutri/System Inc. went public, adding additional cash to its balance sheet.