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 $2 million has helped finance construction of the company's new headquarters and development of its new venture, Tele-Cut, a unique hair styling salon. Since August, Nutri/System has also acquired three existing companies, including Fox-Morris Associates, an executive placement firm based in Philadelphia.
"Fox-Morris is one of the top five in the country in terms of executive placement," Katz says, "but they've been run conservatively. I feel that we can triple their business in a year and a half."
As he speaks, Katz's voice grows animated with excitement. It is obvious that, for him, each of the new ventures is a Nutri/System in the rough. Like a pair of hot dice or a hand of cards that shows promise, they require only instinct, intelligence, and style to turn them into big winners.
And Harold Katz is betting that he can do it.
THE NUTRI/SYSTEM MONEY MACHINE
Fiscal year (ends 7/1) 1977 1978 1979 1980 1981
(10 mos.)
Revenues ($ 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.
