Katz, for his part, was convinced that Nutri/System was more than a one-good-idea company. "I'd been in business for nearly 31 years," he says now, "and I'd hate to think that all I, and the people that I'd surrounded myself with, knew was weight loss. We knew franchising, we knew the service business; we were salesmen, marketers." The conviction still rings clear in his voice, but it is tempered by the recollection of subsequent events.
In August 1981, Nutri/System purchased Fox-Morris Associates, an executive placement firm based in Philadelphia, for $4.2 million. The following March, it acquired Gloria Marshall Figure Salons for $15.1 million, along with a cosmetics company, Nutrient Cosmetics Ltd., for $8 million cash. All were regarded by analysts as strong turnaround possibilities. "At the time, none of them were earning satisfactory levels of profit," says Meyer, "and I think Harold believed he could touch them with magic." Nutri/System also started a new company, Tele-Cut, a high-tech-look hair-styling salon that it intended to franchise.
Katz's touch, however, proved anything but golden: Soon after he bought them, all of the acquisitions slipped into losses and stayed there. A recession, unexpected competition, Nutri/System's ignorance of its new markets, and lack of management depth paved the way to disaster. The experience with Gloria Marshall Figure Salons was typical. Initially, the company was headed by Sid and Jenny Craig, who were among the former owners, then by Robert Berman, a former Nutri/System franchisee. Other Nutri/System personnel also came on board. But the synergism that Katz and Wall Street had hoped for simply wasn't there. Gloria Marshall did much of its business on credit, while Nutri/System's business was essentially cash. Gloria Marshall also had its own distinctive style."It was a rah-rah-rah type of thing, contests and sales promotions," Katz explains, lighting up a Veracruz. "We ran it in a more businesslike manner, until we realized that we were wrong. Then we went back to the rah-rah meetings."
The lack of a sure hand and a clear sense of direction was aggravated by changing market conditions. Gloria Marshall's utilitarian 1,400-to-2,000-square-foot facilities were rapidly being eclipsed by competitors' sybaritic gyms, complete with saunas and swimming pools, and by a change in what people were looking for. "We appealed to the lazier exerciser," says Katz, "and, as we got deeper into '82 and '83, sweat became the thing."
Even more important than the salons' large losses was the acquisition's impact on the morale of Nutri/System franchisees. "We began to get negative feedback from people who feared that Gloria Marshall would compete with their weight-loss centers," Katz remembers. Despite his reassurances, franchisees pointed out that the Gloria Marshall salons offered a computerized diet, a weight-maintenance program, and a special diet supplement, the latter introduced by Nutri/System.
"All of which," Katz says with a blast of cigar smoke, "led to the end of the honeymoon" between franchisor and franchisee.
As in a troubled marriage, distrust soon turned to paranoia. In January 1983, Harold Katz sold 670,000 shares of Nutri/System stock. Other insiders, The Wall Street Journal reported, were selling heavily, too. Robert Katz, Harold's brother and a vice-president of the company, unloaded 42,250 shares; marketing vice-president Norman Amster got rid of 58,250 shares; and national medical director Norman Horvitz sold 7,000 shares. On March 16, 1983, nine days after the end of the selling spree, the company announced that its third-quarter earnings would decline by as much as $1.8 million because of the projected closing of some of its unprofitable Gloria Marshall and Nutrient Cosmetics operations. Its stock, which had closed at $31 on March 15, finished at $23 on March 18.
Discussing the transactions, Katz told the Journal: "The reason is simple. At some point, people want to cash in." Others had different ideas. The Securities and Exchange Commission launched an investigation, although, to date, it has not initiated any charges. A group of stockholders brought suit, charging that Katz and other company officers had painted an overoptimistic picture of the company's finances.
In September 1983, Nutri/System sold off Nutrient Cosmetics; one of the new owners was Buccaneer-smoking Leslie Charm of Docktor Pet Centers and the YCK Group, a partnership specializing in turnarounds. Not all of Katz's problems, though, were so simply resolved.By then, Nutri/System's weight-loss centers, the source of its success and stability, were, like Gloria Marshall, competing in a new and more aggressive environment. "Our biggest competition," recalls Katz, "was do-it-yourself dieting. There were more diet books, more low-calorie recipe books; and businesses with tremendous reputations, such as Stouffer's, had gotten into the act with lines like Lean Cuisine." At the centers, traffic began to decline.
The company fought back: "If do-it-yourself dieting worked," one advertising campaign asked, "would you be heavy today?" But Nutri/System, to many, was yesterday's miracle, a stodgy matron out of step with the leotard-clad lovelies who were touting such programs as those offered by Weight Loss Clinics and The Diet Workshop. Soon, some of the centers were losing money as well as clients. A few were forced to close.
