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It's The Year of The Value Diet

From books to bars, pills to powders, getting smaller has become big business.

Slim Fast Bar
Source: Slim Fast
Slim Fast Bar

Though growth in the $59.7-billion diet industry has slowed, new players and concepts continue to enter a crowded field, with a trend toward do-it-yourself plans.

The total U.S. diet market in 2009 was up less than 2 percent from the prior year, according to Online Dieter Research Report, released in April 2010. In contrast, the sector, which includes do-it-yourself diet plans, commercial weight-loss chains, prescription drugs and medical programs, averaged a 6.4- percent annual growth rate over the past 20 years.

Year of the Value Diet

On a website called BestDietforMe.com, John LaRosa, Marketdata’s research director, tracks consumers’ diet habits. In the first quarter of 2010, he found over 80 percent of dieters wanted a low-cost, home-based plan.

People are using meal replacements like Slim-Fast (Unilever ) and various over-the-counter diet pills. Cleansing weight loss kits are doing well. GNC has had success with their Weight Management Starter Kit.

Scott Van Winkle, managing director in equity research at Canaccord Adams, adds that Walmart has increased its sales pace for this category in the last year or two.

Mail order, infomercials, diet books and websites have also been popular. These are things that people do when their budgets are pinched and should continue to do well if the recovery is slow, LaRosa says.

According to the latest Publishers Weekly A View from the Top report, which provides the sales ranking of 2009's bestselling hardcover books, "Master Your Metabolism: The 3 Diet Secrets to Naturally Balancing Your Hormones for a Hot and Healthy Body!" by Jillian Michaels was number 12 in nonfiction. "Eat This, Not That! Best and Worst Foods" by David Zinczenko and Flat Belly Diet Cookbook by Liz Vaccariello also has been selling well.

Big Winners

While traditional member-based models are down from their peak, there are other pockets of strength. Direct selling, multi-level marketing companies like Medifast, Herbalife and Isagenix, a private company in Arizona, have had good trends right through the recession.

“When unemployment rose, people were looking for second jobs, part time work or extra income opportunities,” says Van Winkle.

Medifast, in particular, has been on fire, Van Winkle adds, growing 50-100 percent over the last two years. The primary driver is its multi-level platform, “Take Shape for Life,” which now accounts for 60 percent of their business.

Chris Krueger, senior research analyst at Northland Securities, points out that Medifast has about 7,100 health coaches right now, up from 3,400 at the end of 2008. However, other multi-level companies have hundreds of thousands or even millions of representatives, so Medifast has a lot of room for growth.

Though a smaller piece of the overall business (10 percent), the Medifast clinics division grew 89 percent in 2009 —from 20 to 27 clinics. At the centers, experts provide clients support around the weight loss process.

The company’s direct response segment sells meal replacement products like shakes, snack bars, oatmeal and soups through ads and their website. While this used to be their entire business, it is currently only 30 percent of sales, and will likely go down further while "Take Shape for Life" and clinics continue to rise.

Krueger adds that while Weight Watchers and NutriSystem provide a similar type of hand holding at their centers, they are mature companies and have felt the effects of the economy more. Medifast is growing fast from a smaller base of sales.

Ever Bigger Market

The U.S. Weight Loss and Diet Control Market, a report published in February 2009, Marketdata Enterprises projects prescription diet-drug revenue to grow at 13.5 percent, and diet books, cassettes and exercise videos at 12.1 percent, annually through 2012.

The prescription diet-drugs growth rate is high because there are many pharmaceutical and biotech companies working on anti-obesity drugs, and it's likely that several new drugs will be approved in the next few years.

“Any one of them could be a $1-billion blockbuster if it shows good results with few or no side effects,” says LaRosa. One that could benefit as early as this fall is a biopharmaceutical company, Vivus, whose obesity drug, Qnexa, may get approval in October.

LaRosa adds that the Food & Drug Administration has been more accommodating lately in terms of approving new obesity drugs due to the tremendous weight problem in this country.

Phentermine, which suppresses appetite, is the most commonly prescribed diet pill, accounting for 50 percent of the market.

There's also a wealth of over-the-counter pills, often called nutritional supplements. Hydroxycut is the top selling brand, at 1 million pills a year, according to 2009 data,

Although the diet market may experience only modest growth in the near term, La Rosa, Van Winkle and Krueger agree that the category will grow again.

“There is a positive umbrella of news flow, advocacy, and regulatory impact, and it seems like every time the first lady speaks, the word obesity comes out of her mouth,” says Van Winkle.

Every state or city seems to be trying to do something. Once the legislative attempt occurs, and the media attention picks up, it will affect consumer behavior, Van Winkle says.

Stress Factor

Another interesting factor is that during the recession, people had the stress of working harder to make ends meet, and thus were eating more comfort foods and buying less fresh and more carbohydrate-rich foods. Americans gained more weight than usual in the last two years, says LaRosa.

Source: Medifast

“When they come back to the structured diet programs, they’re going to have more weight to lose,” he says.

Krueger also points to the large baby-boom generation, whose members, having expereinced the middle-age spread, are thinking more about health and longevity and rising helath care costs. Clearly losing weight is an integral factor.

“People are more aware of cholesterol than they were 25 years ago," says Kruger. "They are learning what leads to heart attacks and diabetes.”

The success of a company like Medifast, and the positive long-term outlook for the sector may prompt new entries in the diet space. However, newcomers face several obstacles including limited funds for advertising, challenges around manufacturing a competitively-priced, superior product and distribution.

“It takes time and a lot of money to build a new brand,” says LaRosa.