Market Spotlight: Diet companies

With consumers looking to add weight to their wallets, investors and analysts are questioning how well diet companies that require customers to pay for food, support groups or fees will fare.

Since the start of the year, shares of Nutrisystem Inc. and Ediets.com Inc. have dropped by more than 20 percent _ a possible sign that investors are fearing the worst.

For Nutrisystem, the drop is the culmination of a difficult year in which shares have plummeted 67 percent, due to lower profits and fewer new customers.

Much of the problem, analysts say, stems from last summer's launch of GlaxoSmithKline's over-the-counter weight loss drug alli, which allows dieters to eat any food they like as long as it's low fat.

Nutrisystem's far more stringent plan requires customers to buy the company's own food and then supplement it with fruits and vegetables from the store.

"Once you're on the Nutrisystem program, you're committed to that food," said Oppenheimer analyst Vivian Ma. "Here comes a pill that you can pop and eat anything you want as long as its low fat."

In its third quarter, which ended Sept. 30 and included the first few months of the alli launch, Nutrisystem's profit fell 5 percent. New customers in the second half of 2007 fell 12 percent.

"I think they're still trying to recover from that to a certain extent," Ma said.

Analysts say although the company has started getting its business back on track with a new program featuring heart-healthy foods and plans to introduce frozen items, the spending slowdown may make a turnaround more difficult.

Nutrisystem's food costs about $300 a month upfront _ a price that may be too high for cash-strapped dieters.

"Given the weak consumer spending environment, we expect this high price point to turn many people away from the program," said Lehman Brothers analyst Karen Howland in a note to investors.

Weight Watchers International, in comparison, charges $10 a week for its support group weigh-ins and meetings.

Ma said Weight Watchers and other programs that would allow a dieter to eat the same food as other family members can be more economical, especially in larger families.

"In a family, if mom is doing Nutrisystem, she's still buying food for everyone else," Ma said.

At Ediets.com, meanwhile, the company has attempted to address cost issues directly by offering a five-day version of its meal delivery plan that is slightly lower priced than the company's original seven-day plan.

Kim Evenson, senior vice president of marketing and sales, said in an e-mail that the company's meal delivery business has been strong but she has seen some softening in online subscriptions, which cost $4.49 per week.

The meal delivery option, which provides meals for customers similar to Nutrisystem's plan, costs $15.95 a day, plus a $19.95 weekly delivery fee.