Two-thirds of the U.S. population is considered either overweight or obese, according to industry data compiled by Medifast (NYSE:MED), a distributor of weight loss and weight management products. Last year, the American Medical Association also officially recognized obesity as a disease, which should increase awareness of this growing problem.
While the general prospects of the weight loss industry are bright, it is much more difficult to pick any single company as a proxy. Some of these companies are already giants in their space, with little room for market share gain; meanwhile, others are single-channel operations that don't capture the entire demand from varying personal weight management, health, and wellness needs.
Making more people aware
Based on industry data collated by Medifast, the market segments within the U.S. weight loss industry served by Medifast are estimated to be valued at about $18 billion. Of this amount, Medifast only has a 2% market share.
On the surface, it seems that Medifast and its peers Weight Watchers (NASDAQ:WTW) and Nutrisystem (NASDAQ:NTRI) all already have well-known brands. The results suggest otherwise--2013 campaign showed that Medifast is still behind Weight Watchers and Nutrisystem in terms of brand awareness.
Weight Watchers and Nutrisystem have consistently scored brand awareness ratings above 80% over the past two years, suggesting some degree of market saturation. Medifast has been closing the gap with its peers, seeing its brand awareness levels rising from 20% in 2011 to about 40% in 2013. This suggests that Medifast has the greatest room for growth, as a greater number of obese consumers don't know about its branded products and programs.
Given all the horror stories associated with weight loss programs gone wrong and food safety concerns, a successful company needs to build its brand before its products gain acceptance with customers. Medifast already has elements, including a long-established track record backed by scientific studies and a list of industry awards and accolades, which are key factors in creating a trusted consumer brand.
First, more than 20,000 doctors and in excess of 1 million customers have respectively recommended and used Medifast's products since the 1980s. This is the strongest endorsement possible, since time is the best test of the authenticity and effectiveness of any weight loss program.
Medifast's more established peers Weight Watchers and Nutrisystem have been in the business for a long time. Weight Watchers founder Jean Nidetch started inviting friends into her house weekly to share weight loss experiences in the 1960s; meanwhile Nutrisystem has a 35-year track record in the business.
Second, Medifast provides scientific evidence as support for its products. For example, participants lost more body weight and fat on its flagship Medifast 5 & 1 Plan than on a reduced-energy, food-based diet for a one-year period, according to an April 2013 study published in the International Journal of Obesity.
Nutrisystem and Weight Watchers have their own set of studies to support their causes. Nutrisystem works with The Obesity Society and other academic researchers with respect to clinical investigations of its products and programs. Weight Watchers also has bodies such as Britain's Medical Research Council and the University of Tennessee Health Science Center coming out with results to support its studies.
Third, Medifast's corporate image has also been boosted by two new awards in 2013. It was ranked 16th on Forbes' list of America's Best Small Companies in 2013, and was also named a Future 50 Blue Chip Award Winner by SmartCEO Magazine in January this year.
While Medifast's brand isn't known to a majority of its target market, its multichannel strategy gives it an edge over its competitors. It sells products and programs through four main channels: direct to consumer (Medifast Direct); personal coaching network (Take Shape For Life); brick and mortar clinics (Medifast Weight Control Centers), and wholesale (Medifast Wholesale). In 2013, Take Shape For Life was the key contributor accounting for 63% of sales, followed by Medifast Direct at 22% of revenues. Medifast Weight Control Centers and Medifast Wholesale generated the remaining 15% of revenue for Medifast.
There are three key advantages associated with a multichannel strategy.
First, people try to lose weight via various means (such as personal physical training, diet plans, seeing the doctor, etc.), so it doesn't hurt to reach out to as many people as possible. For example, Nutrisystem generates revenue primarily through its direct channel via the Internet and telephone. In contrast, consumers who enroll in a weight control center or hire a personal health coach can still have access to Medifast's products.
Second, an overdependence on a single channel runs the risk that channel partners become too powerful and use their bargaining power to lower prices. Manufacturers of off-the-shelf weight loss products are usually at the mercy of retailers such as supermarkets and pharmacies.
Third, a multichannel approach opens up new opportunities for international expansion. Medifast established its presence in Canada in March of this year via its direct-to-consumer and wholesale channels. It plans to further expand its business in Canada by leveraging other channels such as brick and mortar clinics and its personal coaching network. On the other hand, certain foreign countries might have tighter regulations regarding direct selling. For example, direct selling businesses in China are required to apply for licenses before they can operate.
Foolish final thoughts
Medifast's multichannel model means that it will capture a greater share of the weight loss market in the future, as it can meet the varying needs of overweight people through different channels such as direct-to-consumer, wholesale, clinic, and personal coaching. Moreover, its lower brand awareness relative to its peers suggests room for growth.
Mark Lin has no position in any stocks mentioned. The Motley Fool owns shares of Weight Watchers International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.