Shares of Weight Watchers (NYSE:WTW) are down big on investors' concerns about the company's ability to attract and retain customers. Free diet apps like My Fitness Pal have pressured Weight Watchers' attendance numbers, sending shares down 35% in the past year. But a closer look at Weight Watchers' competitive position reveals a surprising winner in the diet wars.
Free apps are taking off
Free diet apps are all the rage. From apps that let you track calories consumed and calories burned, to apps that remind you to eat a healthy lunch and drink water at the right times, to those that simply list foods high in antioxidants, these free offerings are taking over the diet world. My Fitness Pal is one of the most popular: Over 65 million people have downloaded its free calorie counter app, which comes with a nutrition and calorie database that covers over 3 million foods.
My Fitness Pal was founded in 2005, according to its CrunchBase profile. However, the app didn't reach full steam until 2012, when Pando.com reported that it added 1.5 million users per month and hit 30 million total users by October. That year, attendance at Weight Watchers' meetings started a sharp decline after years of stagnation.
Weight Watchers' attendance is down another 15% through the first two quarters of 2014, and its stock price is down even further. If dieters continue to flock to free apps in lieu of Weight Watchers' paid offering, the attendance numbers could dwindle away to nothing.
No real long-term threat
However, there is reason to believe the damage to Weight Watchers will not last. For one thing, there have always been free alternatives to its programs: Since the dawn of time, consumers have had the freedom to diet and exercise on their own. Free apps such as My Fitness Pal are merely a convenient way for self-motivators to look up nutritional information and track their progress.
However, Weight Watchers' core customers are not self-motivators. People who pay $43 per month to attend a diet support group are not the kind of people who can lose weight using a diet app. Each week, 1 million members attend Weight Watchers meetings to receive encouragement and be held accountable through weigh-ins.
Apps don't hold people accountable. They don't offer adequate support to the people who need Weight Watchers. They can't replace the program that has withstood five decades of diet fads to help millions of people lose weight. My Fitness Pal and other free apps might gain a large number of users, but they will not help Weight Watchers' target customer lose weight as effectively as in-person meetings. As a result, Weight Watchers will ultimately retain the segment of the dieting population that needs group accountability to effectively lose weight.
How much short-term threat remains?
If free apps do not offer the support that Weight Watchers' core customer needs, then why has meetings attendance fallen so much? There are two main drivers for this. The first is the buzz surrounding free diet apps. Click on any article that lists the "best diet programs" and you'll likely find a popular free app among the cited resources. Free apps are new, and people want to try (and write about) something new. After Weight Watchers' core customers have tried and failed to lose weight using free apps, those people will likely turn to a premium service that integrates accountability into the program.
The second reason has nothing to do with free apps, as evidenced by the relative success of Weight Watchers Online, which enables dieters to track what they're eating. Its main draw is the proprietary system that assigns points to food based on the full nutritional content of the food rather than simply calories. Unlike free apps, Weight Watchers Online costs $19 per month.
If free apps were the only reason for Weight Watchers' recent woes, then you'd expect the company's online program to struggle more than its meetings program. However, Weight Watchers Online grew from 763,000 subscribers at the end of 2009 to more than 1.7 million subscribers by the close of 2013. Meetings attendance went in the other direction. This suggests that poor marketing has more to do with Weight Watchers' attendance woes than dieters' sudden desire to hold themselves accountable. Once Weight Watchers finds the right way to package its meetings and online tools, along with a fresh advertising campaign that resonates with customers, attendance will pick up again.
Free apps will continue to gain use by self-motivated dieters who can track their own progress, but there will always be a segment of the dieting population that needs in-person accountability. Weight Watchers has served those customers for over 50 years, and there's no reason to believe it will be unable to serve them in the future. As a result, Weight Watchers will win the war.
Ted Cooper owns shares of Weight Watchers International. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and 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.