The Diet Company Soared With Its Sensible Approach to Eating and Weight Control. Then the Market Changed--and the Company Didn't
INSIDE STORY Los Angeles Times Magazine
Americans know how to lose weight and keep it off. Anyone who has ever frowned at a full-length mirror knows the formula: exercise, eat modest amounts of nutritious food and make the sign of the cross whenever tempted by a box of See's candy. Unfortunately, for most of us, knowing how to lose weight is like knowing how to be rich. It's the getting there that's hard. Instead of losing weight, we're locked into a never-ending series of try and fail, then try again and fail again.
So relentless is the cycle that it sustains a $35-billion diet and fitness industry, pushing this diet, that regimen, this pill. It's a highly competitive market in which only nimble businesses survive--for the cruelest reality about overweight Americans is this: We betray the dream of a bikini waist when we see the Ben & Jerry's case.
Just ask Jenny and Sid Craig, co-founders of Jenny Craig Inc. Eight years ago, their company was the unbuttered toast of the diet industry. Today, the company could be moving toward "case study" status at business schools--an example of failure to adjust to a changing market. The company that earned $36.8 million in 1992 posted a loss of $9.7 million over the last three quarters. The stock price fell as low as $1.43 last month, down from $33.88 in '92.
Declines like that will test the skills and resolve of any business. At Jenny Craig, the circumstances led to a series of departures of chief lieutenants who tried and failed to turn the company around. The latest blow is in the form of a warning from the New York Stock Exchange. It says it will drop the company if fortunes don't improve over the next 15 months.
But dire as those indicators are, none compares to Sid Craig's choice of that White House intern of celebrated enthusiasms, Monica Lewinsky, as the company's spokeswoman last year. She was supposed to inspire masses of women to sign onto Jenny Craig. Instead, her hiring demonstrated the depth of trouble at a company that once stood among California's 80 largest private employers.
TORREY PINES ROAD CLIMBS HIGH INTO WEALTHY LA JOLLA. There, amid swaying pines with the Pacific lying below, is where you work if God and your customers have been good. At the top of the hill, a broad, stately building facing Hawaii is where Jenny Craig celebrates its good fortune. From the outside, all appears well in the world of low fat.
It once was. Genevieve Guidroz met future husband Sid Craig in New Orleans in 1970, when she was working as a supervisor for his company Body Contour Inc., a chain of women's fitness salons. As specialists in that field, the couple knew that the truth about dropping pounds and sustaining the loss was to change eating habits for life. The Craigs were aware that most people were caught in the cycle: They ate poorly and gained weight, then shed pounds through strict, short-term diets, then resumed the bad habits and gained weight, then dieted again. In 1982, the couple sold their interest in Body Contour and moved to Australia, and within a year they had opened their first Jenny Craig Weight Loss Centre.
The concept, then as now, was to give customers a holistic approach to weight loss. Jenny Craig dieters are to drop pounds slowly, not in crash programs, and are taught how to change eating habits. Customers pay a membership fee of as much as $350, for which they receive counseling and access to weight-control and exercise workshops. They also eat Jenny Craig's prepackaged meals, which usually cost $50 to $75 a week and possibly more, depending on the menus a customer chooses.
The company proved especially popular with middle-aged women. As business soared, the company expanded, opening centers in New Zealand and, in 1985, Los Angeles. By the late 1990s, the company had 767 weight-loss centers around the world.
But even as the company grew, major shifts were occurring in the marketplace that presaged trouble. At supermarkets, prepackaged foods clearly disclosing low-fat and low-calorie contents began to appear, says Phil Lempert, a food-industry analyst in Santa Monica. Many people from Jenny Craig's core middle-class market who wanted to lose weight found they could do it without the Jenny Craig regimen. "When the company first started, back in the early '80s, frozen diet foods weren't available. It was all their show," Lempert says. "Now, every grocery store offers several tasty, inexpensive lines. The company can't compete with that."
At the same time, the company's target audience was aging. As the baby-boom women who had flocked to Jenny Craig in the '80s grew older, they became less inclined to continue with a strict weight-control regimen. Customers in such programs tend to drop out because of cost or boredom, says Kathryn Sucher, a professor of nutrition and food science at San Jose State University. The Jenny Craig system "is not a bad diet in terms of food. The big problem is that customers have to purchase the food from them." As the boomers opt out, they are leaving a big gap in the market. America has 76 million people in their late 30s to mid-50s, but only 40 to 45 million in Generation X, notes David Stewart, a marketing professor at USC. Unless Jenny Craig does something, "the diminishment of the company is inevitable," Stewart says. "They've got to come up with some new markets, fast."
Instead, the company is having less and less success teaching customers to make permanent changes in their eating habits and sustaining their newly trimmed figures. "When the weight is lost, the problem is seen as taken care of," Sucher says. "People need to learn how to make lifestyle changes they can stick with all their lives." But many Americans aren't listening.
Rather, they are flocking again to quick-fix diets that seem to multiply like fat cells and are offered, Lempert says, through fresh marketing approaches, such as infomercials and Internet pitches.
Jenny Craig did try to catch one of the new generation of quick-fix waves in the 1990s when it joined the fen-phen and Redux parade, putting doctors in Jenny Craig centers to write prescriptions for the hugely popular weight-loss drugs. When the drugs were pulled from the market for safety reasons in 1997, the company lost millions of dollars and valuable marketing momentum. By endorsing drug therapy, Jenny Craig also had undercut the importance of its own food and counseling. Two new prescription drugs, Meridia and Xenical, are now cutting into the weight-loss market but Jenny Craig says it will not incorporate them into its system.
As if those woes weren't enough, Jenny Craig was one of a handful of diet-industry giants sued by the Federal Trade Commission for exaggerating the benefits of their programs. Jenny Craig settled the case by signing a consent decree in 1997 promising that its advertising would not exaggerate benefits of the programs.
With its market share slipping at the close of the 1990s, the company needed to adjust, to find a new niche as successfully as it had filled a void in the weight-reduction industry a decade earlier. It's here, analysts and former executives say, that Jenny Craig suffered its biggest failure: leadership.
Sid Craig, 68, is widely credited as the force who built the company. However, that same keen eye is now seen as lost in the fog of the changing market. "Sid is very much in charge but he's in a time warp," says an advertising executive familiar with the account. "In his earlier days, he had a direct-response formula, which was to run an ad and then wait for the 800 number to start ringing. The consumer has changed, but he hasn't." Sid Craig declined to be interviewed for this story.
It's not that the company has been bereft of new thinking. Executives have offered plenty of ideas, but like so many successful entrepreneurs who built companies based on their vision, Sid Craig has trouble letting go. "You have to remember that Sid and Jenny Craig still own 69% of the stock," according to Securities and Exchange Commission figures, says Bud Leedom, who has watched the company from an investment standpoint for years as a securities analyst and as publisher of the San Diego Stock Report. "In many ways, Sid still treats it like a family store. It'll be tough for anyone who wants to change things to go against his will."
As a result, the broom has been busy. Jenny Craig had five presidents in the '90s and in recent months has lost the leaders of marketing (twice), operations, finance and public relations and the in-house lawyer. "What does it say when a company loses almost all its executive staff in a short time and has several presidents, one right after another?" asks one former executive.
IT IS A GOLDEN RULE TO MASS MARKETERS THAT CELEBRITIES MOVE products. It's not quite so simple in the diet industry, however. As an executive who worked with the company said, few celebrities are eager to go on national TV and admit, "I'm fat. I need to lose X pounds." For years, the voice and image of the company had been Jenny Craig herself, but an affliction left her with impaired speech. The company needed a replacement.
It also needed something more elusive: media buzz. To a company that is marketing-driven, one that survives by selling-selling-selling with the metabolic intensity of a Pekingese, the desire to make a publicity splash can be a prize worth reaching for. Jenny Craig's biggest competitor, Weight Watchers, managed a coup along those lines in 1997 when it hired the famously picaresque Sarah Ferguson, Duchess of York, as a spokeswoman. She was a celebrity with a weight problem to which she was willing to admit. It is no secret that the ex-wife of Prince Andrew had had a few risque tabloid encounters, and her picture hangs in no Sunday School classrooms, but the couple had divorced and the public seemed willing to forgive. Her role with Weight Watchers is a substantial success, says John LaRosa, who as head of Market Data Enterprises in Tampa, Fla., has been tracking the weight-loss industry since 1989.
In La Jolla, Sid Craig recognized Fergie's pull. He hit on an idea. "Sid is enamored with celebrity, always has been," says a former executive for the company. "That brought Monica onto the radar screen. They knew she would give them a blip and they hoped she just might work out. It was a move of desperation." The Jenny Craig of 10 years ago, even five, might have been more cautious. But the silence of idle cash registers can lead to an itchy trigger finger. It was the final ingredient needed--for a failure.
As the company weighed a decision on Lewinsky, some at Jenny Craig feared a blunder was in the making. Sid Craig "got a lot of internal resistance from people on all different levels in the company, and even from outsiders, but it was going to be his way," says the advertising executive. LaRosa says comparisons between Fergie and Monica are deceiving. "The Duchess," as Weight Watchers primly refers to her, is middle-aged, carries the mystique of royalty, has maintained weight-loss consistency, and when she goes to company functions can answer that magic question: "What was Di really like?"
Lewinsky did have a weight problem and she was a "celebrity," but she is younger than the target market, she has no royal cachet, and her fame comes from doing not only the wrong thing but the stupid thing. Lewinsky, who did not respond to interview requests for this story, has all the gravitas of Rick "Who Wants to Marry a Multimillionaire" Rockwell.
"Monica as a role model?" asks Ron Lunde, retired senior vice president of the Leo Burnett Advertising Agency in Chicago. "That's a question that needed lots of research and intelligent interpretation of data. Anything else is voodoo. The way it happened sounds like voodoo."
Still, she was hired, quietly signing a contract on June 9, 1999, committing her to lose weight before she would be announced as the new Jenny Craig spokeswoman. The company refuses to discuss its contract with Lewinsky. But the Los Angeles weekly newspaper New Times obtained a copy. It stipulated that if she reduced to her "target weight" by losing 40 pounds by Nov. 1, 1999, and kept them off, she could collect $2 million from Jenny Craig over a two-year period. In return, the contract spelled out that "Monica Lewinsky agrees to perform on-camera or voice-over in TV and radio commercials and their edited versions, and to pose for still photographs. . . . [she] promises to comment and discuss in a favorable and positive manner, publicly and in any interview, her association with Jenny Craig and her positive endorsement of Jenny Craig services and products."
The company announced Lewinsky's involvement the day after Christmas. On that day, Jenny Craig's 20 million shares of stock were listed on the New York board at $2.13 each. Four days later, the stock rose as high as $4.50 per share. For one brief, gilt-edged moment, Lewinsky had generated $40 million of paper wealth. The advertising campaign featuring her began in early January.
Reality hit like a double cheeseburger. Protests streamed in from franchise owners and customers. As one former executive explained: "Is a woman who walks into the office of the President of the United States and practically undresses in front of him the type of spokesperson you want representing you to the world?"
The media were atwitter. The company thought the public would see Monica as a celebrity with a weight problem and would forgive the ignominies that had thrust her into the spotlight in 1998. It was an assumption that showed remarkable naivete about the salivating beast that is the national media. These folks even chewed up wholesome Kathie Lee. Lewinsky was a rabbit thrown into the tabloid dog pound.
The late-night boys--Dave, Jay and Conan--snacked on yet another Monica morsel. "Monica Lewinsky is the spokesperson [for Jenny Craig] and she's doing television commercials," Letterman said. "When I heard this, I said to myself, 'Oh, I hope this doesn't cheapen her image.' "
The company had committed the unforgivable marketing sin of ignoring its primary customer base, says Michael A. Kamins, associate professor of marketing at USC. It had offended middle-aged, middle-class women, wholesome types intent on saving marriages, not breaking them up. Selling Lewinsky to them is as likely as persuading Al Sharpton to visit Bob Jones University.
Suddenly, it ended. The stock fell back to pre-Monica levels. Commercials featuring her stopped airing in early February. As the company hunkered down, Lewinsky abruptly lost her most-favored-dieter status. Asked about Lewinsky's status after commercials featuring her stopped airing, a facile PR man for the company said: "Monica's a client, just like tens of thousands of other clients."
Lost in the maw was another failure: Lewinsky had lost 31 pounds by January, but that was nine short of her contract goal. (It does appear, however, that she could have earned $325,000 for her efforts up to that point.)
On April 10, the company announced a new promotional campaign featuring five dieters. Lewinsky was not one of them.
SO WHERE DOES THIS LEAVE JENNY CRAIG? IT STILL BOASTS 660 weight-loss centers, but that's down 14% from a year ago. "Their operations are in the tank," securities analyst Leedom says. On April 26, Jenny Craig reported that the New York Stock Exchange has warned it will drop the company if its market capitalization and total stockholders' equity do not rise to $50 million each by September 2001. As of late April, the company's market capitalization stood at $36.2 million, and stockholders' equity totaled $47.3 million.
Jenny Craig does have cash reserves and short-term investments of $33.9 million, an unusually large amount, especially for a struggling company. The reserves should buy more time. "If the company's losses continue, they're going to run out of cash," Leedom says. "If they're still at $2 then, I don't think anyone is going to care a hill of beans about them."
Others believe Jenny Craig should rethink whether it should keep prepackaged foods at the core of its business. LaRosa says the concept is outdated and the public no longer finds it appealing. He says that with the Internet and its proliferation of low-overhead competitors, "a lot of customers have learned they can get dieting products from their living rooms. That's an easy habit to form."
Lempert says the company must resist any impulse to try competing in grocery stores. "If they're tempted to offer the Jenny Craig line in supermarkets, they'd be jumping into the most competitive business in America. They'd get killed."
Jenny Craig executives recognize the danger. "We're not going to hop into that market, because that's not who we are," says company President Patti Larchet. "But we can lend our brand and name as a partner with Balance Bar to bring nutrition bars and diet drinks to the market."
Weight Watchers International went the opposite route. That company also once provided an all-encompassing diet, offering support meetings for dieters and selling them food. But in 1978, the company sold out to the food giant H.J. Heinz Co., which continued marketing the prepackaged food but years later sold off the weight-loss service. The slimmed-down Weight Watchers International now offers advice and support at company-led groups that meet weekly in low-cost rooms. Membership costs about $30 and weekly fees range from $9 to $14--a comparatively small sum that makes the company accessible to most any income level. Group sizes range from 35 to 40, according to Linda Webb Carilli, general manager for corporate affairs. After revamping, Weight Watchers has seen its attendance jump 60% in the last two years, Carilli says.
Despite the success of its competitor, Jenny Craig believes its best hope is to continue with the same general, once wildly successful formula. The answer, its executives say, is to redouble their efforts to tap the market. "Jenny Craig is going to put their energy back into a program that we know works, and continue to evolve and update that program," Larchet says. The company has added a new menu. "We're not going to deviate from what our core business is, but [will be] offering more choices."
Analysts doubt it will work. If the company rebounds, they say, it will be due to broader changes that must occur soon.
If the company instead becomes a casualty of the weight-loss wars, its place will be squabbled over by 10 other firms eager to proclaim, "You, too, can shed those excess pounds." But none will be so eager to employ Monica Lewinsky to make the pitch.