Weight Loss Franchises

There are several misconceptions by the public about commercial weight loss franchises:

Commercial weight loss chains probably receive the most publicity and are the most visible, due to the large amounts they spend on advertising. They may also at times come under the greatest criticism. This segment of the U.S. diet market, however, does NOT represent the bulk of the industry’s sales. System-wide revenues of the 9 leading franchise chains accounted for only an estimated $1.1 billion of a total $37 billion "industry" in 2002.

The decline in both the number of centers operated and the top chains’ revenues since 1995 has been dramatic. Over a decade ago, in our 1991 report, BestDietForMe.com/Marketdata estimated that there were 8,600 centers or meeting sites operated. As of the Fall of 2002, we estimated the top 10 chains operated only 4,400 sites. The phen-fen diet drugs craze of 1997 took its toll on the commercial centers, as well as other competing segments, shifting dieter attitudes, and consolidation among the major systems.

There are four major weight loss franchise systems: Weight Watchers, Jenny Craig, LA Weight Loss, and the combined operations of Physicians Weight Loss Centers/Diet Center Inc./Formu-3 International. (Health Management Group). Together, these three systems operated about 4,317 sites/centers in 2002.

Women dominate this business, as franchise owners. A Saavy Woman magazine article said that 95% of Diet Center franchise owners were women, and 61% of Nutri/System’s franchises (when they still operated them years ago) were then owned either by women or women in partnership with men.

Potential franchisees are usually given the Basic Disclosure Document at their personal meeting with the franchisor, or before money changes hands, or the contract is signed. In addition, in 15 states franchisors are required to file a Uniform Franchise Offering Circular (UFOC). These states are: CA, HI, IL, IN, MD, MI, MN, NY, ND, OR, RI, SD, VA, WA, and WI. Furthermore, IF potential earnings claims are made, an Earnings Claims Document is required by the FTC’s Franchise Rule. If claims are made, the franchisor must provide a reasonable basis for them, and be able to substantiate them. Earnings should be geographically relevant to the franchisee’s location.

Most commercial weight loss operations are still small and few are franchised. Even in the largest organizations such as Weight Watchers and Jenny Craig, most of the centers are now company-owned.

Indeed, there are several regional medical weight loss chains such as Lindora Clinics, and infomercials, and even individual diet celebrities that generate more money per year than many commercial weight loss companies! Richard Simmons alone grosses $30+ million most years with his infomercials.

In the 1980s, the commercial weight loss centers operated "fat and happy" (no pun intended). Revenues were growing 12-15% per year or more for most firms, and gross profit margins of 30% or more were common. It was easy to make money in this business, and to attract new franchisees. America was gaining weight, was employed, and had the discretionary income to spend on such "luxuries" as weight loss programs.

Rapid growth of the major franchise systems, fueled by the entry of Jenny Craig, spurred the expansion. The large companies had the funds to spend heavily on advertising, further stimulating demand. At its peak, Diet Center had more than 2,000 outlets (although many were operated by part-timers), and Nutri/System’s revenues neared $1 billion, operating more than 500 franchised outlets until the late 1990s.

Those were the "good old days" of weight loss center franchising and growth. Those days are long gone.

Then by all means perform your due diligence. Obtain and review carefully the UFOC document, with your attorney if possible. Speak to as many existing franchise owners you can contact, some former ones that left the system too. Be prepared to spend long hours running what today is a very competitive business. Don’t be swayed by overly optimistic projections. There ARE some franchises in certain metro areas where you can make significant money, but they are the exception, not the rule. If you are a truly independent entrepreneur, you may not enjoy being under the strict control of a parent company. As with any franchise, you are not free to do whatever you want. Franchisees also depend heavily on their relationship with the franchiser and that relationship may change suddenly if new owners take over.

If you are a downsized executive looking for a new career, but don’t have any consumer retail experience, nutrition or consumer healthcare or counseling background, think long and hard about getting into this business via franchising. This is also not a business where you can be an absentee owner and let it run itself.

BestDietForMe.com/Marketdata obtained the 1999 UFOC franchise document filed with the state for ABC Diet Company. Information in it allowed us to paint a composite or "average" picture of a typical commercial weight loss center’s finances. This financial profile appears below. Figures are BestDietForMe.com/Marketdata estimates, based on estimated percentages and ranges provided in the ABC Diet Company document.

ABC Diet Company reported 1998 revenues of $38.7 million. This figure, divided by 157 centers in operation, means that the "average" center grossed $246,496 in sales that year.

Expense ranges supplied by ABC Diet Company were as follows:

• Advertising 17-24 % of sales
• Cost of goods sold 11-18%
• Payroll 24-29% (based on hiring a manager to run the center for you)
• Rent & miscellaneous 12-14%
• Royalties 7%

Therefore, ABC Diet Company claims that one should be able to generate an 18.5% profit on sales, using the mid-point average for the above ranges.

From the figures above, one can see that if YOU (the franchise owner) act as the center’s manager, you can earn an estimated $32,321 plus the 18.5% gross profit of $43,680 – or a total of about $76,000. If you pay someone else to run the center for you, you’d earn $45,600. That’s assuming that your sales DO reach $246,000 and that your expenses are indeed within these estimated ranges.

According to information in the ABC Diet Company’s more recent 2002 UFOC document…

The initial franchise fee is $20,000, and there is a 7% royalty of gross revenues. The company estimates the total initial investment at $61,800 to $112,200.

In addition, the franchisee must allocate The greater of $5,000, or 15% of gross revenues, per month, for co-op and local advertising. A center will usually require 900 to 1,200 square feet of space in an office building. The company also offers a Development Agreement that gives you the right to open multiple centers within a designated area.

Based on 373 centers in operation, and revenues of $105 million, average revenues per center were $283,163 in 2001.

The following chart summarizes the average operating expenses for a typical ABC Diet Company center:

Back in 1996, the cost to get started with an XYZ Diet Company center ranged from a minimum $40,300 to a maximum of $100,050. That has been cut substantially. As of 2000, it was $38,140 to $70,200. The royalty rate in 2000 (ongoing license fee) started at 5.5% and can go as low as 3% on a sliding scale. There is an additional required payment of $600/week or 7% of sales that’s used for local center marketing, and another 7% for co-op advertising.

Following below are estimated investment costs to purchase a franchise (year 2000):

Weight Watchers today has 37 franchise territories in the U.S. and another 16 worldwide. The company operates a "closed" system--no outsiders can buy a Weight Watchers franchise. It must be bought by the parent or by another franchise owner, or transferred to the owner’s family, and the cost, while not specified, is said to be in the millions.

Territories can differ substantially in the geographic area they cover. A franchisee may own a whole state, or just a county, depending on population density. For example, there are 10 separate franchises for the area in New York State along the Hudson River, plus others in Rochester, Syracuse and Oneida County. Suffolk County, Long Island is a separate franchise, whereas Queen, Brooklyn, Richmond, Manhattan, and the Bronx (5 boroughs of NY) are considered part of Weight Watchers of the Northeast. California only has 2 franchises, Florida has 6 and there are 5 in Texas (El Paso, Houston, Dallas-Ft. Worth, etc.).

Many franchisees in this system have perpetual contracts, and go back to the founding days of the 1960s. In these cases, the franchise often is passed along to the children, or sold back to the parent company. The parent has the right of first refusal. Many franchises are said to be "family businesses" that typically incur smaller overheads than company-owned territories. There are no performance guarantees, on either side.

Franchisees do pay a percentage of revenues as a royalty, believed to be about 10%, based on interviews with franchise owners. (This is also felt to be one of the highest rates now in effect in the industry.).

As an example of the fickle and cyclical nature of the diet business, 1997-1999 was NOT a good time to sell commercial weight loss franchises. Most in the industry took a "wait and see" stance, hoping that their companies would rebound and grow before attempting to grow via franchising again. Companies have definitely cut their franchise fees and the royalty rates. This situation was reversed since 1999, however. Companies have raised their operating capital requirements and franchise fees. However, there is also a marked trend among the largest chains (such as Weight Watchers) toward buying back franchises and converting them to company-owned operations.

Why? Because franchising is risky for the parent company. Franchisee groups form and can gain clout and divide the company, objecting to policies and new products. There is also less control over quality and consistency of the program and services rendered, as well as advertising campaigns.