Weight loss player Medifast pivots toward network marketing model

08-Aug-2016 - Last updated on 09-Aug-2016 at 16:05 GMT

Related tags Network marketing Revenue Nutrition

Weight loss specialist Medifast reported lower revenues as it repositions its business with an increased emphasis on its network marketing component and a nascent sports nutrition segment tied to sponsorship of sports leagues.

Medifast was built on a model of offering a proprietary suite of weight loss products and plans via a number of corporate-owned centers. The products include meal replacements, foods such as nutrition bars and breakfast foods, and dietary supplements. The company is now exiting that business, and has sold all of its remaining corporate owned centers to franchisees.

While still offing the Medifast program for franchisers, the company is now building up a network marketing segment called Take Shape for Life, which markets a line of products under the Optivia brand name. Medifast calls its distributors Health Coaches. The company also sells products online and through health care professionals. The company launched the Optivia line in July as a way to better differentiate the products clients could purchase from Health Coaches and the Medifast products they could buy online for themselves.

Revenue doldrums

As the company negotiates its transition away from corporate owned centers, some segments declined. Overall Medifast reported second quarter revenue of $71.1 million, a 1.5% decrease from the $72.2 million it posted in the second quarter of 2015. But the wholesale business declined precipitously, to only $300,000 in revenue from $3 million, as the company instituted new rules about who could buy through this channel. Sales in the direct-to-consumer business suffered as more emphasis was placed on the network marketing angle. And the franchise operation also declined.

What saved the company’s bacon in the second quarter was the multi-level marketing portion of the operation. Revenue in Take Shape For Life was up 10% to $57.4 million in the second quarter of 2016, compared to $52.3 million in the second quarter of the prior year. The company said this is the sixth straight quarterly improvement in the year-over-year trend.

Even with the revenue declines, profits for the company were up, bolstered mostly by the extraordinary margins Medifast has been able to achieve.

”Take Shape For Life results fueled our consolidated financial performance in the quarter and helped us achieve greater leverage across our cost structure. Across the entire business, gross margin expanded 110 basis points in the quarter to 74.8% and our team remains focused on efficiently managing our expenses to support our revenue plans,” said CEO Michael McDonald in an earnings call that was posted in transcript form on the site seekingalpha.com.

Sports nutrition developments

In addition to the MLM breakthrough, Medifast also is launched a sports nutrition line under the Dual Fuel brand name. The company plans a number of sports league tie-ins to form the marketing basis for the line’s launch, which McDonald said won’t start contributing significant revenue until the next fiscal year.

“We're still working on product development, but we have signed up about seven colleges and universities and we also have the ECAC (Eastern College Athletic Conference), the Atlantic Hockey League, and the CIAA (Central Collegiate Athletic Association) conference where we are sponsoring three conferences. So one of the things we’re doing is really trying to get the right references and start to sign these people up. It does take some time,” McDonald said.

International expansion

According to Mona Ameli, president of the Take Shape for Life subsidiary, future plans for the brand include international expansion, but the process will take time.

“One of the most important parts of actually going international is to be able to make sure that we have the right infrastructure and the right support and investing in this new IT platform enables us to have a multilingual, multi-currency platform and to be able to then start working on our cross-border sponsorship compensation plan to ensure that health coaches that come onboard in other countries are able to be compensated and vice versa. So there are some additional parts that goes into it. On top of that, as we introduce the Optavia new product line and the reformulation, we need to go through regulatory approvals through the countries. At the moment, the Optivia line is still being fully formulated, and seeking regulatory approval for the products in various markets is proceeding along with that,” she said.