Tivity Health, a healthcare organization in the Southeast U.S., acquired NutriSystem, the weight loss company, in December 2018. Tivity ran NutriSystem under its Nutrition division for about 18 months, then wound up selling it, at a big loss, to private equity firm Kainos Capital.
On Oct. 19, 2020 Kainos Capital agreed to acquire NutriSystem, from Tivity Health, for $575 million. Kainos is well known for investing in weight loss brands, such as Slim-Fast. The purchase price was less than half what Tivity paid to buy Nutrisystem. Tivity had acquired Nutrisystem in a deal valued at $1.3 billion, that was announced in December 2018 and that closed in March 2019.
Why did Tivity bail out after only 18 months, with a loss (write down) of $570 million? Why did the combination fail? Well, it's not rocket science, and it has happened twice before (Unilver's failed acquisition of Slim-Fast, then selling it, and Nestle's failed acquisition of Jenny Craig, then selling it). .
First, an examination of Tivity's 2019 10K statement and its 3rd quarter 2020 10Q reveal that the company only spent $128 million on marketing and advertising for NutriSystem in 2019, producing an estimated $597 million in sales. That's about $100 million less than what the company did in 2018, when marketing spend was north of $200 million. If Tivity had not cut the marketing spend, the brand would have done better in 2019.
The Q3 2020 report showed that NutriSystem had sales of $518 million for the first 9 months, or an annual pace of $690 million--not at all bad during a pandemic and recession and in line with 2019 sales.
Secondly, the top management and marketing team at NutriSystem, familiar with the weight loss market, was gone. They either resigned or were fired soon after the acquisition (Dawn Zier - CEO, Kiera Krausz - Marketing Director). Tivity probably thought that their marketing people could do a better job, at less cost. Big mistake.
Next, in March 2020, the Covid-19 pandemic hit, and many weight loss companies were hurt, especially ones operating brick & mortar centers that provide coaching in person. That model cratered. However, NutriSystem doesn't use that model. Customers order their diet foods online and by phone and the foods are delivered to clients' homes. Coaching and support happens by phone. As more Americans (and dieters) stayed home, and consumed more frozen foods, this model became a lot more popular, and NutriSystem sales benefited.
So, if Tivity had just held on a little longer through 2020, if they had devoted enough funds to marketing, and if they retained key personnel, they'd be a lot happier today and probably would not have had to sell at a big loss. Lesson learned.
Formula for failure when acquiring a weight loss company:
- Overpay for the acquisition
- Don't retain key personnel that know the market well.
- Cut the marketing budget and don't support the brand enough
- Don't give the integration enough time to work.
- Sell out for a big loss.
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