Mainstream Medifast

Owings Mills firm is using outlets, franchises, national ads to market its weight-loss products

May 04, 2007|By Allison Connolly | Allison Connolly,Sun reporter

For years Medifast has relied on under-the-radar marketing to sell its weight loss products. Physicians referred the company's meal replacements to patients who needed to shed pounds. Some of those patients in turn became salespeople, using themselves as walking testimonials. And with the advent of the Internet, the 27-year-old company began selling directly to consumers through its Web site.

In the meantime, rivals such as NutriSystem and Unilever's SlimFast elbowed their way to the top of the meal replacement market with high-profile marketing.

Now Medifast, based in Owings Mills, is going mainstream, with strip-shopping center clinics, franchises and a national campaign.

It has opened nine clinics in Orlando, Fla., and Dallas and is evaluating sites in Baltimore. This year, it plans to begin offering franchises. It has signed a deal with Cuts Fitness For Men, a franchise of 75 male gyms and professional trainers, to pitch Medifast products to its customers. And it's about to launch a new advertising campaign.

"You really have to differentiate yourself from all the competition out there," said recently appointed chief executive Michael S. McDevitt.

That's not easy.

Medifast, which operates in an industry dominated by well-heeled corporate giants that include Unilever (SlimFast), Nestle (Jenny Craig) and Weight Watchers International, companies that dwarf Medifast.

Medifast competes in the meal replacement category of the weight-loss market, alongside NutriSystem and SlimFast. Its program, with more than 65 calorie-controlled snacks and powder replacement meals, costs users about $10 a day.

Its closest rival, NutriSystem, had sales of $568 million last year and is projecting revenue of $790 million to $805 million this year. Medifast, in contrast, had revenue last year of $74 million, up 85 percent from 2005, and expects 2007 sales to be between $85 million and $88 million.

Analyst Laura Richardson of BB&T Capital Markets estimates the market for diet programs and related food products to be worth about $48 billion a year. While there are plenty of players, she said, mass-advertised brands such as Weight Watchers and Jenny Craig take the lion's share.

"You need advertising for awareness, but when you're the size of Medifast, you can't go from direct marketing to hiring Valerie Bertinelli to be your spokesperson," said Richardson, who rates Medifast a "buy" and whose firm expects to do business with Medifast in the next three months.

Analyst Scott Van Winkle of Canaccord Adams Inc. in Boston is waiting to see Medifast's marketing plan before deciding whether to change his "hold" rating on the company's shares.

"Marketing drives this business," said Van Winkle, who does not own any Medifast shares and doesn't do business with the firm.

Still, in so vast a market, he said "Medifast can gain a small piece of it and still be successful."

McDevitt said the company has moved to increase production capacity in anticipation of business it expects the new marketing campaign and storefront clinics to generate. Last year, the company spent $3.5 million on infrastructure upgrades, including a new information technology system, two production lines and a mixer that is twice the size of two existing blenders, and can produce a 5,400-pound batch, or 500,000 packets of product, over two shifts.

Medifast also recently invested in two new packaging lines. The company said it could fill orders worth $250 million a year if it were to add a third shift.

About 80 employees work two shifts at its manufacturing plant in Owings Mills, which is also home to Medifast's administrative offices, a small research lab and a call center, with 265 employees total. It has a distribution center on the Eastern Shore.

"This year, I'm very optimistic we're going to be able to grow the Medifast brand," McDevitt said.

Getting to this point has been a bumpy ride. Started in 1980 as a family-owned company called Jason Pharmaceuticals, Medifast declared bankruptcy in the early 1990s and endured several years of inner turmoil.

In 1998, shareholder Bradley T. MacDonald, a retired Marine colonel, wrested control of the company through a proxy fight and headed off a second bankruptcy. With the motto "Marines don't surrender," MacDonald grabbed hold of the company and steered it toward profitability.

MacDonald was aggressive. He paid an investment banker to cover the stock and funded scientific research that would bolster Medifast's products. In January, he was accused of anonymously promoting the company on a Yahoo Finance message board. In a statement, the company defended MacDonald's right as Medifast's largest shareholder to defend it in public forums. That same day, MacDonald announced that he was stepping down as CEO as part of a previously disclosed succession plan.

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