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  1. Analysis
July 6, 2006

Nestlé eyes growing diet sector with Jenny Craig deal

The diet foods market may be seen as volatile and faddish, but Nestlé clearly feels the growth prospects outweigh the risks, acquiring the Jenny Craig business for US$600m last month. Ben Cooper reports.

The diet foods market may be seen as volatile and faddish, but Nestlé clearly feels the growth prospects outweigh the risks, acquiring the Jenny Craig business for US$600m last month. Ben Cooper reports.

As vexing as it may be for those who believe major food corporations bear the lion’s share of the blame for rising obesity, those same companies are well placed to benefit from the escalating problem through their involvement in the diet products and weight management sector, allied with product innovation aimed at the health and wellness market.

It is no secret that rising concern over obesity is causing a major headache for many big food groups in the form of bad publicity, but the financial rewards offered by healthier product areas afford a significant palliative. The slimming market in the US alone is estimated to be worth around US$30bn. Couple that with the potential to generate some positive PR, to become “part of the solution and not part of the problem”, and it is little wonder that major food groups are showing such an interest.

In this context, Nestlé’s recent US$600m acquisition of the Jenny Craig diet products and weight management company comes as no surprise. In fact, the deal brings the Swiss-based group into direct competition with Anglo-Dutch food and consumer goods group Unilever, which owns the Slim-Fast Foods Company. It also becomes a direct rival of Weight Watchers International, in which Heinz has a substantial involvement, and NutriSystem.

Jenny Craig is a US-based producer of premium calorie-controlled meals, and also offers advice and weight loss services from 648 slimming centres in the US, Australia and New Zealand. The purchase price values the company at more than four times its value in 2002 when founders Sid and Jenny Craig sold 80% of the group to ACI Capital and MidOcean Partners. Nestlé has acquired 100% of the concern.

The deal, which is expected to close during the third quarter, was generally welcomed by analysts who view Jenny Craig as a useful addition at an affordable price, though some were cautious about the move because of the volatility of the diet foods market and the faddish nature of the business. In its favour, however, was the premium focus of the Jenny Craig brand, which targets more affluent consumers than NutriSystem. In addition, analysts consider there is significant potential to expand direct-to-consumer sales for the brand through direct marketing, telesales and the internet, sales channels which have not hitherto been pursued by the company.

With annual sales of US$400m, Jenny Craig is some way behind the market leader Weight Watchers International, which has a turnover of $1.1bn and a market capitalisation of $4.2bn, but Nestlé clearly feels the brand has strong growth potential.

However, the Jenny Craig purchase is more than a commercially attractive add-on to Nestlé’s mainstream food business. The move is an important step in what executive chairman Peter Brabeck-Letmathe describes as the company’s “transformation process into a nutrition, health and wellness company that sees weight management as a key competence”.

Brabeck-Letmathe also said that the “the rise of obesity and the resulting metabolic disorders, such as diabetes and cardiovascular disease, is a major public health concern”, and that the “Jenny Craig acquisition puts us in a privileged position to help many of our consumers”.

Such rhetoric shows just how valuable producing more good-for-you foods can be for beleaguered food companies but its value goes far beyond PR. The commercial benefits are undeniable. Last year, worldwide sales of granola bars rose by 14%, against just 4% growth in chocolate confectionery. As JP Morgan analyst Arnaud Langlois put it: “’Healthy food’ undeniably is a key growth engine.” Just as crucially, functional foods generate operating margins above 15%, compared with 9% to 12% for more conventional processed foods.

While the diet products and services business looks like an attractive market, the larger functional foods sector is generally viewed as a more lucrative growth opportunity for major food manufacturers in the long run. The frightening statistics underline why food companies are investing in this area. According to US government data, around 65% Americans are either overweight or obese, with obesity rates doubling over the last 25 years. In addition, there are thought to be around 171m Type 2 diabetes sufferers worldwide, some 80% of whom are obese.

Once again, critics would suggest food companies should look more at their own culpability than the commercial opportunities presented, but such statistics not only bear out the potential rewards but more importantly the glaring necessity for investment in such products. Major food corporations are bound to be the best placed to produce and market these products on the large scale that is required.

Nestlé has been ramping up its activities in the functional and health/wellness areas steadily for at least ten years. Jenny Craig will become part of the group’s Nutrition division which produces and markets functional products such as food bars, notably those targeted at sufferers of Type 2 diabetes. Earlier this year, Nestlé acquired the Australian breakfast cereal and snack-bar business Uncle Toby’s for US$657m.

Cynics will protest that by investing in the diet and health and wellness markets, major food groups like Nestlé are, to use a distinctly inappropriate metaphor, having their cake and eating it. The degree to which food companies are directly responsible for rising obesity is of course at the crux of the debate but they would surely be more harshly criticised if they were not investing in such areas. So to a degree they are damned if the do and damned if they don’t.

So Nestlé will ignore any accusations of double standards and continue a strategy which is both commercially attractive and good for its image, a blueprint with which the acquisition of Jenny Craig is utterly consistent.

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