Encore: Diet Wars | Reaching for the Stars | 3

0:00A note to listeners, the material in this episode covers the weight loss industry and diet culture, which could be upsetting for some people. This series originally aired exclusively on Wondery Plus in 2022.

0:22March 1994, the World Trade Center, New York City. In a conference room on the 44th floor of the North Tower, Heinz Chairman Tony O 'Reilly takes a deep breath and steps up to the podium. In front of him are 250 Wall Street analysts, and they all think he's finished. O 'Reilly turned Heinz into one of the biggest corporate success stories of the 1980s, and much of that growth came from Weight Watchers. But now, Weight Watchers is on its knees, and Heinz is flagging. I know what you're all wondering. Is the downturn at Heinz going to be an enduring problem? My objective today is to show you that it's temporary.

1:08For the next hour, O 'Reilly battles for his career. He explains how Heinz is fixing its core operations. But he knows that what these analysts really want is for Heinz to offload Weight Watchers and stick to food. But O 'Reilly still believes in the weight loss brand. Weight Watchers attendance dropped for four years straight after we bought it in 1978. We've seen lows before. It took us until 83 to get the formula right. But once we did, this happened. O 'Reilly brings up a graph showing Weight Watchers' attendance shooting higher and higher until peaking at 32 million in 1991. Attendance soared every year until the recession hit.

1:54Ever since, attendance has been falling. Last year was bad. 1994 will be worse. Our forecast is Weight Watchers' profits will fall by$100 million this year. The analysts feel vindicated by the ongoing losing streak. But they're also wondering how O 'Reilly is going to defend this. Now some say we should sell Weight Watchers. I say no. America's getting fatter. Obesity rates among kids are shocking. The U.S. government says this epidemic will cost the country$140 billion a year. It's a problem that must be tackled. And when it is, weight washers will be there, at the forefront of change. An analyst interrupts.

2:43So your strategy is to just wait for that moment? O 'Reilly smiles. Some of the analysts are nodding in agreement. But he knows his confident words are just plastering over a cracked wall. He has to find a way to truly turn Weight Watchers around. Or skeptical analysts could spark an investor defection that could leave a Weight Watchers-sized hole in Heinz.

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4:52From Wondery, I'm David Brown, and this is Business Wars.

5:21On the last episode, Jenny Craig used Australia as a springboard to success in America. A quicker weight loss plan turned Weight Watchers into a billion-dollar behemoth, and Nutrisystem got crushed by an avalanche of lawsuits claiming its rapid diet damaged gallbladders. Now, the 80s diet boom is over, and the weight loss giants are hunting for ways to get people back through their doors. But while Jenny Craig and Weight Watchers are about to turn to celebrities for help, Nutrisystems got another remedy for jump-starting sales. Drugs. This is Episode 3, Reaching for the Stars.

6:10September 1995, Voorhees, New Jersey. In a room inside the local NutraSystem Center, a doctor in a white coat weighs the latest customer to walk through the doors. Okay, you can step off the scales now. The middle-aged woman steps off the scale and slips her shoes back on as the doctor inputs her weight into his computer. So, your BMI is 27.79, which is more than 20 % above your ideal weight. That means you qualify for our new NutraRx program. Uh, that's the one with the weight loss pill, right? The one I saw in the newspaper? That's correct. It's actually two pills. Together, they're known as fen-fen.

6:54The first pill is fenfluoramine. That's an appetite suppressor. Oh, I need that. I tried Nutrisystem before, but I was hungry the whole time. I just couldn't stick with it. You'll have a very different experience on fenfluoramine. You may struggle to finish what's on your plate, but fenfluramine can cause drowsiness, which is where the second pill, fentermine, comes in. It counteracts the drowsiness. Are there side effects? Well, as with all drugs, there can be. Most commonly, it's dry mouth, insomnia, maybe diarrhea. Extremely rare, but it might raise the risk of pulmonary hypertension, too. Uh, pulmonary hypertension?

7:36And that's a condition where blood vessels to the lungs tighten. That forces the heart to work harder to pump blood, which could cause heart failure. The woman's eyes widen. I know it sounds alarming, but it is extremely rare. And remember, losing your excess weight will reduce your risk of cancer, heart disease, and diabetes. Plus, you'll have regular sessions with our weight loss counselor and checkups with me every few months. The woman relaxes. She wants to believe in fen-fen. The dream of getting slim by popping pills goes all the way back to the 1800s. Over the decades, dieters have swallowed pills laced with arsenic, amphetamines, and tapeworm eggs in the belief that nurturing a 20-foot parasite in their guts will keep them trim.

8:28Now, the working women of the 90s are putting their faith in fen-fen, And that's great news for Nutrisystem. The company went bust in 1993 after spending millions of dollars settling hundreds of lawsuits claiming its weight loss program damaged customers' gallbladders. Now, it's rebuilding under new ownership. But it's a shadow of its old self. In 1993, there were a thousand Nutrisystem centers nationwide, and it was the second biggest weight loss brand. Now, two years later, just 560 centers remain. But then Nutrisystem executives read a study showing that fen-fen could help people lose and keep off weight and spied an opportunity for hefty profits.

9:19By summer 1996, Nutrisystem's doctors are writing thousands of fen-fen prescriptions and its competitors are playing catch-up. The customer exodus causes Jenny Craig's stock price to crash. Fearing it's about to lose its number two position, the company starts selling Fin Fin, too. But Weight Watchers refuses to take the Fin Fin bait. Instead, the market leader's searching for a different way to lure people back to its meetings.

9:57Late 1996, Manhattan. In his extravagant apartment, PR guru Howard Rubenstein is schmoozing with his A-list clients. He's a silver-haired Brooklyn native with thin-rimmed glasses. And tonight, he's playing matchmaker. In the hallway, Rubenstein greets the latest arrival, Weight Watchers' 70-year-old co-founder and Heinz board member, Al Lippert. Al, good to see you. Follow me. There's someone I really want you to meet. Rubenstein leads Lippert to a red-haired woman in a pastel pink dress. Lippert recognizes her immediately. Rubenstein does the intro anyway. Al, this is Sarah Ferguson, the Duchess of York.

10:42Sarah, this is Al Lippert, the co-founder of Weight Watchers. Delighted to meet you, Al. Likewise. I've never met royalty before. Should I bow? Please don't. I've endured enough pageantry. Rubenstein moves to steer the conversation before slinking away. I thought you two should meet. I think you have a lot in common. Really? Well, I guess Howard's referring to how I've also struggled with my weight. In fact, that's how Weight Watchers started. I used to weigh 216 pounds until I joined this little weight loss group run by this housewife in Queens. She helped me lose 40 pounds. And together we founded Weight Watchers.

11:21But that's very different to your weight loss journey, I'm sure. You did it in the public eye. You know, I think it was brave being that open about it. That's very kind. But I'm not sure I'm brave. The British media gave me a little choice. Yes, I heard they were unkind. Unkind? Al, they were utterly beastly. They called me the Duchess of Pork. That's awful. It really did hurt. But I can almost laugh about it now that I'm slimmer. Anyway, enough about me. What about you? What is Weight Watchers up to? Well, we're launching a new weight loss program. It's called 1-2-3 Success, and it makes dieting much easier.

12:04Really? How so? Well, instead of counting calories and measuring portions, 1-2-3 Success simplifies that with points. Every day you get points to spend and each food item has a points value based on the number of calories plus the fat and fiber content. So that wine you're drinking is two points. A Burger King bacon double cheeseburger costs 12 points. How many points does one get each day? 22 on weekdays. So that cheeseburger's half a day's allocation? Yes, but the important thing is we're not telling people what to eat. They can eat the cheeseburger if they want to sacrifice the points. We've tested points in Britain already and it proves successful.

12:47If we get the marketing right here, I think... Lippert stops. He's just realized why Rubenstein introduced him to the recently divorced duchess. You know, we need a spokeswoman for the 123 Success launch, and given your public struggle with Wade, I think you'd be perfect. Would you be interested? Ferguson smiles. Of course she would. She's no longer on the royal payroll, and she's got multi-million dollar debts to pay. After trying Weight Watchers for two weeks, Ferguson signs up as the brand spokeswoman for$1.7 million a year. And in January 1997, the Duchess introduces America to Weight Watchers' new points system.

13:36It's harder than having a thinner mother. It's harder than being called the Duchess of Porg. It's the hardest thing in the world, staying on a diet. Introducing 1-2-3 Success. It's a real diet breakthrough. From Weight Watchers. No complicated counting. I like that. And no food's a no-no. It makes the hardest thing in the world a lot easier. 1-2-3. It's working for me. 1-2-3 Success. New from Weight Watchers. Weight Watchers points becomes a sensation. Attendance at Weight Watchers surges 66 % in two years. Restaurant chains and food manufacturers start noting how many Weight Watchers points their meals contain.

14:18And as Weight Watchers rebounds, its rivals' attempts to cash in with Fen-Fen unravel. It's fall 1997, and the Fen-Fen dream has become a nightmare. Before Chicago area women are taking the makers of FinFen to court, it's been one week since the prescription diet drug was pulled off the market. That, after studies link the drug to heart problems. The class action suit filed Tuesday seeks monetary damages, payment for heart monitoring, and patient updates on any new findings. The suit also alleges the pharmaceutical companies knew about the drug's dangers. They should have warned the patients. They should have at least warned the doctors to tell their patients that the side effects are real.

15:07The study that sparked the lawsuits found fen-fen could cause heart valve defects. It also prompts America's drug regulator, the FDA, to ban fenfluramine. For the diet centers that bet big on fen-fen, it's a disaster. Jenny Craig takes a$15 million hit. Nutrisystem watches half its 300 franchise diet centers go under. Nutrisystem pivots to selling an herbal fen-fen made from St. John's wort and ephedra, but with ephedra linked to serious adverse effects, including heart attacks and strokes. The FDA orders the company to stop selling the unapproved and unproven drug. So Nutrisystem takes radical action.

16:00It shuts its diet centers and reinvents itself as Nutrisystem.com, an online seller of diet plans and meals. But its rush into the new internet frontier doesn't work out. Its annual sales waste away to a puny$20 million. Ten years before, Nutrisystem was a billion-dollar brand. Now, it looks ready to join Pan Am and Woolworths in the brand Boneyard. But Weight Watchers is untainted by the Fen-Phen scandal, and its point system is attracting millions of new customers. Heinz's new CEO decides this is the perfect time to cash out. In September 1999, it sells Weight Watchers to a private equity firm for$735 million, but keeps the right to make Weight Watchers branded food.

17:00Even without its food operations, Weight Watchers' future looks healthy. Its rivals are shrinking, and obesity rates are spiraling. But in Philadelphia, an ambitious businessman is hatching a plan, one that will transform Nutrisystem. And when he does, Nutrisystem will go from hovering near death to becoming one of the era's fastest growing companies.

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18:45It's January 2000, and Jenny Craig's kicking off the new millennium with a$7 million ad push, featuring a woman sure to create buzz, Monica Lewinsky, the White House intern who had an affair with President Bill Clinton. I've tried every diet in the world. I mean, if it was stand on your head, I tried it. If it was eat only grapefruits, I tried it. Magic diet pills, I tried it. I've lost 31 pounds on Jenny Craig. I'm not there yet, but I can still appreciate and be grateful and proud of my success so far. Jenny Craig thought Lewinsky could be its answer to Weight Watchers' Sarah Ferguson. But the company quickly discovers there's a big difference between famous and infamous.

19:36Angry emails pour into the inbox at Jenny Craig headquarters. Customers walk out of centers with posters of Lewinsky on the walls. Franchisees refuse to run her ads in their markets. Jenny Craig drops Lewinsky after just five weeks. And with its New Year ad campaign a flop, the company's stock price tumbles. By summer 2001, Jenny Craig's stock is trading at just$1.70. The company is now worth less than the cash it's got in the bank, prompting the New York Stock Exchange to delist the business. In the wake of their company's humiliating exit from the stock exchange, and with their 70th birthdays approaching, the Craigs decide to step back.

20:26In January 2002, they sell control of the business to two private equity firms for$115 million. But Jenny Craig isn't the only diet brand about to find itself under new management. Fall 2002, Radnor, Pennsylvania. In the offices of venture capital firm Safeguard Scientific, Michael Hagen is chasing millions. In front of the square-jawed tech executive are two venture capitalists who've agreed to hear out his plan. My vision is we buy Nutrisystem. It's a company that's totally lost its way, but its brand is massively undervalued. We can get control for under$7 million. That's super cheap for a brand this well-known.

21:19Hagen tries to read the faces of the venture capitalists. To the right is a very skeptical Pete Musser, the 75-year-old founder of Safeguard Scientifics. Which means Hagen's real task today is to win over the guy who has left, Mike DiPiano, the bald co-founder of New Spring Capital. But DiPiano doesn't look convinced. Isn't this a lot of money to shovel into a company that's been going from one mess to another since the 1980s? All it's got is an aging brand that people probably associate with bad food and dangerous diet pills. I don't see the play here. Hagen scrambles to win over DiPiano. It just needs some TLC.

22:04The recipes are ancient, so we make new ones. We fire their distributors and sell directly to customers. The distributors are just middlemen who are cutting into Nutrisystem's profits. I still don't see it. Hagen is about to try again, but Musser holds up a hand to stop him. Musser now sees Hagen's vision. He turns to DiPiano. I think of Nutrisystem as being like a small stock. You know, small stocks go up and go down, but buy them cheap, say at 65 cents, and that stock doesn't have to do much to become a$2 stock. You know, this doesn't need to be a long-term play. If Hagen delivers, and I think he will, you could make a tidy return in a very short period.

22:51DiPiano rubs the salt and pepper stubble on his chin and nods. Hmm, that makes sense. All right, I'm in. In December 2002, Hagen, DiPiano, and Musser buy 60 % of Nutrisystem for$6.6 million. And now that they've bought the wreck, they've got to fix it. But while they get to work, Jenny Craig is trying to revive its fortunes with a daring ad campaign fronted by Cheers and Look Who's Talking star, Kirstie Alley. 1-800-JENNY-20. Jenny Craig, please. This is Kirstie Alley. It's in regards to me being fat. Can you hold on a second? Hey, you're chubby too. Let's lose weight together. They have really yummy food.

23:45That'll make it easy for us. They have chicken fettuccine. Fettuccine! Call 1-800-JENNY-20 to lose all the weight you want for only$49 plus the cost of food. Jenny! Hey, hey, listen, girl, I'm fat. Have you called Jenny yet? Jenny Craig's new campaign shreds the diet industry advertising rulebook. Weight loss companies had long steered clear of the word fat. But Jenny Craig hopes that Ali's taboo-busting ads will cut through. The commercials also upend the usual strategy of showing before and after shots of successful dieters. Instead of showing Ali after she lost weight on its program, the campaign's airing before she starts dieting.

24:30Potential customers can even track Ali's progress via a blog on the Jenny Craig website. It's a risky move. If Allie fails to lose weight, the whole campaign could backfire and leave people convinced that Jenny Craig doesn't work. But in the months that follow, the gamble pays off big time. As Allie shrinks, Jenny Craig's customer numbers grow. For the first time in years, Jenny Craig is moving up. That return to growth inspires the private equity companies that control it to sell the business and cash in. In June 2006, Nestle pays$600 million for Jenny Craig. The idea of the chocolate and ice cream giant selling weight loss programs raises eyebrows.

25:25But Nestle's betting that health and wellness are the next big trends, and it's determined not to miss out. Kirstie Alley helped give Jenny Craig a badly needed boost. Nutrisystem will also use star power, but with a twist. Fall 2006, the Nutrisystem call center in Philadelphia. On a wall-mounted TV, ESPN's Monday Night Football is playing, and the first ad breaks closing in. The call center manager climbs onto a desk and addresses his sales team. All right, everyone, ad break in 20 seconds. Get ready. The team is plenty ready. They earn between$40 and$120 for every caller they sign up. The best salespeople here make six figures a year.

26:21The manager turns up the volume on the TV as Nutrisystem's new ad starring former Miami Dolphins quarterback Dan Marino airs. Hey, I'm 44 years old. I feel great. I'm Dan Marino, and I lost 22 pounds on Nutrisystem. Get real results with Nutrisystem for men. Hey, I'm in my playing weight now. Losing never felt so good. Call or go online now to get four weeks of awesome food. Plus, through this special offer, you'll also get an extra week of hearty meals free. The moment the ad ends, the call center bursts into life. You're through to Nutrisystem. Let me guess, sir, you're interested in learning about Nutrisystem for men and getting an extra week of hearty meals free?

27:04Am I right? The caller's surprise the salesman knows. But Nutrisystem uses hundreds of toll-free phone numbers in its ads so that it always knows exactly what prompted people to call. Yeah, the food is great. You get to eat six times a day, and I don't mean salads. I'm talking burgers, beef tacos, hot dogs, you know, man's food. In the next cubicle, a saleswoman is reeling in a customer who's balking at paying$320 a month for Nutrisystem food. Oh, honey, I understand. I do. But answer me this. On a scale of 1 to 10, how important is it to you to lose weight? A 10? Well, that sounds pretty important.

27:46You will. That's great, honey. You won't regret it. Now, can I get your credit card number? For Nutrisystem, the Dan Marino ads are just the latest touchdown in a rapid turnaround that's seen the company's sales soar from$22 million to more than$560 million in just three years. Since buying control of Nutrisystem, CEO Michael Hagen and his team have turned the burned-out diet brand into a money machine. They started by refreshing the food for the first time in 30 years. Next, they modernized the call center and started using data analysis to identify which ads worked and why. The company also moved ad buying in-house so it could secure last-minute deals for cheap ad space on major cable TV networks and in popular magazines like Parade.

28:44And now it's doing what the weight loss business thought was impossible, selling diet programs to men. The industry had largely given up on men. It knew 38 % of dieters were men, but they preferred to diet alone rather than join formal programs. So much so that men made up just 9 % of Weight Watchers members. But with Dan Marino's help and a new line of manly meals, Nutrisystem's breaching the gender barrier. Soon, one in three of its customers will be men. And that success is paying off for Hagen and his backers. The price of Nutrisystem's stock has gone from 65 cents to 63 dollars. The$6.6 million they spent buying control of the firm is now worth more than$600 million.