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Killer Apps



August 22, 2013 – Comments (0) | RELATED TICKERS: WTW , GRMN , OPEN.DL

Board: Value Hounds

Author: LeKitKat

Weight Watchers has shed market cap faster than clients drop pounds. Since the fourth quarter of 2012, it’s been nothing but bad news and slowing growth for this membership weight loss service.

WTW rose from its zombie–like performance in 2008-2010, to dazzle the market with lively growth in 2011 and a subsequent resurrection of its market cap and its price. The growth was short-lived and 2012-2013 has seen a disappearing subscriber base especially in the critical North American market.

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As revenue growth flat-lines with lowered earnings and guidance, WTW has taken a turn for the worse and the stock is heading toward three-year lows. The measure Weight Watchers uses to track success is a number known as total paid weeks. The paid week report is the total of monthly and pay-as-you-go member payments for a reported time period —- annual and quarterly. When members are joining up either at meetings or online, these numbers go up and as the company loses members, it goes down.

Paid meeting weeks for North America dropped 5.6% in 2012 along with decreases of 11.5% in the UK. Together these two geographic bases account for 84% of meeting paid weeks—North America alone is 67%. When 84% of a business is underperforming, it’s going to get the market’s attention.

The reversal of fortune in 2012 and 2013 followed a brief recovery in the back half of 2010 and 2011. Paid weeks increased 26.4% and attendance was up 18.8%. Marketing with Jennifer Hudson as spokesperson and ads focusing member experience were a highly successful campaign driving huge membership gains. Membership has sagged and management blames loss of members partially on the proliferation of nutrition/weight loss apps available either for free or at modest prices.

Business continued to deteriorate in Q2 2013 with North American paid weeks down 10% and member attendance off 14.5%. Expectations are for meetings business and volume to drop by mid-to-high teen numbers for the second half of 2013. The UK business was even worse with paid weeks down 19% and expectations are that the second half will see declines in the mid-to-high 20% range. Margins will contract as spending deleverages with flagging topline growth. The company has even offered guidance for 2014 expecting the meeting base will start lower than 2013.

There’s an app for that

If you type in “free weight loss apps”, Google will give you 79 million results in 23 seconds. The first page has one of the most popular –- MyFitnessPal. It has a free calorie counter and an online diet and fitness community all completely free and claims 40 million members. Consumers can do it for themselves and at no cost. That’s a powerful competitive threat to WTW’s monthly charges for membership. Weight Watcher’s online program is $18.95 per month. MyFitnessPal just got venture backing to the tune of $18 million, giving it the potential to become an even more pervasive, successful force in the weight loss niche.

Smart phones give consumers dozens of free options that include calorie counters, calorie consumption by activity and effective workout routines all with a simple search. Weight Watchers has conceded slow growth with heavy mobile app adoption in the near-term, stealing their market, but also expects members will come back to the organized supportive meeting structure they provide.

From the Q2 conference call:

Nicholas P. Hotchkin CFO:

Since we last gave guidance, what we've seen is a deteriorating trend in recruitments, particularly on our online business and we feel that some of that is driven by the continued sudden explosion of interest in free apps and activity monitors.

One thing I want to stress, Glen, as we look to '14, we've discussed that the issue with free apps is they're taking trial out of the market. We view that as a temporary phenomenon because we know that our program works. We believe, as Jim has said, in the science behind our program.

WTW has survived the Atkins diet, The South Beach Diet and the countless fads that come and go in the weight loss world. Calorie counting apps with online communities that do what Weight Watchers does and for free may prove to be more challenging

What other businesses could fall victim to killer apps?

Garmin is in the global positioning business using satellites to pinpoint a users exact location. Their biggest market segment is car/mobile and even with slow erosion of car/mobile business over several years, it’s still 50% of their business. Between 2010 and 2012, mobile lost 11% of its revenue and in Q2 2013 dropped 12%. This is largely due to the proliferation of mobile devices that have GPS apps -– free and otherwise. While standalone GPS in a car is a nice feature, it can’t compete with the convenience of calling up an app on the phone and getting directions. Consumers can buy a cheap dashboard or windshield mount and plug in the smart phone with plentiful apps giving superior provide updated traffic info, maps and directions. Smart phone use is estimated at 47% of navigation app usage.

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Let’s eat out

OpenTable hasn’t suffered much yet from a fast-expanding menu of reservation websites and apps, but it may be next on the hit list. The model is different than the Weight Watchers dilemma —- it’s paid by restaurants and not by the diner/consumer. That doesn’t mean the growing universe of mobile devices and apps won’t make life harder and temporarily more expensive for them.

OpenTable sells reservation management to around 28,000 restaurants worldwide. They set a client up for a fee with hardware and software and charge clients a monthly fee per reservation. OpenTable recently acquired Rezbook to broaden its client base, add mobile apps, and cut out some competition.

OpenTable Q2 revenue was disappointing -- $45.7 reported against $46 million expected by analysts. They guided to third quarter earnings at 38¢-42 well below the 48¢ analysts were looking for, citing spending on mobile marketing and development as partially responsible for the shortfall. It’s eat or be eaten in this business and
OpenTable needs to move fast and spend hard to stay ahead of the competition.

Numbers of diners making reservations through mobile devices are rising rapidly and companies catering to this wave will have the advantage signing new restaurant business. Just one year ago the number of reservations made via mobile was 28% climbing to 38% now. OpenTable is investing aggressively in mobile apps for reservations against competition that is equally motivated to win the space.

Yelp will acquire internet and mobile reservations service SeatMe, an OpenTable competitor, for around $12.7 million. SeatMe gives them the technology providing easy, online reservations directly through Yelp rather than through current partner OpenTable. It’s a battle in reservation territory for consumers –- ease of use with catchy mobile apps will win the war.

Bigger chains with deeper pockets are able to develop their own mobile apps. TGI Fridays app pays your bill, gets you to the closest restaurant, lists specials, and lets the diner browse the full menu all from a smart phone. While OpenTable and Yelp’s SeatMe will be able to catch business from thousands of small restaurants, the larger chains may go it on their own, siphoning off profits from big accounts.

Mobile apps are changing the way the world does business and has the capability of crippling some businesses or even putting some on the endangered species list.


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