Jenny Craig Takes a Pounding : Lifestyle: A 43% drop in new customers for the weight-loss chain signals a shifting attitude toward dieting.

The surest way to measure losses at Jenny Craig Inc.’s chain of diet centers is not with a scale but a calculator. The diet craze has cooled, and with it the fortunes of a company that grew fat selling Americans on thinness. Beginning in 1985, founders Sid and Jenny Craig built the company into a weight-loss empire with more than 650 centers nationwide. Sales grew tenfold, to $467 million in 1993.

Now Jenny Craig is itself on a diet. The Del Mar, Calif.-based company is closing more than 30 centers to stem losses that came to $8.7 million for the first three months of this year. The company reports that the number of new clients signing up for the program during that time was down 43%.

The company’s upper management has been in turmoil. Jenny Craig has lost two presidents, a chief financial officer and a marketing vice president since November.

In a further sign of problems, the Craigs’ children are getting out of the business. According to company documents filed last week, the four offspring and their spouses are selling unprofitable franchises in California, Florida and Texas back to the company.

Asked if the losses are related to his decision to sell the 13 franchises he owns with Jenny Craig’s daughter, Denise Altholz, son-in-law Walter Altholz said, “What do you think?”

Jenny Craig, it increasingly appears, is a company out of step with changed consumer attitudes toward fat--and unsure what to do about it. Industry analysts say consumers in the 1990s are more concerned about nutrition and health than their appearance, the focus of the Jenny Craig program.

A nationwide recession and the economy’s slow recovery are worsening the company’s problems. Dieters trying to reduce expenses are avoiding the program, which carries weekly costs of $7 for counseling sessions and between $50 and $75 for Jenny’s Cuisine, the prepackaged food accounting for 90% of the company’s revenue.

In a prepared statement, Chairman Sid Craig said the company’s future lies in shifting its emphasis from weight loss to “lifestyle management”--a concept that stresses health as well as looks. Sid Craig didn’t offer any specifics, and he and Jenny Craig, the firm’s vice chairwoman, would not be interviewed for this story. (“They’re not in the mood,” said Ron Iori, a spokesman for the company.)

In a brief interview, the company’s new president and chief executive, C. Joseph LaBonte, talked about the possibility of “leveraging the Jenny Craig name,” but did not say how he might do so. LaBonte allowed that Jenny Craig Inc. might seek a tie-in with a health insurer, a notion executives at the company have bandied about for years.

Jenny Craig’s problems are not unique. Rival Nutri/System, which also sells prepackaged foods, has recently emerged from bankruptcy with fewer centers and under new ownership. Weight Watchers International, a unit of Heinz Inc., said business is beginning to pick up after falling 20% during the last three months of last year.

Overall, companies running commercial weight-loss centers are expected to show a 10% revenue drop this year, according to Marketdata Enterprises, a research firm following the weight-loss industry.

Americans still care about their weight. After all, “In the Kitchen With Rosie,” a book written by the chef who helped talk show host Oprah Winfrey lose weight, is a bestseller. But experts say consumers care more about maintaining a healthy weight than achieving svelteness.

In various surveys, Americans in the ‘90s say they are eating more and exercising less than they did in the 1980s. The percentage of overweight people on diets is shrinking.

Among dieters, low-fat foods widely available in supermarket cases are gaining in popularity over prepackaged meals sold through structured programs such as Jenny Craig, according to a 1993 survey by the Calorie Council, an industry group. New government food labeling rules will make it easier for grocery shoppers to choose low-fat, low-calorie meals on their own.

Jenny Craig’s rivals have already taken steps to adjust to new consumer attitudes, though it is too soon to know whether the programs are working. Nutri/System, for example, has teamed up with health care giant Johnson & Johnson to offer “wellness” programs that deal with overall health. It also sells a line of skin creams.

Weight Watchers is billing itself as “the health care plan that works,” and talks about the health risks of obesity. Besides selling magazines, cookbooks and Weight Watchers brand food, the company is testing a telephone service for do-it-yourself dieters who want menus and tips but don’t want to attend weekly meetings.

The centerpiece of Jenny Craig’s latest marketing drive is a 30-minute infomercial that has been airing in Los Angeles and other big cities. Actor Dick Van Patten, a friend of the Craigs, lobs friendly questions at Jenny Craig and is appropriately stunned when six dieters describe how they lost weight eating Jenny’s Cuisine. One woman tells how happy her husband is with her new shape.

In the infomercial, Jenny Craig does make several references to lifestyle themes. “It’s not a diet,” she says at one point. “It’s about changing behaviors in lifestyle.” At another point, she lists diseases associated with obesity.

But Jenny Craig Inc. continues in the main to market its standard program, which involves weekly individual weight counseling sessions and purchases of Jenny’s Cuisine. The company advises clients to exercise, but it has no formal exercise program. Like its chief competitors, it performs no medical evaluations. About 90% of its clients are women.

Clients are encouraged to eat Jenny’s Cuisine at every meal. The costs can be staggering. Clients on the plan for four months can pay as much as $1,312 for the program. That works out to $82 a pound for people losing a pound a week, the average weight loss the company says clients can expect.

For much of its history, the company has been on a growth binge. The Craigs met in 1970 when Sid hired Jenny to manage a chain of fitness clubs. They married in 1979, sold the fitness clubs to a subsidiary of Nutri/System and moved to Australia, where they started Jenny Craig Inc. They opened their first U.S. center in 1985 and went public in 1991. The company has 650 centers in the United States and nearly 800 worldwide.

As recently as a year ago, Jenny Craig announced plans to accelerate its expansion, opening 100 new centers in 1993 and 1994. In aging baby boomers, it saw a growing demand for weight-loss services. Those plans are now on hold amid signs that the market may have reached the saturation point.

In the last two years, the company has acquired at least 87 centers from franchisees--72 of them from the Craigs’ children--a sign that some independent operators are having difficulty.

In documents made public last week, the company disclosed that it is buying back 31 franchises from four money-losing companies owned by the children. Taken together, the four companies lost $1.2 million in 1993, though 19 of the individual centers made money.

The children received no cash for the franchises, according to the documents. Instead, the company is assuming the franchises’ liabilities and canceling debt owed it. According to the sale agreements, Jenny Craig Inc. is canceling a total debt of $1.64 million.

In a phone interview, Scott Craig said he and his sister, Susan Craig McKenna, are selling their 10 Florida franchises because there’s no room left to grow in his Tampa, Fla., franchise territory and he wants to try a new business outside the weight-loss field.

“If it was making a million dollars, of course I’d keep it,” he said.

Walter Altholz said from his office in Houston that he also plans to start a business unrelated to weight loss and that his wife wants to spend more time with their two children.

Jenny Craig’s daughter and son-in-law, Michelle and Duayne Weinger, are selling eight Northern California franchises. In 1992, the Weingers sold 41 Northern California franchises to the company, receiving about $9 million for them, $6 million in the form of a canceled debt due the company and $2.7 million in assumed liabilities. They couldn’t be reached.

Michael Sitrick, a spokesman for Jenny Craig Inc., said the company is buying back the children’s franchises to avoid the appearance of conflict of interest, since the company is providing unspecified “enhancements” to its franchisees. The children have owned some of the franchises since at least 1989.

But in an interview five days before the buybacks became public, LaBonte, asked if the company had recently repurchased any franchises, said, “We don’t have a plan to buy back franchises.”

The company’s rapid expansion is one point of contention in a 1992 shareholder lawsuit still pending in U.S. District Court in San Diego. The suit claims that at the time of its October, 1991, public offering, the company knew the market for diet clinics had become saturated but went ahead with expansion plans to boost revenue and create the illusion that Jenny Craig was a prosperous company.

In public documents, the company has denied the allegations. Neither side in the dispute responded to requests for comment.

The company faces other difficulties. Without admitting guilt, the company disclosed last week that it has agreed to pay $10 million and distribute to former clients discount coupons for Jenny’s Cuisine to settle a class action lawsuit in Orange County Superior Court claiming the diet lead to gall bladder disease. The company’s insurance carrier is covering only $6 million of the settlement.

An administrative complaint from the Federal Trade Commission alleging false advertising is pending against the company. The FTC contends that Jenny Craig ads misled consumers into believing it is easy to keep the weight off. In public documents, the company contends that it warns consumers that individual results may vary.

Weight Watchers is fighting a similar FTC action. Nutri/System has settled with the agency, agreeing to modify its advertising.

The FTC allegations raise consumer doubts about the success of the program and others like it, according to analysts. Consumer Reports fueled those doubts last June, when it surveyed participants of leading weight-loss programs and declared it found no evidence that the programs worked in the long run. The magazine said that former Jenny Craig clients surveyed said they had regained half the weight in six months.

Despite its problems, Jenny Craig Inc. isn’t on the ropes. Though its difficulties have dwindled its cash to $14.5 million in March from $26.1 million nine months ago, it remains debt free. The company has continued paying its regular dividend, which totaled $16.3 million last year. More than half went to an entity controlled by the Craigs. The couple control 60% of Jenny Craig stock, and each earned a salary of $500,000 in 1993.

The company is apparently attractive to Bally Manufacturing Corp. Chief Executive Arthur Goldberg, who purchased 1.3% of Jenny Craig shares last month. The purchase briefly fueled speculation that Bally’s, the nation’s largest fitness chain operator, might buy the company.

But LaBonte said there have been no discussions of any transaction or partnership with Bally’s and that Goldberg made the purchase as an investment. There are no indications the Craigs intend to sell, although Seidler Cos. analyst Ron Rotter said an alliance between Bally and Jenny Craig would make sense.

Where the company’s problems have had an impact is in the executive suite. Last December, Ronald E. Gerevas quit as president with a year left on his $375,000-a-year contract, saying he was frustrated that Sid Craig wouldn’t give him a free hand to make changes. Gerevas said that when he joined the company in 1991, he had assumed the Craigs would spend more time on leisure activities, including raising their prize-winning thoroughbred racehorses.

“Sid decided, with all the toys he had to play with, to come back to the company,” said Gerevas, who is now vice chairman of the U.S. board of SpencerStuartInternational Search Consultants, based in Los Angeles. He said he nonetheless has high regard for the Craigs.

Sid Craig replaced Gerevas with his former rival, ex-Nutri/System President Albert DiMarco. DiMarco left abruptly in March for what the company has described as personal reasons. He is running a chain of Italian restaurants in New Jersey. He did not respond to requests for comment.

LaBonte, a Palos Verdes Estates investor, is no stranger to entrepreneurial bosses. He resigned as chief operating officer of 20th Century Fox in 1982, shortly after its then-owner, billionaire Marvin Davis, sold the resorts and bottling company LaBonte ran.

In 1987, LaBonte joined Reebok as president and chief operating officer, No. 2 to co-founder Paul Fireman. Charged with disciplining the shoe company’s freewheeling management style, LaBonte quit three years later amid complaints that his organization charts had taken the fun out of Reebok. The management structure LaBonte imposed on Reebok has been dismantled, and two companies acquired on his watch have been sold as money-losers.

LaBonte said his contract with Jenny Craig Inc. gives him specific duties and he is satisfied. “It is a partnership here,” he said.

In his statement, Sid Craig said he chose LaBonte as president and chief executive in part because of his corporate experience, especially at Reebok, where, as at Jenny Craig Inc., most customers are women.

“Joe felt Jenny Craig has the opportunity to transition its core business from weight loss to lifestyle management,” the statement said.

LaBonte said he envisions a “focused lifelong program” that moves successful dieters into a maintenance program. The program isn’t yet in place, though the company does sell what it calls lifestyle audiotapes as part of a $219 weight-loss package that also includes weight-maintenance counseling.

LaBonte interprets polls indicating that more Americans are overweight as a sign that potential demand for weight-loss programs is increasing. A 1993 Louis Harris & Associates poll found that 66% of Americans are overweight, up from 61% in 1991. The same poll also showed that 33% of Americans exercise strenuously, a four-point drop from 1991 and a six-point drop in the percentage of Americans avoiding fat and cholesterol.

America is getting heavier. Said Seidler Cos. analyst Rotter: “All Jenny Craig needs to get humming is a change in the thinking among people about losing weight.”

Feast and Famine

The performance of Del Mar, Calif.-based Jenny Craig Inc. has sagged amid a dip in Americans’ enthusiasm for dieting.

Profit has Turned to Loss (Quarterly net income, in millions of dollars). . .: $8.7-million loss (1994)

. . .As Sales Have Shrunk (Quarterly revenue, in millions of dollars). . .: $96.0 (1994)

. . .And the Stock Has Slid (Weekly closes, except latest):

1993: $16.25

May 1994: $6.75

Note: Fiscal year runs July 1 - June 30

Source: Bloomberg Business News