Nutrisystem 2007 Annual Report Download - page 14

We operate an integrated network of distribution facilities of which one is company-owned and six are
outsourced. In 2007, approximately 90% of our fulfillment was handled by our outsourced provider. In 2006 and
2007, we completed an expansion and redesign of our warehouse network. These changes ensure higher volume
capabilities while simultaneously reducing process/delivery times and outbound freight costs. In 2007,
approximately 99% of all direct customer orders were shipped within two business days of the day received. In
addition, we can ship to approximately 99% of the domestic population within four business days using standard
ground transportation. Direct customers are not charged for their orders until the ordered product is shipped. We
do not charge customers for shipping and handling on Auto-Delivery food orders.
Product Development
All of our foods and supplements are currently outsourced from more than 30 manufacturers or vendors.
Our product development department primarily creates ideas and concepts based on customer feedback, market
trends, nutrition and food technology breakthroughs and retail grocery trends. This starts at the laboratory level to
determine if the product can meet our stringent demands (i.e. shelf stable, glycemic friendly, etc.) and is then
outsourced to our food manufacturers who further develop the new product based on our specifications. All new
foods are created to enhance the variety of our current program, or to support the efforts of creating a new
program. Also, new foods are presented to us by food manufacturers to see if they are compatible with our
program. Most of our foods are created from market research and customer requests, as well as recommendations
from our manufacturers. All of our new foods are evaluated for nutrition, compliance with our program, taste (by
using testing panels) and cost considerations. The number of SKUs we introduce each year varies depending on
whether we are introducing a new program, like NutriSystem Advanced, where over 60 new items were created,
or updating an existing program, where approximately 20 new products are typically introduced.
Our Customers
Based on our customer data, our typical customer is female, approximately 48 years of age and weighs 185
lbs. In January 2006, we initiated advertising programs directed toward men. As a result, men comprised
approximately 31% of our new customers in 2007 compared to 24% in 2006 and 13% in 2005. In early 2007, we
also began to market to seniors in television advertising. We believe that, on average, our customers want to lose
approximately 45 lbs. over a period of time. Based on our customer surveys, we believe our typical customers
tend to stay on our program for 10 to 11 weeks (including the one free week most customers obtain with their
initial order), lose 1.5 to 2.0 pounds per week and have tried other popular diet programs. We believe that these
surveys indicate a willingness to refer our program to others and that our customers value the following
NutriSystem program attributes:
• effective weight loss;
• direct delivery to their door;
• easy to follow;
• food can be easily prepared in minutes;
• wide variety of food; and
• they do not feel hungry while on the program.
Information Systems
Our ecommerce and community websites, both of which are based on internally developed software and
other third party software, are each hosted in a top tier, co-location facility. These facilities provide redundant
network connections, an uninterruptible power supply, physical and fire security and diesel generated power back
up for the equipment upon which our website relies. Our servers and our network are monitored 24 hours a day,
seven days a week.
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