Nutrisystem 2009 Annual Report Download - page 14

December 17, 2014, but may be terminated sooner upon 180 days written notice. There are other outside
fulfillment providers that could be utilized if needed and we are continually evaluating the need for secondary
fulfillment services.
We continue to partner with our fulfillment provider to reduce the warehouse order turn-around time for
processing and shipping orders. In 2009, approximately 99% of all direct customer orders were shipped within
two business days of the date the order was received. In addition, we can ship to approximately 99% of the
domestic population within five business days using standard ground transportation. This past year, we made
capital investments in new material handling equipment and a new warehouse management system to target
improvements in productivity, cost, quality and service.
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 provided customers take receipt of their
second order. If a customer cancels before receipt of a second order or postpones his or her second order for more
than 30 days, the customer will be charged for shipping and the difference in pricing for an Auto-Delivery order
versus a non Auto-Delivery order.
Product Development
All of our foods and supplements are currently outsourced from more than 25 manufacturers or vendors. We
have entered into supply agreements with many of these food vendors. The majority of these agreements provide
for annual pricing, annual purchase obligations, as well as exclusivity in the production of certain products, with
terms of five years or less. One agreement also provides for certain rebates to us if certain volume thresholds are
exceeded. All of these contracts may be terminated by us upon written notice, generally between 30 and 180
days. We anticipate meeting all annual purchase obligations.
In 2009, approximately 19% and 18%, respectively, of inventory purchases were from two suppliers. We
have supply arrangements with these two vendors that require us to make certain minimum purchases. In 2008,
these vendors supplied 19% and 15% of total purchases and in 2007 these vendors supplied 24% and 11% of
total purchases.
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 determine 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 or simply updating an existing program.
Our Customers
Based on our customer data, our typical customer is female, approximately 48 years of age and weighs 188
lbs. Men comprised approximately 28% of our new customers in 2009 compared to 32% in 2008 and 31% in
2007. We believe that, on average, our customers want to lose approximately 44 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 1.0 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;
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