Nutrisystem 2010 Annual Report Download - page 14

Product Development
All of our foods and supplements are currently outsourced from more than 30 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 2010, approximately 18%, 17% and 10%, respectively, of inventory purchases were from three suppliers.
We have supply arrangements with certain of these vendors that require us to make certain minimum purchases.
In 2009, these vendors supplied 18%, 19% and 8%, respectively, of total purchases and in 2008 these vendors
supplied 15%, 19% and 5%, respectively, of total purchases.
Our product development team uses a number of sources – customer feedback, market trends, nutrition
science, and breakthroughs in food technology – to create new ideas for our program. New foods are created to
enhance the variety of our current offerings or to support the efforts of creating a new program. Typically,
concepts are formulated in the test kitchen to meet our stringent demands for nutrition and stability. We then
contract with food manufacturers who further develop viable new products based on our specifications.
Alternatively, manufacturers may suggest items. Regardless of a given food item’s pathway through
development, that food is evaluated for nutrition, compliance with our program, taste (using testing panels), and
cost considerations. The number of stock keeping units, or SKUs, we introduce each year varies depending on
whether we are introducing a new program or simply updating an existing one.
Our Customers
We offer weight loss programs designed for women, men, seniors as well as people with type 2 diabetes
who want to lose weight. Based on our customer data, our typical customer is female, approximately 49 years of
age and weighs 187 lbs. 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;
• direct delivery to their door;
• easy to follow and stay on the program;
• 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 primarily on third party software
customized to meet our business needs, 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 websites rely. Our servers and our network are monitored 24
hours a day, seven days a week.
We use a variety of security techniques to protect our confidential customer data. When our customers place
an order or access their account information, we secure that transaction by using the best available encryption
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