Nutrisystem 2011 Annual Report Download - page 15

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, 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 30 manufacturers or vendors. We
have entered into supply agreements with some 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 2011, approximately 16% and 15%, respectively, of inventory purchases were from two suppliers. We
have a supply arrangement with one of these vendors that requires us to make certain minimum purchases. In
2010, these vendors supplied 17% and 18%, respectively, of total purchases and in 2009 these vendors supplied
19% and 18%, respectively, of total purchases. Additionally, we were dependent on one frozen food supplier for
less than 20% of our food costs in 2011. The amount provided from this supplier in 2010 was negligible. We had
a supply agreement with this supplier that expired in November 2011 and we have found other frozen food
supply options to replace this supplier.
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 50 years of
age and weighs approximately 187 pounds. We believe that, on average, our customers want to lose
approximately 43 pounds over a period of time. Based on our customer surveys, we believe our typical customers
tend to stay on our program for 11 to 12 weeks, 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.
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