Medifast’s Michael MacDonald: All in the Family

The Challenge

You’re an executive vice president at an office supply firm with a seat on the board of Medifast, a weight-loss foods company your older brother leads. One day, your brother calls with the kind of news that changes everything—he’s been diagnosed with terminal cancer and wants you to take over his role. You’re suddenly faced with leading a public company in which your family holds a 10 percent stake, and where your niece—with 10 years tenure under her belt—is currently serving as president. Complicating matters, performance is slipping and the company is under investigation by the FTC for unsubstantiated advertising claims.

The Context

Michael MacDonald was no stranger to operational challenges when he got that momentous phone call in 2011, having spent 33 years at Xerox, where he led the 2003-2004 turnaround of its $6.5 billion North American Solutions Group division. While he had worked closely with Anne Mulcahy, he had never been involved in governance. “The regulatory aspect of being CEO of a public company was probably my biggest learning curve,” he reflects. “I wasn’t involved in that area at Xerox.”

The company he was coming into also faced a learning curve. Something of a hybrid of its two much larger competitors—Nutrisystem and Weight Watchers, Medifast offers portion-controlled meal replacements marketed through brick-and-mortar weight loss centers, as well as online and through its networks of physicians and active health coaches. At the time of the CEO transition, the company was in the midst of an ambitious rollout of company-owned clinics—a strategy MacDonald quickly assessed as potentially disastrous. “We had built more than 40 clinics in less than 12 months, but I saw that model was not going to work,” he explains. “We were heading for a $9 million profit hit.”

The Resolution

MacDonald moved quickly to replace the company-owned clinic rollout strategy with a less capital-intensive franchise model that would still enable Medifast to continue to grow its clinic distribution channel but with a much lower outlay of cash. “Today, we have 87 company-owned clinics and 35 franchises,” he says. “Over time, we want to be at 300 franchises.” He also worked to get the company house in order—settling the problematic FTC investigation, changing out 14 managers, recruiting the operational talent the company needed and hammering out a five-year plan. “I basically brought in managers from places like Black & Decker, AT&T, Avon and various other larger companies, because we’re trying to scale the company from where it is today to a billion dollars over a five-year period,” MacDonald notes. “For a small company, we’ve made a lot of progress; but we still have a long way to go.”

The Endgame

Medifast’s 2012 revenues were a healthy $356.7 million, with annual earnings per share of $1.16. Stockholders have benefitted under MacDonald’s tenure, with share prices at $23.50—up from their $13 price when he joined. Optimistic about the future, MacDonald points out that there’s plenty of room for further growth. “We’re only in nine major markets in the U.S., so we have huge white space here, as well as abroad,” he says, adding that the company is in the process of forging partnerships to gain international footholds in places like Mexico and Canada, as well as in Latin America. “We just signed a deal with Medex, a prescription-pharmaceutical drug company in Mexico, which is the second-worst country for obesity outside of the U.S.”

The Lesson

Never give up. “You don’t quit; you keep focusing on what you have to do,” says MacDonald. “I also believe that leaders should be participative but without telling people how to do their jobs. I don’t have a big hierarchy. [Instead,] I talk to my guys every day and I challenge people on different ways to look at things, and I think we’ve done that well. I believe in leading as a leader and getting people to participate [by] building teams that work well together and then rewarding people well for being part of the team.”