First, Richard Million Burke weighed the many risks of the notoriously sketchy and inherently volatile diet pill market.
Then, he not only decided to get in, but to do so with a creative business and marketing plan that could bring risks and the potential for a huge return.
Burke whose middle name really is Million has just launched the first national line of eight generic-branded diet supplements, under the name Diet Classics LLC, with more already in the works. Burke said in many cases his formulas are nearly identical to the big national brands, and the company very often works with the same labs that are making the national brands.
"We are not trying to fool people into thinking they are buying (popular Basic Research diet aid) Relacore," Burke said. "We want them to know they are buying a less expensive product that delivers the same thing as Relacore. That's our selling point."
The Diet Classics products are not copycats, Burke maintains, because they make no attempt to disguise themselves as the brand name products through packaging or labeling. In fact, the front of the bottles bear clear statements that the product is neither manufactured by nor has an affiliation with the original.
It's an important distinction, because copycat packaging and names could trigger intellectual property lawsuits. The Diet Classics pills do sell for about half the price of the designer diet pills, and Burke is hoping that's enough cost savings to sway customers from buying name-brand to buying generic.
"It's not that hard to reverse engineer the national brand, even for the proprietary formulas, but most do not even bother making their formulas proprietary since the lifespan is so short," Burke said.
That's part of what Burke says is the beauty of his products: No claims are made about what the formulas will do for consumers, just about how it compares to the brand-name formula, theoretically leaving the original manufacturers with the bulk of the liability should dispute arise over a product's efficacy.
Determining whether the products really work is one thing, but there are real health concerns.
Sherry Fixelle, a Los Angeles nutritionist and registered dietician, said there are dangers for diet pill users. At their core, most diets pills are simply appetite suppressants.
"If people use diet pills for a long period of time there are going to be side effects they can increase anxiety, heart rate, and cause a lot of physiological problems," Fixelle said. "Most over the counter pills don't really work unless you take more than the recommended dose and there can be serious mental and physical ramifications to doing that."
Burke has been in the niche nutritionals business since 1984, when he started Performance Labs, a company he still owns, which markets and manufactures products like energizing vitamin Vitalert. Over that time, the entrepreneur saw vast sums of money being made in the diet segment of the nutritionals market from products like Dexatrim to modern iterations of the diet pill like Metabolife or TrimSpa.
"We have had a lot of firsts in the vitamin category but we were never able to cash in on the diet category because we didn't have the budget to do the advertising blitz that the fad-diet market requires," Burke said. "We spent a lot of time trying to figure out how to capture the rapid growth of the diet category without having the advertising budget that drives most fad diets or falling prey to pitfalls, like outrageous claims."
Burke had the idea, but not all of the capital he needed to get his diet business up and running. He put about $1 million of his own money in but needed more, so he spent about eight months of last year courting potential investors.
He ended up partnering with Ideation Holdings, which delivered millions and helped Burke create a new company called Brand Alternatives that has Diet Classics as a wholly owned subsidiary. Right now it's a straight cash deal, but Ideation has the option to convert into equity position and could end up as a minority partner in the venture.
Weight loss products are a lucrative business. The supplement and pill category alone is worth about $2.2 billion a year, with the top 10 products accounting for about 50 percent of that market.
Burke said that Diet Classics' revenue goal for 2007 is $30 million, and that's based on reception so far. The Rite Aid Corp. drug store chain has picked up the line for national distribution in its 400 outlets with an opening order of 205 pallets of the products, and there are other deals in the works.
Diet Classics is spending $8 million to $10 million in the first year on advertising alone and so far has spent about $2 million on product development.
Even on the marketing side, though, there have been hurdles. Wal-Mart, the national powerhouse in general merchandise, didn't like the initial pricing concept and declined to carry the product because it was going to sell for just 20 percent less than the national brands.
"That taught us a big lesson," Burke said. "We had to bring in a third pricing and business model; with slimmer margins we ended up being able to come out at lower prices."
Risky coattail riding?
Not everyone shares Burke's belief that he's insulated from legal challenges.
"Is riding coattails and marketing by reference an implied claim based on the original marketer's claims?" asked Loeb & Loeb attorney Michael Mallow, who has worked on diet product cases in the past, as well as antitrust law. "That's the question. The FTC takes significant liberal license with an implied claim, and could in some cases hold the generic manufacturer liable."
The Federal Trade Commission announced in January that it had recovered $25 million to settle allegations of deceptive marketing from Xenadrine EFX, CortiSlim, TrimSpa, and One-A-Day WeightSmart some of the very products that Diet Classics' formulas emulate.
"I think they have a defensible position if regulators come knocking on door, but the thought that nobody will come knocking is a bit na & #271;ve," Mallow said. "It's a great business idea, but by making those comparisons there could be some implied claim; they need to make some disclaimer that they are not purporting to claim that these other products work either."
Diet Classics LLC
Core business: Manufacturing and marketing a line of generic weight loss products similar to leading national brands
2006 Employees: 14
2007 Employees: 20
Goal: Convert users of name-brand diet products into Diet Classics customers by offering substantial cost savings on similar product formulas
Driving Force: Desire of consumers to spend less on weight control products.
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