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The US Federal Trade Commission (FTC) announced on 12 March 2014 that it will investigate weight management and fitness company Herbalife. Those investigations are continuing. The company was set up in 1980 and uses 3.7 million distributors to sell its products in 91 countries through a multi-level marketing (MLM) model. Sales in 2013 were $4.8 billion and its net income was over $500 million. 

A new member or distributor must be sponsored by an existing member and buy an International Business Pack, the price of which varies. Here in Australia, the price is reported as $60-70. You then buy products to sell. Herbalife claims that most members join to buy the products for their own use and to on-sell. But its 125 page Sales & Marketing Plan is very complex and revolves around multi-level marketing and numerous rules. 

Distributors can become senior consultants, success builders, qualified producers and supervisors and can progress through numerous levels such as World Team, Global Expansion Team, Millionaire Team, President’s Team, Chairman’s Club, and Founder’s Circle. The number who reach such dizzy heights is very small indeed. The company’s Australian site has 2012 statistics on its 16,583 distributors. Of these, 12,566 (76 percent) are single level distributors with no downline. A further 1730 (14 percent) are non-supervisors with a downline. Both groups buy the products wholesale and can use them and sell them online (such as eBay) or wherever.

A third group of 2287 (14 percent) distributors are supervisors and above with a downline. Nearly a third (722) of this group earned nothing in 2012 and 873 got $1-1000. A further 418 made $1001-5000, 109 earned $5001-10,000, 56 made $10,001-25,000, 40 made a living of $25,001-50,000 and 37 made a comfortable living of $50,001-100,000. Only 32, or 0.2 percent of the total, earned more than $100,000, including 15 or 0.1 percent (1 in 1000) who made more than $250,000. 

Yet, much of the hype used by distributors to try and recruit more members revolves around promises of a rich and carefree lifestyle by joining. A distributor here in Brisbane, Australia, has a small box ad in our local newspaper each week calling on “smart mums & others” to a “work from home” opportunity with “full training and support”. It includes a phone number and a web link. The website has a number of detailed pages and targets people around the world of an “incredible opportunity”. 

There are testimonials of people buying a BMW and a penthouse with an ocean view, although it does say it’s not a get rich quick scheme. Herbalife happens to be mentioned in one of many testimonials, the only mention on the site. It offers training material, a mentor program, training seminars and “powerful internet tools”. You send your details through an online form and they will book you a session with a “business coach” to explain the “opportunity”. 

Herbalife CEO Michael Johnson was America’s highest paid CEO in 2011 earning $89 million, but much less in 2012. The company’s gross profit is about 80% of net sales, more than double the average. Its products are often manufactured by third parties. The top selling product is a meal replacement shake called Formula 1. It costs 2-3 times competitors’ products. Sales are based on what it sells to its distributors, who often spend thousands, and there is no record of sales to actual consumers. 

Company sales are high because it is selling a lifestyle of wealth, and distributors are buying a dream and are therefore willing to part with large sums. There are also various charges including fees, freight, shipping and taxes. Herbalife has been sued and been before the courts many times and has been found to be a pyramid scheme. In a class action in 2003-2005, Jacobs v Herbalife International, 2700 distributors claimed over $27 million in losses or over $10,000 each. But the company has plenty of money to fight legal battles.

Bill Ackman of Pershing Square Capital Management has done a lot of research into Herbalife and believes that members earn tenfold more from recruitment than product sales. He estimates that 10 million non-sales leaders have lost many billions over the decades. He also says that distributors have a high failure rate and a large majority lose money.

Herbalife tends to target the most vulnerable. Sales to distributors in Mexico are higher than the US, as are sales to Central and South America, and also the Asia Pacific region. US sales only account for 18% of the total. Falling sales in advanced countries are often made up by an increase in less wealthy nations. But this can’t last forever, as with any company that uses an MLM model. Sooner or later, they run out of recruits. 

I would classify Herbalife as a scam.

Sources:

http://www.herbalife.com/global

http://files.shareholder.com/downloads/ABEA-48ZAJ9/3054376905x0x738228/F9565137-C23F-4400-937C-7FCEDE2BD7A9/Herbalife_2013_Annual_Report_Web_Hosting_PDF.pdf

http://www.herbalife.com.au/

http://en.wikipedia.org/wiki/Herbalife

http://factsaboutherbalife.com/wp-content/uploads/2013/04/HLF-Presentation-Exec-Summary-final_4_9_13.pdf

http://www.atf4me.com/

and various articles and forums.

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