I’m going to give this a quick analysis. I’ll focus less on the legal claims, but more on the business issues and some of the issues that pertain to health and fitness. Starting here (my emphasis added). And, by the way, Vikram’s prediction was correct:
Multi-level marketer Herbalife will pay $200 million back to people who were taken in by what the FTC alleges were misleading moneymaking claims. But when it comes to protecting consumers, that may not be the most important part of the just-announced settlement. What could matter more than $200 million? An order that requires Herbalife to restructure its business from top to bottom – and to start complying with the law.
Advertising in English and Spanish, Herbalife pitched its business opportunity as a way for people to quit their jobs and make the big bucks. Other ads promoted Herbalife as a means for already hard-working people to provide a little more for their families: “When we worked in factories our earnings could only pay for basic needs, but now we can take our 12 grandkids on vacations.”
But don’t start packing the kids’ bags because according to the FTC, it’s virtually impossible to make money selling Herbalife products. As explained in the complaint, our analysis shows that half of Herbalife “Sales Leaders” earned on average less than $5 a month from product sales. For folks who invested the most to build an actual retail business – a brick-and-mortar store that Herbalife called a Nutrition Club – the majority made nothing or even lost money.
Which brings us to the inconvenient little secret about Herbalife that the FTC’s complaint alleges: The small number of distributors who actually made money made it not by selling products to people who wanted the company’s powders, pills, and potions, but rather by recruiting others to serve as distributors – and encouraging them to buy Herbalife products.
Chances are better than average that I know more about dietary supplementation than the majority of Herbalife “independent distributors”. I have an idea of what people are typically buying and why. I’m also savvy to ingredients, dosing and some of the issues surrounding the transparency (or lack thereof) on supplement facts labels. With that in mind, I took a look at Herbalife’s Rebuild 24 Strength to see how it stacked up to forskolin fuel weight loss benefits.
Pricing – I saw pricing between $50-$85 for a 2 lb container. You can get better quality products from retailers at around $30.
Serving size – 51 grams for 24 grams of protein? There are 18 grams of carbs in this stuff in the form of maltodextrin. It’s sold separately for people that want to add it to a shake, but here it’s being used as a cheap filler. By comparison, the best protein powders have trace amounts of carbs (this has 3 grams). Keep in mind that the cheap filler cuts down on the number of servings per container, hence 20 servings per container vs. nearly 30 in competing products.
Protein Quality – Most likely non-existent. That the label indicates 24 grams and then under the “Tri Core Protein Amino Blend” only shows 14 grams total tells me that free form amino acids have been added to increase protein count. This is known as protein spiking. Although not illegal, some supplements companies have been sued over protein spiking due to the lack of disclosure; however, as far as I can see, Herbalife does make disclosures. Another issue is that the protein types used in its blend don’t come close to the best protein blends on the market.
Long story short, avoid anything by this company. Actually, I’d say that about any supplement company that doesn’t offer products directly through retailers, whether in stores or through online distributors. (Note, after writing all of this, I found a brilliant source from two years ago that said exactly the same thing.)
I can see why the FTC raised concerns about Herbalife’s business model. Even though I don’t think the company is a pyramid scheme, it is GROSSLY misleading to sell the business opportunity in the way the company did. Think of it this way: imagine someone starting out who gets the product at a 25% discount and wants to earn money strictly through retail sales and wants to earn profits of $50,000 over 12 months. That requires $200,000 in sales, of over-priced yet cheap-quality supplements. The kind of volume required to generate this level of sales is large, and it’s going to require a sizable customer base to hit that. Are we supposed to think that someone with little to no business experience that’s chasing the dream of earning this money by working out of his/her home is going to generate a large enough customer base to achieve this? This article reflects my personal interactions with distributors: once the network of friends and family is tapped out, sales are difficult if not impossible to achieve. That some people purchase sales leads for this kind of stuff and even go so far as to establish bricks-and-mortar stores just blows my mind. It’s akin to throwing money down a hole.
Predictably, Herbalife is claiming victory, but has it really won? A key point in the settlement is this:
Multi-level compensation that business opportunity participants earn will be driven by retail sales. At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
What I find most interesting about this point goes back to a presentation Pershing Square did on Herbalife a few years ago, as well as Vikram’s post:
I share Ackman’s concerns about self-consumption within the network. If a distributor consumes product she bought for herself for $230-$300, the company still records that as $400 worth of retail sales and treats the difference as money in the distributor’s pocket. That seems inappropriate to me (though Herbalife itself gets the same amount of money either way). The company responds to this objection in an 8-K:
The percentage of product of any multi-level marketing company consumed by its distributors is substantial. This is not surprising since consumers who are enthusiastic about the products become distributors in order to purchase at a discount and possibly to share and sell the products to others. In addition, in order to minimize the risk of product being accumulated by distributors, the company has policies in place such as the 70% Rule, the Ten Customer Rule and the Buy Back policy.
That sounds to me like an admission that a significant portion of sales come from internal consumption. Yes, it also says it is no big deal because of their controls, but it still means their retail sales numbers are inflated since those sales are not being made at the full retail price. And that means that retail profits are probably overstated as compared to commissions on downline sales.
I think the change is certainly going to affect how people are compensated, but at the end of the day, how many people are we really talking about? The changes that were most necessary, and the ones I hope to have the most impact, involve the way the company was recruiting independent distributors.
I may not like Herbalife products and have very little respect for the company, but I never saw it as a pyramid scheme. I have some friends that sell MLM products, and their stories are all similar in that they got introduced to the products as consumers, like the products, liked the member/distributor idea if only for the discounts and generally try to make enough product from sales to cover their own consumption and perhaps a little more. None of them are quitting their jobs for this. I see nothing wrong with that.