Herbalife Revisited

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.

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Staff Writer

Dave Regio is a part-time blogger that writes about whatever interests him at that particular point in time. When he is not writing, which is most of the time, he is either gently reminding people of the OT commenting policy or working in the commercial real estate business, primarily in healthcare real estate with a capital markets focus.

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16 thoughts on “Herbalife Revisited

  1. More than a decade ago I got a call from them claiming they had my resume and wanted me down for an “interview”. I went, and it was a ra-ra-sell-our-products thing. That right there made it a total waste of my time, but the marketing techniques were this large series of non sequitur statements, and I also realized that half the people in the room (the half who were really into this) were ‘plants’.

    The whole setup seemed really really slimy.

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  2. “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 the market. The stuff is crap. Consider….”

    Ok, so what education/training/etc. you got to back up your claim of superior knowledge and marketing info?

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    • I’m not formally trained for this. I don’t think anyone is nor do they need to be. The experience comes from use and just a lot of accumulated knowledge. The stuff isn’t rocket science.

      Plus, there are companies out there that pride themselves on going against the grain against the kind of proprietary labeling that’s rampant in the industry. The companies will tell you what’s in them, how much is in them and why. The JYM line is really good for that, and I’ve mostly confirmed the dosing from other sources as well.

      Do they work? Yes, but the devil is in the details. Take D-Aspartic Acid, an ingredient commonly found in herbal testosterone boosters. Studies show that DAA can increase free testosterone levels by inhibiting sex binding hormone globulin levels. I’ve heard numbers between 20% and 40%. There are conflicting studies, but if this is correct, then yes, it does “work”.

      However, I don’t look at working as being the physiological levels cited in a study but rather gym performance. Does it boost strength? Does it lead to increased muscle mass/fat burning?

      Generally, to the extent most of these do anything, it’s negligible. For people that are hell bent on using products that will boost/alter hormone levels to create a favorable affect, the only legal options right now with any prescription for test are the DHEA-based prohormones. While a lot of prohormones have been banned, the ones that are legal are based on naturally occurring substances that convert to DHT, nandrolone, etc. The stuff will work but there are issues with these that I won’t get into here. I probably sound enough like a roid-head as it is . LOL

      I have at least three or four people on my FB that sell various weight loss/supplement products on the side, and a LOT of what they sell to people are the weight loss products whether it’s the shakes or the fat loss pills which could be nothing more than caffeine with some added ingredients in small amounts or something like a green tea/coffee extract or garcinia cambogia.

      My view is that if the people selling the products sold weight loss the proper way, through the creation of a caloric deficit based around a whole foods diet with plant and animal products, people wouldn’t buy the shakes unless they wanted them around in a pinch or took them pre/post workout. I’d even say that people that do sell the shakes do people a disservice when they tell them to replace two of their meals with shakes because of the deep caloric deficit that potentially creates.

      I’ve said before that fat burners are bullshit, and for most people they are going to be. If they wanted to, most people looking to lose a few pounds and have those pounds to lose can put themselves in a pretty mild caloric deficit, increase low-impact yet worthwhile exercise a bit (walking will do) and see start seeing results in 4 to 6 weeks, maybe sooner. People going on low carb diets will see faster loss but that’s not fat they’re losing as much as water and that slows and then they’ll miss carbs and oh boy…

      Fat burners come into play more for people trying to lean down to below average levels and they’re at the point where their bodies are pushing back. They are fighting against metabolic rates that want to decrease so they’re putting stuff in the bodies to fight that. I’m not saying any of this is healthy. It’s not, but this isn’t done for health reasons.

      Personally, I can walk into a Walgreen’s and build a fat burner that’s more potent than anything they sell and anything you’ll find on most of the mainstream supplement sites and stores. Again, I’m not bragging about this for health. I wouldn’t recommend anyone do it. The reality is that the “best” substances are no longer sold as dietary supplements. I’ll put it to you this way: Have you ever taken something like Claritin D or a cold medicine with pseudoephedrine and had a cup of coffee after? If yes, how long did it take for your appetite to return?

      All I’m talking about is the EC stack (ephedra + caffeine) that was and still is commonly used by physique competitors (as is Yohimbine + Caffeine). DMAA was used until it was banned a few years back, but it’s still available if you know where to look.

      And then there’s stuff like this, which I won’t get into here unless you want me to. This shit gets shady.

      Last, and I’m sorry I’m all over the board. Knowing what people buy is simply a function of going to supplement sites and looking at their best seller lists. Typically, its a combination of protein powders, pre-workouts, fat burners and multi-vitamins.

      You asked for my knowledge so I just tried to give you some. I can throw a lot more at you.

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      • Dave,
        That’s good enough. I wasn’t really doubting your knowledge, which I figured you had. You just wrote it in a way that assumed everyone knew. Appreciate the follow up. It’s surprising that this company has been around for so long without having similar “problems”.

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  3. I am really against encouraging grifters. I have no problem with people doing this as a SIDE GIG either. I do have a problem with fraudsters encouraging people to quit their jobs in order to sell products full-time.

    The issue we seem to struggle with in the Unuted States is telling someone that they hit their natural high point economically. The answer for many people might be really depressing. I am thinking of the article in the NY Times a few weeks ago about hopeless Valpro Law Students. One blog asked “why did a guy leave his perfectly good state trooper job to attend a fourth tier law school?” The answer is probably subjective to the person but I imagine he was filled with the idea of not reaching his full potential.

    Basically I am trying to find a way to advance people without rewarding fraudsters like MLM plans and for profit colleges.

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    • Lots of people seem to have no problem with telling people that they hit their natural high point economically in the United States. You see it indirectly all the time based on the reaction to the Valpro Law Students. You see the same sort of heckling when people chide former well paid and unionized factory workers that their jobs have gone away and they need to go into less well paid service jobs.

      Americans have always been a materialistic aspirational people though uncomfortable with acknowledging the realities of class to their full extent even when class differences in economic equality are at their strongest. American liberals are divided between the ones that want to focus on economic inequality more than anything else and the others who see a complicated web of race, gender, sexuality, and the class. The latter has a better grasp on the actual reality but the the big pitfall of identity politics is that it makes achieving progress on more universal things like more economic equality because it divides people into more groups than necessary. Social democratic programs are at their most people when they perceived as helping everybody, think social security or medicare, than when they are seen as helping one group in particular, medicaid, food stamps, affirmative action, and the former welfare program.

      The American Right has a complicated relationship to class to. The idea that anybody can achieve nearly anything they want through grit and hard work is very important in American conservatism even though it is not necessarily true. It used to be much more common a long time ago but some acknowledgment of class hierarchy and definitely race hierarchy was extraordinarily important to American conservatives. White Protestants on top to African-Americans on the bottom and that was that.

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      • Typically, I agree with most of what you say, but I have to push back on this:
        the big pitfall of identity politics is that it makes achieving progress on more universal things like more economic equality because it divides people into more groups than necessary.

        I see the big pitfalls of identity politics as singularity and insufficiency.
        Pigeon-holing people into a single demographic entity is especially prone to error.
        Further, no matter how many different demographics by which a person might be identified, there remain more unstated, as well as intangibles unconsidered.
        Generally, a broad view is less prone to error than a more narrow one.

        Hopefully, someday we will have the opportunity to flesh out that discussion a bit more.

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        • We may have an opportunity to flesh things out a bit if I can get the next post in my series up in the next week or so.

          It addresses a group that is exactly what without being the subject of the post, which is not a fight I feel like picking: fat acceptance.

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        • That’s another problem. People have multiple identities and place different emphasis on their importance. An LGBT person might not see that as their primary or most important part of their identity. They could see their race or ethnicity as more essential than their sexual or gender identity.

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  4. There are 18 grams of carbs in this stuff in the form of maltodextrin.

    It’s worse than that. Check the “other ingredients” list at the bottom. Fructose and sugar come before maltodextrin. Also, 14g of the 18g of carbohydrates are sugars, and maltodextrin is like 90% starch, so the 14g of sugars come mostly from the fructose, sucrose, and lactose in the whey concentrate, not the maltodextrin.

    I’m not sure, but the “Tri-Core Amino Blend” looks like it might be legit, since it’s composed primarily of milk and whey protein isolates plus L-glutamine and BCAAs.

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    • I guess I’m not the expert if I didn’t focus on sugar. LOL.

      The blend is fine but when you’re getting a protein powder, every gram of protein should contain the full amino acid profile, which will include the BCAAs and L-glutamine. Manufacturing protein with the full profile is more expensive than getting some with the full profile and then separately adding free form amino acids. I don’t want additional L-glutamine in a protein supplement nor added BCAAs. I can supplement those separately.

      It’s legit to a point but it cheats uninformed consumers, especially at their prices.

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  5. I’m actually of the opinion that almost all companies that are actively trying to recruit random people to resell their products are scam.

    The business model of ‘trying to get random people to buy and resell stuff’ simply doesn’t make sense. It’s never really made sense, and it *really* doesn’t make sense in this day and age.

    There *already* is a method for getting random people to be salespeople. It was called mail order, and now there’s the whole ‘affiliate’ thing online. If a legit company wants people to help sell stuff, they figure out a way to get those people a cut *when someone buys that stuff from the company*, not requiring private individuals to maintain inventory!

    I mean, this can still be somewhat scammy, when ‘salespeople’ are required to buy samples and kits from the company, and don’t make their money back.

    But it doesn’t *have* to be scammy. Amazon affiliate links aren’t scammy, for example. (Well, they’re not scamming the people making the money.) And Tupperware isn’t particularly scammy…most of the ‘samples’ used in starter Tupperware parties are just Tupperware people already own, plus a free (I assume it’s free) catalog. People collect the money at the party from the people who ordered, presumably go to a website, and order the products *afterward*, either at a discount or later getting a kickback. (I, obviously, do not sell Tupperware, but that’s how it appears to work.) Thus it requires no actual investment.

    But having the actual salespeople buy the product in advance and then resell it…yup, always a scam. I don’t want to say it should be illegal, I mean, there’s really no distinction between that and someone starting up their own retail business, if someone finds it profitable to buy Coke by the 24 pack and sell it by the can on their front porch, who am I to argue? But actual real companies don’t need to wander around urging people to start retail stores in their own living rooms. Actual real companies are trying to get their products into *existing* stores. (Coke won’t even sell you a Coke machine, for example.)

    Likewise, there is already is a model for having people invest in their own store to sell your stuff. It’s called a *franchise*, and that has any entire system of things built up around it so that the main company and the franchise owner are both deliberately at risk, and both have to be very careful and make sure the place is profitable in advance of starting it, and there are rules about territory and standards and all sorts of things. You can’t just, willy-nilly, spend a bunch of money on McDonald’s food, buy a building, put up a logo, and then, months later, you close because you don’t know what you’re doing.

    The fact Herbalife allowed this without any training at all says a lot.

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