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Herbalife Distributors Loyal to the Company and Its Products

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Herbalife Distributors Loyal to the Company and Its Products REPORT Susan Jennings Kantari, [email protected] Herbalife Distributors Loyal to the Company and Its Products Companies: HLF February 8, 2013 Research Question: How accurate is hedge fund manager Bill Ackman in calling Herbalife a pyramid scheme? Summary of Findings Only one of Blueshift‟s 17 sources believes Bill Ackman was accurate in calling Herbalife Ltd. (HLF) a pyramid scheme. None of our Herbalife user or distributor sources reported being pressured or recruited to sell the products. In fact, six sources said they became Herbalife distributors purely for the discount. Seven of eight distributor sources said they have been satisfied with Herbalife‟s support and with their experience with the company. The remaining source, based in Singapore, reported being dissatisfied with the support and the compensation. Distributor sources said they knew of no colleagues who had lied about their sales figures. They added that distributors can make money as long as they dedicate themselves to selling the products. The customer/distributor ratio for three U.S. sources who commented on their “downline” was approximately 3:2 for two and 1:1 for the other. One European distributor‟s ratio was 2:1. A U.S. distributor said his entire “upline” recently left to work for another company but that he plans to remain with Herbalife. Silo Summaries 1) HERBALIFE DISTRIBUTORS Income from selling Herbalife products varied greatly for these eight sources, including four located outside of the United States. Sources‟ 2012 sales increased 10% to 250% year to year. None believes Bill Ackman‟s claims of Herbalife being a pyramid scheme, and all but one source reported being satisfied with their Herbalife experiences and with the company‟s distributor support. The remaining source said the compensation plan was not rewarding enough. Of the four sources who commented on their customer/distributor client mix, at least 50% of their customers are not distributors. The customer/distributor ratio was 3:2 for two U.S. sources, 1:1 for another U.S. source and 2:1 for a European source. One U.S. source‟s entire upline recently left for another company, but he chose to remain with Herbalife. 2) COMPETITORS AND MLM SPECIALISTS These four sources do not believe Herbalife is an illegal pyramid scheme, but one source, the founder of a consumer awareness institute, said there is no such thing as a “good MLM” and that Herbalife is “worse than a pyramid scheme.” An Amway source said Herbalife distributors pay only for products, not for joining. An MLM consultant said Herbalife‟s growth may start to slow as its penetration of international markets nears completion. 3) USERS OF HLF AND COMPETITOR PRODUCTS None of these five sources believes Herbalife is a pyramid scheme. One source is a new Herbalife customer and is considering becoming a distributor. She has been pleased with the results from Herbalife‟s products. Three sources are customers who became distributors in order to receive product discounts; one said the number of distributors appears to be increasing. The remaining source was an Herbalife customer until the products made her ill; she believes AdvoCare has better prices and is taking share from Herbalife. 1 1 Ferry Building, Suite 255, San Francisco, CA 94111 | www.blueshiftideas.com Herbalife Ltd. Background Most sources for Blueshift‟s Oct. 25, 2012, report expected Herbalife‟s sales to be steady or increase during the following three to 12 months, but two of three MLM specialists said most of this growth would take place outside of the United States. No distributor source had complaints about support from Herbalife. Bill Ackman‟s (head of the hedge fund Pershing Square Capital Management) well-publicized and controversial presentation on Herbalife contained many allegations against the company, including little money being allocated to product R&D and growth coming mainly from the recruitment of distributors. Ackman said Herbalife distributors make little money and are dissatisfied, and that the company inflates prices and has misleading sales information and a complicated incentive plan to hide its pyramid scheme. Herbalife responded to the allegations by stating that 73% of its distributors join to get a wholesale price on products consumed by themselves and their families. CURRENT RESEARCH In this next study, Blueshift set out to get industry reactions to Bill Ackman‟s Herbalife presentation. We employed our pattern mining approach to establish and interview sources in four independent silos: 1) Herbalife distributors (8, including four outside of the United States) 2) Competitors and multilevel marketing (MLM) specialists (4) 3) Users of Herbalife or competitor products (5) 4) Secondary sources (3) We interviewed 17 primary sources, including three repeat sources, and identified three of the most relevant secondary sources focused on a blogger‟s visit to a Queens, NY, Herbalife Nutrition Club to test Bill Ackman‟s thesis, a review of the Federal Trade Commission‟s 1970 criteria for determining if Amway Corp. was a pyramid scheme, and an Herbalife distributor‟s breakdown of commissions and royalties. Next Steps Blueshift will continue to monitor Herbalife distributors‟ downlines and if their customers continue to buy Herbalife products. We will follow up with Asian distributor sources to compare their experiences with those of the unhappy distributor in Singapore. Finally, we will monitor sales growth for Herbalife sources in and outside of the United States. Silos 1) HERBALIFE DISTRIBUTORS Income from selling Herbalife products varied greatly for these eight sources, including four located outside of the United States. Sources‟ 2012 sales increased 10% to 250% year to year. None believes Bill Ackman‟s claims of Herbalife being a pyramid scheme, and all but one source reported being satisfied with their Herbalife experiences and with the company‟s distributor support. The remaining source said the compensation plan was not rewarding enough. Of the four sources who commented on their customer/distributor client mix, at least 50% of their customers are not distributors. The customer/distributor ratio was 3:2 for two U.S. sources, 1:1 for another U.S. source and 2:1 for a European source. One U.S. source‟s entire upline recently left for another company, but he chose to remain with Herbalife. Truck driver and Herbalife customer and distributor, Illinois This source began using Herbalife in December and quickly became a distributor to get the product discount. He believes customers will continue to become distributors but that Herbalife‟s sales growth will be slow, mainly because people often jump ship once they realize the level of work involved in selling the products. He noted that his Herbalife upline group left the company last month. 2 1 Ferry Building, Suite 255, San Francisco, CA 94111 | www.blueshiftideas.com Herbalife Ltd. “I started on Herbalife in December 2012. I never really used any competitors‟ products other than a trial here and there.” While doing some of my own . “I love the products and prefer to have the distributor discount while attempting to build a home-based business.” research [on Bill Ackman] I . “I know there are some other decent products out there other than found certain groups were Herbalife. Some cost less, some cost more. But Herbalife products being accused of poor business have a proven track record, and my personal experience is what keeps practices and misleading me around.” information. In fact, the group . “[In terms of Herbalife users becoming distributors] I believe it has a steady, although small, growth. I know many people get into this that brought me in [to business and realize it is work. Then they vanish. But many stick Herbalife] fit right into this around, sometimes only for the discounted products.” mold. Just last month my entire . “While doing some of my own research [on Bill Ackman] I found certain upline left Herbalife. I decided groups were being accused of poor business practices and misleading to stay. information. In fact, the group that brought me in [to Herbalife] fit right into this mold. Just last month my entire upline left Herbalife. I decided Herbalife Customer & Distributor to stay.” Illinois . “They followed the top guy of the upline to another company. He made a choice to leave Herbalife and those who chose to follow him also gave up their Herbalife business. Some, like myself, stayed with Herbalife." . “[I use] the QuickStart program, the Herbal Tea Concentrate. … I started on these and like how I feel and that I have lost some weight. I also love the Cookies „n Cream Formula 1 Bars and am taking the Mega Garlic tablets.” Independent distributor in Pennsylvania; repeat source Of the source‟s 56 active and inactive customers, 32 are not distributors; these customers come to the source‟s weight- loss clinic and buy products as needed. The rate of customers becoming distributors has increased 10% in the past six months. Some distributors want to make money, while others are happy receiving the distributor discount. Approximately 40% of distributors purchase directly from her. The source‟s year-to-year 2012 sales were up 25%. Fourth-quarter sales rose only 5% but likely slowed because of the holidays. She has been spending more time on the business, and expects her sales to increase 50% this year. “I have 17 customers who are actively purchasing at this time and are not distributors. There are probably 15 more who still need to return after the holidays.” . “Maybe 24 active customers are distributors at either the senior [25% discount] or supervisor [50% discount] levels. Some have their own websites and offer free shipping as a VIP customer discount.” . “People want to be distributors; they want to make money and get healthy. This has increased steadily in the past six months, maybe up 10%.
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