FTC Herbalife investigation: They had it coming.
Despite the industry-wide ramification of a full-blown investigation into Herbalife, there’s surprisingly not all that much to write about.
Herbalife shares sank as much as 15% in Wednesday trading after the nutritional supplements marketer said it is under Federal Trade Commission investigation.
Kinda curious that Herbalife themselves made the announcement, although after further consideration, I suppose it was probably a “making the best of a worst-case scenario” situation for them.
The FTC themselves, as per regulatory policy in the US, won’t publicly comment on the investigation. That left it up to Herbalife to either maintain radio silence or break the announcement.
No doubt in a lofty boardroom somewhere, it was decided that going public was the best move. News of the investigation would have gotten out sooner or later anyway, better it come from them. Herbalife’s transparency track-record is pretty atrocious, so it’s good to see the company be open and honest about something for a change.
Along with the investigation announcement, Herbalife also reiterated their stance on regulatory cooperation:
“Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC,” the company said in a statement.
“We are confident that Herbalife is in compliance with all applicable laws and regulations.”
That they’re “cooperating fully” is good to know. Y’know, given that they don’t really have a choice.
Meanwhile as I woke up to the news this morning, this pretty much summed up my reaction:
Why am I totally not surprised at an FTC investigation into Herbalife? Read on.
When I first reviewed Herbalife back in January of last year, here’s a run-down of my thoughts:
the single most problematic issue I see with the Herbalife compensation plan is the complete lack of incentive to sell products at a retail level.
As such, aside from the Royalty Override and Production bonuses requiring monthly sales to ten retail customers to qualify, it’s entirely possible to set up an endless chain of recruitment, with distributors qualifying eachother via their own product purchases.
No doubt Herbalife will try to explain this away by stating that their distributors go on to sell these products to actual customers, thus counting as retail sales but this is simply not the case.
Distributors are not employees of Herbalife. As such what they do with the purchased products is entirely irrelevant to analysis of the revenue generation by Herbalife. This is true regardless of whether Herbalife distributors do indeed go on to sell their purchased product to customers, toss it in the bin or resell it to other Herbalife distributors.
All that matter is where the revenue comes from and who is buying the product, which in the case of distributors purchasing the product from Herbalife themselves, would quite obviously be the distributors (internal consumption).
With thirty years of business under their belt, Herbalife, although they like to play dumb, know that their retail customer figure is key to anyone making an accurate assessment of company’s business model.
Yet this is information the company has purposefully hidden from the public. Shortly after all the Bill Ackman short-seller lobbying began in late 2012, Herbalife offered a slither of redemption by announcing they were going to start tracking wholesale customers.
This was a big deal because at the time Herbalife claimed affiliates who didn’t or failed to recruit new affiliates were wholesale customers. Utter hogwash and a blatant flouting of a long-standing regulatory grey-area.
At the time, Herbalife said they’d begin tracking actual wholesale customers in April. Front the numbers, show everyone you have a mountain of retail activity going on within the business as you claimed, and everybody can move on.
April came and went and Herbalife failed to disclose anything related to how many wholesale and retail customers actually exist within the business. No doubt painfully aware of how condemning their silence looked, the company then attempted to blow smoke up our asses with a self-commissioned Nielsen survey.
“The Nielsen study found that 87 percent of the 349 respondents (out of 10,525 total respondents) who purchased Herbalife products for personal use in the past three months self-reported that they did not purchase it from the company as a distributor.
Herbalife customers would include their distributor network, which totaled approximately 550,000 in the U.S. as of the end of the first quarter 2013.”
Proclaiming the legitimacy of Herbalife on the back of the Nielsen survey is problematic for a few reasons. The first being that, as quoted above, distributors are reported as consumers.
Announce to the world you’re going to finally disclose your retail activity, wait three months and then release a survey that professes the legitimacy of your model using data that was the instigator for you to disclose retail activity in the first place, all the while still failing to disclose said retail activity?
Brilliant. A text-book example of the smoke and mirrors bullshit we regularly see in the MLM industry if I ever I saw one.
That was June 2013, but fast-forward nine months later to now and Herbalife have still thus far failed to disclose the actual retail activity taking place within the company.
Want to take a guess as to why a company, who is facing a mountain of political and activism-related criticism over the past year and a half has not made public a figure that would instantly remove all doubt of Herbalife being a pyramid scheme?
Yeah, it just doesn’t add up does it.
Well, with confirmation that the FTC have launched a Herbalife investigation and Herbalife “fully cooperating” with them (again, how nice of them), one way or another I think we’re going to find out.
Personally I’d peg actual retail activity at well below 10% company-wide. In China I’d even put money on the fact that true retail is non-existent (99.9%+ of revenue generated by affiliate-purchases).
Once the FTC get those figures from Herbalife (somehow I think the stale “but we don’t know!” excuse Herbalife trot out isn’t going to work anymore), it’s not so much a question of “are they a pyramid scheme” but whether or not Herbalife’s retail figures trigger further legal action.
I for one hope it does. Not because I want to see Herbalife go down mind, but because it might finally clarify what is an acceptable amount of retail activity for an MLM company to have.
I currently use 50%/50% in writing my own MLM company reviews, taken from common-sense and an FTC paper on “multi-level marketing” from November 2012:
Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan
Keeping the above in mind, it should be more than obvious why Herbalife have not made their true retail activity figures public. How they expected not to attract a regulatory investigation on such a crucial dataset boggles the mind, and is precisely why I’m not surprised that the FTC will no doubt demand the company hand over the data.
Now what they do with it, if anything, remains to be seen.
Tick-tock Herbalife, tick-tock.