Herbalife fined $200 million by FTC, will also restructure business
Rumors of an FTC investigation into Herbalife began back in 2013 and here at BehindMLM we’ve been covering the story diligently ever since.
Today a conclusion to the saga is in sight, with news that the FTC has fined Herbalife $200 million dollars for being a pyramid scheme.
About an hour ago the FTC announced they have reached a settlement agreement with Herbalife.
The FTC allege Herbalife’s
compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product.
Herbalife’s compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product.
BehindMLM reviewed Herbalife in January 2013 and came to the same conclusion:
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.
The FTC allege Herbalife’s operation as a pyramid scheme has caused ‘substantial economic injury to many of its distributors‘.
(Herbalife) deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products.
The FTC settlement will also see Herbalife ‘pay $200 million to compensate consumers‘. This figure was leaked by Herbalife back in May.
Looking forward, the settlement will see Herbalife unable to get away with primarily paying recruitment commissions at the expense of retail sales.
This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Ramirez said.
“Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make”.
Specifically, Herbalife’s new compensation plan will
reward retail sales to customers and eliminates the incentives in its current system that reward distributors primarily for recruiting.
(The settlement agreement) mandates a new compensation structure in which success depends on whether participants sell Herbalife products, not on whether they buy products.
This is a welcome change to Herbalife’s business model, which in my opinion has, by design, operated in the grey for far too long.
BehindMLM will publish a formal review of Herbalife’s new compensation plan when I’ve had a change to go over it in full.
For now, highlights of the plan revealed by the FTC include:
The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.
“Discount buyers” will not be eligible to sell product or earn rewards.
Herbalife promised to create a preferred customer class in February, 2013. The class was supposed to be created in April the same year.
For reasons that have never been made public, Herbalife reneged on the promise and instead (incorrectly) continued to assert that most of their affiliates were retail customers.
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.
Sounds good to me. Raw numbers wise you’re looking at each affiliate required to have 66% of their monthly sales volume be retail sales.
Affiliates themselves can only claim a max 33% of their total monthly volume from their downline.
Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
In order to ensure this is enforced,
Herbalife will pay for an Independent Compliance Auditor (ICA) who will monitor the company’s adherence to the order provisions requiring restructuring of the compensation plan.
The ICA will be in place for seven years and will report to the Commission.
Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.
This is targeted at preventing new Herbalife affiliates being sold on the dream of opening up a nutrition club off the bat, only to get massively into debt.
Not such a big deal, but in line with the consumer protection spirit of the settlement agreement.
All in all it’s great to get confirmation that Herbalife was operating as a pyramid scheme. And the specific retail sales requirements (a minimum 66% of sales volume for each affiliate), are concrete numbers the MLM industry can use as a guideline.
The $200 million fine isn’t enough to destroy Herbalife outright, but enough to cause a small dent. Personally I think settling being a pyramid scheme will be far more damaging to the Herbalife brand.
As per the settlement agreement, Herbalife have 10 months to implement the FTC’s requested restructuring changes.
As to whether or not Herbalife an survive without operating as a pyramid scheme… I don’t like their chances.
If Herbalife affiliates were able to generate substantial retail sales then it would have been happening. That the FTC had to finally step in means it wasn’t.
Pending some miracle, I predict a slow and steady decline over the next few years. Sort of like what’s happening with Vemma, but over a much longer period of time.
Herbalife isn’t going to be the MLM giant they once were, and other large MLM companies better sit up and take notice.