Herbalife to track wholesale customers in April
As good an admission as any that there are some serious problems with Herbalife’s current compensation plan and business model, the company announced today that it ‘will more clearly identify the wholesale customers among its 3.2 million distributors from April’.
The big questions?
Will Herbalife actually cut off these wholesale customers from the income opportunity (making them true customers) and will said wholesale customers stick around after being cutoff from earning anything?
Herbalife disclosed that the decision to create a wholesale customer class in April came about after it held ‘short discussions with Carl Icahn‘.
Icahn is an investor in the company who currently holds a ‘13 percent stake in the company‘. Why an MLM company is only now taking action and direction (from a stock investor no less) I have no idea.
On an investor call, CEO Michael Johnson stated that ‘beyond that (discussions with Icahn), there’s nothing concrete to report‘. Whether or not a regulator has stuck their finger into the Herbalife pie and prompted their decision remains to be seen.
Update 21st February 2013 – Herbalife has announced that they are ‘cooperating with a Securities and Exchange Commission review of its business model‘.
This seems far more likely the reason behind Herbalife’s wholesale customer’ announcement, as opposed to it being the result of discussions with Carl Icahn. /end update
In anycase the announcement is a welcome one and if Herbalife do truly cutoff what they claim are existing wholesale customers, provide a deeper insight into the distributor to customer ratio of the company.
Currently Herbalife claim that ‘73 percent of its “distributors” join Herbalife just to get a discount on the products rather than to earn money‘.
They identify these distributors as not having earnt anything. Joining Herbalife as distributors and as such participating in the income opportunity, this would make them “failed distributors” (in that they made no money).
Herbalife however insist they aren’t failed distributors but are instead wholesale customers. Where the 73 percent figure comes from I have no idea, it appears to be pulled out of their arse. Herbalife are notoriously vague in tracking distributors statistics, at least publicly.
Given review of the current Herbalife compensation plan, there’s no way to differentiate between a failed distributor and wholesale customer as they’re both distributors who earned nothing. Truthfully or not, Herbalife just presume that if you didn’t make any money as a distributor then you are a wholesale customer.
Another aspect to consider with the introduction of a wholesale customer class would be general attraction to the business. Currently you can recruit distributors on the promise of the attached income opportunity, with Herbalife claiming you as a wholesale customer if you fail to generate any income.
With no access to the compensation plan and income opportunity, it will be interesting to see whether or not the existing distributorbase will be able to market the products.
One of the key points of Bill Ackman’s criticisms of Herbalife is the fact that demonstrably, Herbalife’s products are overpriced. The current pricing of Herbalife’s product range only makes sense if you consider the attached income opportunity.
Another possibility is that the wholesale customer class will flop, revealing that, contrary to Herbalife’s unfounded claims, that new distributors are infact signing up for the income opportunity, buying a whole bunch of products to qualify themselves for commissions and then failing to generate any.
And what about retail? Surely the introduction of a wholesale customer class (with no distributor membership fee) will kill the retail side of the business?
Why pay full retail when you can sign up as a wholesale customer and get a 25% discount? Sure you’ll have to commit to a minimum monthly autoship but if you don’t like the product just cancel the order after a month. That’s still better than paying 25% more.
Either way Herbalife’s announcement appears to be a bit of a gamble for Herbalife but as I said earlier is a welcome one. They’re pegging everything on supposed wholesale customers they’re not even sure actually exist.
Here’s hoping they follow through and create a wholesale customer class that is truly cut off from the income opportunity.
Anything less is just confirming an already present lack of faith in Herbalife’s products themselves, meaning we’re left with a company generating the bulk of its revenue interally from its distributors.
Update 2nd May 2013 – Well April came and went without a peep on wholesale customers from Herbalife.
Seems like they’re not quite ready to reveal how many wholesale customers they have, CEO Michael Johnson stated on April 30th that
they will be announcing significant changes to the nomenclature used by the company in the next 30 days.
I suppose with the KPMG auditor inside trading issue a delay isn’t totally unexpected but if nothing comes out by the end of May it’s not going to look too good.
Guess we’ll just have to sit tight and wait for those figures.
there’s no way herbalife will make a preferred customer class cut off from the income opportunity . they might as well sign their own death warrant.
they will insist that 25 % discount is available only to distributors and allowing direct retail from the company at this discount will kill the market for their true distributors. so if anyone wants to enjoy the 25 % discount they have to make the sacrifice of joining as distributors, and can be given another fancy neo name.
in short they will classify their distributors in different categories but NO preferred customers.
if i had money like ackman does, i would have bet on this .
Distributors cannot be preferred (wholesale) customers, the two classes are at odds with eachother definition wise.
Anything short of creating a wholesale customer class cut off from the compensation plan will prove today’s announcement to be nothing short of marketing spin.
Now that they’ve made the announcement (who didn’t see it coming?), Herbalife have to follow through. Otherwise they are pretty much confirming that without constant recruitment of new distributors their business won’t survive, making it a pyramid scheme.
You can’t claim that most of your distributors are wholesale customers not interested in making money and then refuse to create a true wholesale customer class because it will kill your business.
they are NOT going to claim it will kill THEIR business , but they can claim it will kill the business of their TRUE distributors. there is truth in that.
also herbalife is going to go private in a hurry. they’re damn lucky icahn wants to teach ackman a lesson of his lifetime.
…what’s the difference?
Doesn’t change their business model.
you cant be serious! how can a company compete for retail with it’s own distributors and make it wholly unfair by offering 25 % discounts. they can have a preferred customer class of people who for some reason, [ like ,don’t know any herbalife distributor in their neighborhood ]purchase directly from the company at retail price.
but you want distributor price then BE a friggin distributor !
doesn’t change the business model of 99.9 % networking companies either which didn’t get bear raided by ackman .
(Ozedit: removed offtopic spam)
I have no idea what you’re talking about. An MLM company’s affiliates/distributors retail the products, not the companies themselves.
That’s not MLM. Let’s not waste our time discussing silly irrelevant hypotheticals shall we.
We’re not talking about 99.9% of network marketing companies, we’re talking about Herbalife. Stop derailing.
How and with what ??
What difference will it make to their business plan ??
Does “going private” mean they no longer fall under pyramid scheme or endless chain recruiting scheme laws ??
Would “going private” make Herbalife a more attractive proposition for someone looking to become involved in a legitimate Multi Level Marketing company ??
While “going private” may give Herbalife some relief from being subject to the vagaries of the stockmarket, how will it help the average member who is looking to make a few extra dollars in an over supplied market ??
Article updated with Herbalife’s announcement that they are ‘cooperating with a Securities and Exchange Commission review of its business model‘.
I’m tipping this most likely the real reason behind their recent wholesale customer announcement, as opposed to it being a result of discussions with Icahn.
Additionally Bill Ackman is claiming that he wasn’t allowed on the Herbalife investor call to ask questions:
Herbalife responded that they had ‘no record of Ackman or anyone at his firm, Pershing Square Capital Management, attempting to ask a question‘.
How Herbalife ascertained who was wanting to ask questions on the call is not clarified, however it’s worth noting that
I’m guessing Ackman (and a whole bunch of other people) were simply locked out due to Herbalife severely restricting the amount of questions they would take and time allocated to Q&A.
More conspiratorial thinking observers might even suggest the five questions accepted by Herbalife were
stagedcarefully controlled…“The company said it bought back about $50 million in stock in the fourth quarter and then repurchased another $162 million since January 17, contrary to published reports that indicated no buyback activity was occurring.
Herbalife estimates it has $788 million remaining on its $1 billion authorization, potential ammo to squeeze short sellers like Ackman.
also they have icahn’s help, who announced that there was enough finance available to help the company go private, or words to that effect
except for the changes they are incorporating to “fix the misconceptions,” as Des Walsh, Herbalife’s president, said during the call , ZILCH .
they are safe unless the SEC or FTC comes in. till then it’s just them against a shorter with vested interests. one good PR spend will solve their problem regarding ackman.
if FTC doesn’t come in then yeah, they’re safe from pyramid laws. remember that FTC doesn’t necessarily see pyramid selling in black and white. they probably take a ‘wisdom’ approach and interfere only when a company doesn’t voluntarily introduce reforms.
FTC is not ‘out to get everybody’ but appear to have a more conciliatory approach. ackman has severely misunderstood the method adopted by FTC, in my view .
maybe not for deep thinkers like yourself, but for lots of people around the world – yes. one man ackman and his allegations will be forgotten if it leads to nothing.
amway got itself in deep shit in the UK and india. does that mean people are not joining up anymore? hell, the MLM world is attacked day and night, who cares about one more motivated attack of a stock player?
it will help an average member just the same as joining any other MLM. only the ones who work it, make the money the rest will join the group of distributors who could not be retained.
as long as there’s buy back, it’s okay. there will be people who will be unhappy, but the world is full of people looking for reasons to be unhappy.
according to fox business herbalife’s response to not taking ackman’s representative’s question during the call is –
Uh what? So they’re denying Ackman was prohibited from asking questions on the call but also stating they “don’t take calls from short-sellers anyway”.
What a crock!
What difference would that make?
Herbalife already have that class according to its own POV, “distributors that actually are customers”, “where the main economic objective is to get a discount on their own purchases”.
Distributors will simply have to offer their prospects an alternative option: “You can join as a distributor OR as a preferred customer”.
Of course they can’t sell the $9.95 “info DVD” to a customer, or sell the IBP. The paperwork will also have to be different for preferred customers (no 124 page agreement).
You obviously know something we don’t know here? How can introducing a new class of customers be similar to “signing its own death warrant”? Distributors should normally LOVE having that extra option to offer their true retail customers?
The “authorization” they’re talking about there is from its own Board of Directors (its shareholders). Herbalife had to defend its own stock price during May/June 2012, and needed permission from its Board of Directors for a new buyback program, from July 30th 2012 to June 30th 2017.
HERBALIFE’S MARKET CAPITALIZATION
Herbalife repurchased around 11 million shares in 2012, $47.78 per share, cost $527.8 million. That’s a REDUCTION in the company’s market value, but it will protect the stock price.
114 million shares * $70 = $7.980 billion (before Einhorn)
103.1 million shares * $38 = $3.918 billion (now)
Repurchasing stocks has to be FINANCED in one way or another.
* Borrow money?
YES, Herbalife has borrowed money for that purpose, in July 2012.
* Through the daily cash flow, e.g. by reducing costs or increasing profit margins?
Introducing some new additional fees will surely look good in a pyramide scheme investigation. 🙂
* Reducing dividend payouts to shareholders?
NO, that would not protect the stockprice. The price is vulnerable to all “negative signals”.
From my POV, exaggerated repurchase of its own stocks will be one of the worst strategies the company can use, if it can’t finance the repurchase by increased sales volume to external customers.
It has borrowed money to repurchase stocks (and lost $100 million on it) That will have to be paid back over 5 years, reducing the company’s profitability. It will eventually hurt the shareholders.
Herbalife has the authorization from its shareholders. Now it will only need the money. It doesn’t have $788 million to use for that purpose, neither as current assets nor as long term assets.
It can BORROW money, and use that to repurchase its shares. But that will actually reduce its profitability and liquidity in the near future, e.g. the next 5 years. It will be paying off debts rather than paying out dividends to its shareholders.
Herbalife is actually bringing itself deeper into trouble with its own strategy. It has managed to protect its share price in a short term by reducing its own long term profitability.
The only reason Herbalife want to go private is so it doesn’t have to file all those disclosures so critics can view them.
One wonders what would be be more cost efficient and therefore more advantageous to the shareholders.
Borrowing heavily to fend off Mr Ackman and his fellow short sellers, or changing their rules to remove any doubts about Herbalife being a pyramid scheme.
Caught between short and long sellers and shareholders demanding “value”. This isn’t what MLM is about.
No wonder Herbalife’s top distributors are jumping ship:
Sounds like they don’t really care about their distributorbase, what with Carl “funding is available if requested” Icahn playing their financial saviour and all.
All I hear about recently is discussions between Herbalife and its investors, I wonder when was the last time they had a talk to their distributors…
well it’s a big decision for herbalife and there will be a bill to pay. no pain no gain.
but if their stock is attacked repeatedly by short sellers they will have more pain. constantly defending themselves from such corporate raiders can be taxing. so maybe they want to bow out from this sleaze stock market. fair enough.
Herbalife is clearly borrowing money to buy back its own shares. I checked their 10-K (annual report) in the EDGAR system.
Found under “Notes details” –> “Subsequent events” (in the 10-K “Interactive data”):
Senior secured credit facility outstanding
Dec 31 2012 | Dec 31 2011 | Feb 19 2013 | Feb 19 2013 (1)
487,500,000 | 202,000,000 | 987,500,000 | 500,000,000
(1) Revolving credit facility
Unused credit, Feb 19 2013 = $195,200,000
If I have interpreted it correctly, Herbalife has borrowed an additional $500 millions in 2013, in credit rather than as a loan. “It has maxed out its credit card limits”.
It has bought back 4 million shares in January/February 2013, cost $162,400,000, $40.61 per share.
Here’s news that icahn and herbalife are officially mates:
read the article at http://www.forbes.com/sites/steveschaefer/2013/02/28/fighting-ackman-herbalife-sews-closer-ties-with-icahn/
who is the guy behind fusion research on seeking alpha? while herbalife is refusing to take on ackmans allegations , they seem to have ‘hired’ fusion research to tear ackmans presentation apart.
fusion research claims to be presenting his own opinions for free, while admitting that “The article was written with substantial inputs from an investor who has a long position in “in the money” call options of Herbalife ” [icahn ?].
inspite of several articles from fusion picking holes in ackmans theories , there has been no rebuttal from ackman’s or shane direens side. shane dineen posted a few questions in the comments section of fusions research ,but did not follow up when fusion answered his question .
http://seekingalpha.com/article/1244981-herbalife-putting-bill-ackman-s-arguments-in-perspective?source=google_news
as of now the ball seems firmly in herbalife and it’s supporters court .
I believe I saw it a couple of days ago, but then I gave up trying to understand his logic. I’m not wasting much time trying to analyse other people’s ideas if they can’t communicate them properly, e.g. if some information is missing.
On Seeking Alpha, I can only read a part of the articles without registering, and the author has failed to reach clear conclusions within the first page.
When he’s claiming Ackman has made a mistake (misunderstood the term “PRIMARY”), he’s making a mistake himself (in what I could see in the first of 3 pages).
I don’t think that guy is writing for an AUDIENCE, so I don’t think anyone has ‘hired’ him either. He’s trying to communicate his own opinions, and HOPES he will meet an audience.
If you feel he has some theories worth mentioning, please quote the main parts of them or tell us about them? Or link to a source where I won’t have to register to read the full article (if he has something worth mentioning, of course)?
The main objective is normally “putting the ball firmly inside the opponent’s goal”, not “having the ball firmly in our side of the playing field”. 🙂
That problem seems to be related to specific authors, not to others. Some authors prefer to divide their articles into small parts, making them become less readable “as a whole”. They’re probably interested in something else than bringing information out to an audience.
@anjali
You can simply forget my questions about “other sources” or “quoting parts of his theories”. That author didn’t offer anything of interest to a normal audience.
i dont know what your crapping on about norway ,i find fusion research’s articles very informative and interesting .i have not seen any other serious attempt to take down the ackman allegations, other than fusion’s. he got shane dineens attention that surely says something?
ackman and his analyst have relied on peter vander nat’s definition of MLM:
the part that caught my eye is “sale of goods and services to consumers”. peter vander nat being a senior economist at FTC and all , has chosen the word ‘consumer’ instead of ‘end consumer’ or ‘non distributors’.
this paper was published 11 years ago ie 2002 or so, and soon after the FTC also wrote a letter to DSA saying the amount os self consumption was not necessarily important in defining pyramid schemes. the FTC has now put up another message on it’s site saying:
yet the FTC have not declared that they are discarding peter vander nat’s mathematical explanation of MLM, or retracting their 2004 letter. the full form of FTC should be Frigging Total Confusion!
and yes norway, the ball is firmly in herbalife’s tennis court, you can play football with someone else.
He acted like a “copywriter”, a person publishing articles on the internet for the purpose of marketing himself as something. They will usually REPEAT something they have found on the internet, but rewrite it so it will look “genuine”.
Usually, they don’t have enough insight to identify what they’re writing about properly, they have picked up the theories from someone else. I used “what they’re writing about” in a broad sense here.
If you feel he added something of value, you’re free to quote from it using “fair use” rules. I have only read the first pages of article #1 and article #4, and none of those pages contained anything important.
I really don’t care WHO Ackman has quoted. I had never heard about the guy anyway.
Even in tennis, the main objective is to play the ball over to the oppponent’s side of the playing field. 🙂
I have already covered the same topic, and have analysed it in one of the other threads.
The pyramid scheme issue isn’t about external or internal sales or consumption, it’s about whether or not a business is set up to PRIMARILY act as a chain recruitment system.
Focusing on internal and external sales is simply to look at it from another perspective, from a perspective where you can’t see things clearly. Some people INSISTS on seeing it from a perspective where they can’t see things clearly.
It’s not about whether they are consumers or distributors, it’s about whether or not they are participants in a chain recruitment system.
DIFFERENT PERSPECTIVES
To see something from a different perspective, you’ll first need to unfocus from the perspective you currently have, and usually you will also have to move yourself to a different location.
The typical example is if you’re in the middle of a forest you will only be able to see the trees, not the forest itself. Climbing up in one of the trees will give you a different perspective, climbing up on a hill will give you another, flying over the forest in a plane will give you a third perspective, and so on.
Most people will need to change perspective from time to time to see something clearly.
To really SEE a promotional pyramid and to be able to identify it, you’ll need to move yourself in different directions, e.g. to a place where you can compare it to something similar or something different, or to a place where you can see the whole forest rather than the trees.
Try to move yourself from the MLM perspective over to a new perspective? The rules defining “legal/illegal” are located in a different part of the forest than where you are.
Try to look at a traditional pyramid, and try to understand the factors which makes THAT “business model” illegal?
A traditional pyramid has no confusing elements of “internal/external” consumption or sales. It’s about people being offered financial gains, they’ll only have to pay something for the right to participate in the plan. People will earn a ROI greater than their own investments if they’re able to recruit enough new participants. But the system is inherently flawed and will eventually collapse.
In a traditional pyramid, “external/internal” consumption theories will be irrelevant. Those theories do NOT define what’s legal/illegal, but from an MLM perspective it might LOOK LIKE those theories are playing an important role.
@M_Norway Just curious what you do for a living…
@NHRA
I’m a sales man, selling office furniture to big companies and government institutions. Or actually a former sales man, working in other parts of the sales process, only frequently with typical sales.
The TYPE of sales man is reflected in most parts, I’m dealing with business people rather than consumers, selling “hardware” rather than “software”. “Hardware” will require some technical insight to sell, while “software” will require social skills.
Sales people do usually NOT have very deep insight into different topics, they only have enough insight to communicate it properly. They’re not “experts” in any fields, but they’re often capable of communicating a wide range of topics to a wide range of people. My range of topics is mostly business related.
NOT A SALES ATTEMPT
The forest example in post #25 wasn’t a sales attempt. I simply identified that she was in the wrong part of the forest. In that part of the forest, it will look like the “internal / external sales or consumption” actually is defining what’s legal or illegal.
In reality, what’s defining legal/illegal can be found in another part of the forest, in the traditional pyramid parts rather than in the MLM parts of it.
What’s illegal?
Organising, running or promoting a chain recruitment scheme, a fraudulent plan where participants are paying for the right to participate, where the participants can earn a ROI greater than their principal investments by recruiting other participants.
Business models like that are inherently flawed and fraudulent, e.g. in that they eventually will run out of new participants to recruit.
My 2c on Seeking Alpha:
Most of the articles I’ve seen linked there are not really MLM focused and tend to be orientated towards the finance sector.
I’m not taking anything I read there too seriously.
Seeking Alpha is indeed aimed toward investors, and any one can publish an opinion piece there. However, there’s a difference between your average Joe’s advice vs. an expert’s advice. It’s up to you to pick out who’s a real expert. 🙂
That author was placed in the “wannabe” bin because of several different reasons. I will normally prefer H.E. Pennypacker or Art Vandelay as “expert authors” (Cosmo Kramer and George Constanza from “Seinfeld”).
From an MLM viewpoint, it LOOKS LIKE the pyramid scheme issue is about internal/external customers. You can easily get that idea if you’re looking at the companies being shut down.
The real issue is about whether a business PRIMARILY is set up to sell a recruitment driven income opportunity, or PRIMARILY is set up to sell products or services to real users.
Mandatory purchases to qualify for commissions should partly be excluded from the “real users” group. Most mandatory purchases are clearly motivated by other incentives than the desire to buy a product.
When an Herbalife distributor is buying his first 4,000 Volume Points worth of products, it’s clearly motivated by the promotion to become a Sales Leader rather than the desire to own the products. He’s simply PAYING for a better position in the organisation.
The pyramid scheme issue is about that, “paying for the right to participate”. It’s not about HOW they’re paying or WHAT they’re paying for, but about WHY they’re paying.
A pyramid scheme is set up PRIMARILY to sell a recruitment driven income opportunity to participants. A business model like that is inherently flawed and fraudulent, e.g. in that the mathematics will favourize people who joins it early on the expense of late joiners.
Also remember when the Herbalife Distributor buys the 4k worth of product, he/she does get 50% off of future buying for one year. Thus making more of a profit when selling retail to his/her customers, that’s if they have customers.
sopabox and chang . i agree SA is aimed towards the investors but that does not take away from the well researched articles especially about herbalife.
read the articles by fusion research and poke holes in his theory instead of panning the site and it’s authors . in the comments section i have seen dineen, william keep [peter vander nat’s co author], david thorton and even a couple of guys who are in the news for their famous ‘longs’ in response to ackmans ‘shorts’, and some herbalife distributors waving the cult flag.
a good bunch of commentators for a guy who norway dismisses as a ‘wannabe’.
norway defining legal MLM may be about whether the system is set up to reward recruitment rather than retail, but this question is the sum of many parts.
internal consumption versus retail, product pricing, product quality, the structure of the compensation plan, cost of business kit, amount of compulsory periodic volume purchase, underlying demand for the product, the spiel used to sell the business idea, and maybe even more connected issues, together will define whether the MLM is structured towards recruitment or retail.
the ‘WHY’ they are buying will also depend on the above and probably more factors. on that note read this article about recruitment rewards versus retail rewards:
http://beta.fool.com/shwetadubey/2013/02/21/why-bill-ackmans-key-argument-flawed/24926/
shweta dubey also writes about my favorite kind of MLM the ‘save and consume’ model which i find pretty close to my buying club MLM idea. i’m glad to find at least one voice which agrees with me that in such a model, quantity of internal consumption is not an issue because it is discount based, and should be treated as retail. it also appears that herbalife is going to ride the ‘save and consume’ pony.
with 73% distributors joining up only for discount, for a good median priced product along with support and encouragement, they are good to go with ‘save and consume’.
and yes soapbox it is going to be only a change of nomenclature, the buyers will continue to sign up as distributors. and as you have complained several times about my fascination with making up ‘new words’, i’m putting my new word ‘custodist’ up for sale. who’s buying? 🙂
and norway , in tennis i cant win unless i give my opponent a hard knock, and for that i will definitely need the ball in my court. but why argue over a metaphor ?
Like I said, I’m not particularly interested in debating the 50% rule itself. We’ve both agreed it’s “common-sense” so I’m more interested in it’s application in the MLM industry.
With the companies being shut down clearly it’s an issue.
What investors have to say about it I couldn’t care less, they have their own talking points and what not. I imagine if I was to start penning articles on finance I’d receive the same reception.
That said I’ve readily admitted I know nothing about finance so I wouldn’t put myself in that situation.
If you don’t have retail customers you’re in trouble and distributors aren’t retail customers. I have no objections to a buying club per say but it’s not MLM then.
huh?
for instance herbalife 73 % distributors will be only BUYING members .27% will continue to recruit and retail in MLM style.
other companies may have a different percentage distribution.
so what do we call this kind of set up? since it has two structures in one, will traditional MLM law define it?
Your favorite kind of MLM is a hypothetical model, with single level commissions for both retail sale and recruitment? Then your favorite MLM isn’t really an MLM model.
Her model is VERY different from Herbalife:
With zero self consumption and zero cost for participation, she has actually solved Herbalife’s “issues”.
ALL rewards in her example DERIVES from sales to external consumers, it’s only PAID OUT as headhunting fees.
Absolutely all the rewards in her example derives from retail sales to non-distributors. Herbalife’s “issues” are quite the opposite, i.e. nearly all the rewards derives from internal purchases rather than from sale to external consumers.
Her model will work as long as each distributor makes the required retail sales, and it will fail if they don’t make retail sales.
That’s probably true, the only way YOU can win in tennis is to give your opponent a hard knock. But I was talking about normal rules, e.g. “hit the ball rather than your opponent”.
The “hit your opponent” strategy can probably be used in some sports. Are you sure you’re talking about tennis? Curling may LOOK relatively similar to tennis, and one of the objectives is to give your opponent’s stones a hard knock.
Until a preferred customer class is setup, that’s nothing more than an assumption (you can’t just write off failed distributors as wholesale customers).
In MLM anything less than 50% retail revenue and pays out on recruitment (directly or indirectly) is a pyramid scheme.
where did you get that? i’m talking about the save and consume model which she describes towards the end of her article which is a multilevel selling set up based on sharing discount.
can you tell me why >50% retail will be needed to make this system legal? no use asking soapbox he just parrots his 50 % rule whatever the weather. he has the ‘one dress fits ALL sizes’ logic pattern.
also what shweta dubey did, was not describing the herbalife plan. she constructed a simple example of a legal MLM with retail/recruitment with a ratio of 1, no self consumption, 100% retail based rewards and showed how even that ‘perfect’ model would FAIL ackmans insistence that recruitment rewards > retail rewards = pyramid scheme.
Herbalife’s “issues” are quite the opposite, i.e. nearly all the rewards derives from internal purchases rather than from sale to external consumers.-norway
that’s what ackmans analyst says , and you are just being a blind follower. get some perspective first. read this article and say why you don’t agree. william keep who co authored the vander nat pyramid scheme paper for FTC, has not been able to disagree with this inspite of being a herbalifehater.
http://seekingalpha.com/article/1219261-herbalife-what-exactly-is-in-peter-vander-nat-s-paper-and-why-bill-ackman-is-wrong
The “hit your opponent” strategy can probably be used in some sports- norway
the sport is called ‘punch out the eow ‘ 🙂
The big hole in his theories is that he’s focusing on unimportant details (in the 3 pages I have read). The pyramid scheme issue isn’t about internal / external sales or consumption, it’s about participants participating in a chain recruitment scheme.
So rather than focusing on whether or not people are CONSUMERS, he should have focused on whether or not they are PARTICIPANTS.
Confusion Research only vaguely identifies his sources, e.g. he’s not stating exact page numbers. “Page 90-160 in the presentation” is too vague for anyone to check.
I checked the first part of that area, and found mostly Herbalife’s own presentations to investors with different comments from Ackman. Ackman was mostly identifying different parts of Herbalife’s presentation.
Where Ackman is pointing out a major flaw in Herbalife’s presentation ( = misleading investors), Confusion Research seems to believe Ackman is talking about recruitment rewards.
I identified Confusion Research clearly as a “wannabe”. He hasn’t really ANALYSED the material himself as a professional (someone understanding the topic he’s writing about).
Article #2, page #1:
The area where he found the $1,740 millions is about Herbalife’s presentations to investors. Ackman is pointing out inflated numbers, e.g. that Herbalife ASSUMES all products are sold at full price SRP to end users. That doesn’t reflect the reality.
I renamed him to “Confusion Research”. He only adds to the confusion. The $1,740 million is an imaginary number, it’s not payouts to distributors. The $1,740 million is the imaginary worth of the wholesale discount.
@anjali
Here’s some perspective from the FTC (November 2012):
http://business.ftc.gov/documents/inv08-bottom-line-about-multi-level-marketing-plans
The above is what the FTC have called the “bottom line” when it comes to MLM companies. How would you ascertain whether you’re making money from sales to recruited distributors? 50% or more (technically 51%) retail customer sales revenue sounds like a good enough figure to me.
With no MLM company ever being taken down as a pyramid scheme having >50% retail sales revenue, it seems the authorities agree too.
As far as tennis goes I believe that’s called a loss, in straight sets no less.
Now stop wasting my time with irrelevant finance orientated articles and silly ideas of MLM buying clubs with close to 100% distributor sales. At this point I couldn’t care less about the finance industry (including Ackman). I’ve done my own review and research into Herbalife and it’s not hard to see with 70% internal distributor sales how it’s currently a pyramid scheme.
This April wholesale customer class addition should prove it either way, unless Herbalife come up with excuses and don’t follow through.
She constructed a business model that will fail logically. There’s several flaws in it that will have to be solved, but she didn’t manage to identify neither the problems nor any solutions.
The first distributor has of course been recruited by the company itself, at a non-distributor level. She failed to identify that non-distributor class and how that class works? Without that class, no one will be able to recruit any new distributors or make any retail sales.
The article was about defending Herbalife by proving that Ackman’s logic is flawed. She didn’t manage to do that, she only managed to prove her own lack of business knowledge and logical sense.
She failed to defend Herbalife. She showed that a business model without Herbalife’s ‘issues’ wouldn’t cause any financial problems for the distributors. She showed that if ALL commissions derives from sales to external customers there won’t be any problem. How can THAT idea defend Herbalife?
She failed to show flaws in Ackman’s logic. Her theoretical business model would have failed completely. It doesn’t work logically, it will stop working before anyone can be recruited or any retail sales can be made. It LOOKS LIKE it can work on paper, but it will fail logically.
She failed to address the main point. Ackman is criticizing Herbalife for being a chain recruitment scheme, where most of the revenue DERIVES from the distributors themselves. The RECRUITMENT isn’t the main point, it’s about where the revenue DERIVES FROM, from external sources or from the participants themselves.
I’ll have to stop here. Analysing her work logically makes me feel ‘guilty in a crime’, something similar to shooting an unarmed man. “How could you? She wasn’t even armed with weapons like that!”. 🙂
I’m fully capable of analysing businesses myself, so I don’t follow Ackman’s view blindly, e.g. I’m less convinced than he is about the pyramid scheme issue.
I have already made comments about Confusion Research. He’s focusing on unimportant factors rather than the important ones. He’s using “Art Vandelay’s” report as a bible, rather than focusing on case laws and other relevant material.
Rational people will simply NOT waste their time on unimportant stuff, unless they have a special interest for it in one way or another. Engaging in “Art Vandelay’s” reports will feel like engaging in a meaningless high school debate, where the participants are discussing theoretical issues just to get that practice.
Confusion Research has failed to identify WHY people should download that report and look into it. The report is from 2002, and I hadn’t even heard of it (or the authors) before Confusion Research brought it up.
The report might be Confusion Research’s favorite litterature, but is it relevant for me to look into it? I seriously doubt that. I’m simply not the ‘bible’ type of guy.
The pyramid scheme issue isn’t about internal and external consumption. When people are focusing on that, they are literally in the wrong part of the forest. The amount of internal and external consumption can be used as an INDICATOR for something, but you can’t use it alone.
Confusion Research has one major flaw in his work. He assumes the Retail Commission is something that is being PAID OUT to the distributors. But Herbalife doesn’t PAY OUT any retail commission.
Where Confusion Research assumes Herbalife has paid out $1,740 million in one example, it hasn’t paid out anything identifiable.
The distributors may or may not have earned some sales profit directly from retail customers (or from unregistered sales to downline distributors), but they surely haven’t earned $1,740 million in sales profit.
Confusion Research is mixing in flawed data / data types in his theoretical model, at least in the parts I have been able to check. I have only checked the parts that are accessible without registration (I will consider a registration process to be an annoyance).
I have read ALL the parts of his articles he has made available for me. If I have misunderstood something in his work, it’s probably related to his own communication methods.
she dint need this class of people for the explanation she was making ?
She showed that EVEN if ALL commissions derives from sales to external customers THERE WILL BE a problem. ackmans analysis says that even her simple legal example of MLM will be a pyramid .
she is attacking ackman’s analysis, defending herbalife is just a corollary to that.
well if 73% of distributors are just discount customers, it will be obvious to even the dimwitted that most revenues will come from within the distributor ranks themselves. Just 27% herbalifers are engaging in the MLM side of the business norway, dint you hear?
at any given time, any of these 73% distributors can decide to discount their purchases further by selling a few products to friends and family. they are not going to get parcelled away in a preferred customer class cut off from the business opportunity. didya hear that soapbox?
duh. maybe because ackman and his presentation has relied on it pretty heavily ?
from the article by fusion research:
vander nat wrote a mathematical construct to explain this definition. fusion uses the same math to show herbalife is NOT a pyramid. so it’s worth a look, norway, registration or no registration?
Try to make her hypothetical business model work, step by step? Follow her rules, but you can let the first person be recruited by the company,
“The company recruits person #1, who has to make 1 retail sale to become a distributor”.
Person #1 has been recruited, but he hasn’t become a distributor yet. They will need to have a “pre-distributor” class so he can be able to make his first retail sale, so he can become a distributor, so he can recruit a new “pre-distributor”.
Each and every distributor will first have to be recruited to a “pre-distributor” position, so they can make their first retail sales and become distributors.
Her business model was logically flawed. It wouldn’t have worked in reality the way she had visualised it. It would have failed immediately.
You can’t expect me to check how that business model would have worked in Ackman’s model? I have several “grey areas” where Ackman only see a pyramid.
Normally, the pyramid scheme rules applies both to the ORGANIZERS and to the PARTICIPANTS. The organizers here will be the company itself and its management.
If the organizers’ “compensation” derives primarily from introducing participants into the plan then a renaming of distributors to “customers” won’t solve anything. They will still be participants.
It isn’t about whether they are “distributors” or “customers”, it’s about whether or not they are participants.
I have no problems with “preferred customers” selling retail. From my POV, they can even earn commission (but solely on retail sale to external customers, including family members and friends).
Retail sale to real customers is a SOLUTION rather than a problem. The problem is the recruitment of participants in an endless stream.
I should have specified “in law THEORY” in that statement, because I don’t know how it’s handled in real cases in other countries than Norway.
The law theory used was from when the EU UCP Directive should be implemented in other laws, in a proposed bill to change the law (the complete material about a law change).
Law-technically speaking, ORGANIZERS are clearly participants in the illegal activity. Third party promoters CAN be participants in the illegal activity, depending on how “knowingly involved” or “carelessly involved” they have been.
Here is the latest news on Herbalife and Ackman:
http://www.foxbusiness.com/investing/2013/03/13/ackman-pleased-about-new-call-for-ftc-probe-herbalife/
So this is a bit “wtf”…
http://www.nypost.com/p/news/business/ny_lawyer_investor_sues_herbalife_ZpMYmXYH1gVLLX7dkfHHEM
Don’t really like his chances… not without a formal investigation taking place anyway. Sounds to me like someone’s upset Herbalife’s stock performance didn’t align with his investment expectations.
Troy Dooly had an update on Herbalife March 15, about the company dropping several Lead Generating companies tied to people in the upper teams.
http://mlmhelpdesk.com/breaking-mlm-news-herbalife-eliminates-98-of-all-internet-marketing-lead-gen-companies/
He’s quoting an article in the New York Post by Michelle Celarier, but I didn’t have time to find the original article right now (I have too many open browser tabs at the moment).
The right to run a side business is typical for pyramid schemes, but not very typical for other businesses.
http://www.nypost.com/p/news/business/herbal_remedy_oVtV0JPh502N1W7L8R7hvJ
Rather reminiscent of that little Peak’s link to Zeek…
https://behindmlm.com/companies/zeek-rewards/peak-usa-llc-lead-generator-linked-to-zeek-rewards/
BREAKING NEWS: Herbalife’s “independent auditor” KPMG resigned, trading of Herbalife’s shares halted:
http://blogs.wsj.com/marketbeat/2013/04/09/herbalife-shares-halted-news-pending/
Update: trading resumed, Herbalife confirmed resignation, stated that KPMG resigned because a senior partner leaked info of several companies to a third-party, who then used that info for insider trading. As such, KPMG felt their independence as auditor is no longer ensured and thus they are resigning.
http://www.usatoday.com/story/money/business/2013/04/09/herbalife-halt-stock/2066755/
This suggests that someone in KPMG leaked Herbalife inside info to somebody else.
You can see this two ways.
Postive for Herbalife: implicate Ackman (whose critics have always claimed he’s running and short and distort campaign against Herbalife)
Negative for Herbalife: this only adds to the doubt and uncertainty around the whole company.
(Bonus) Conspiracy Theorist: this is a cover story because KPMG covered up for Herbalife. 😀 (just kidding)
Trading reopened about two hours later, HLF closed down 3.75% on the day. The Chicago Tribune is reporting that the FBI is investigating the now former KPMG accountant who is suspected of passing on insider information to someone who used that information for investment purposes.
The interesting thing is that KPMG has withdrawn their endorsements on their Herbalife audited financials for the last three years citing “lack of independence.” Now this could just be KPMG, who have had regulatory issues in the recent past bending over backwards to preserve integrity or it could speak to larger doubts about those audits.
The one thing that is clear is that there will be fallout from this both for Herbalife and KPMG and so far, there’s no evidence being reported that any of this particular incident is Herbalife’s fault.
It was halted for around 2 hours.
Initially, the case didn’t look too bad, it would normally affect KPMG more than Herbalife. But one analyst immediately dropped his 1-year price target from $78 to $38.
Some of the stories (links disabled):
blogs.wsj.com/marketbeat/2013/04/09/for-herbalife-new-auditor-will-be-walking-into-a-war-zone/
blogs.wsj.com/marketbeat/2013/04/09/herbalife-downgraded-after-kpmgs-scandal/
Another interesting thing here is the lack of articles from “semi-professionals” (“relatively qualified hobby-analysts”). People seems to be unfamiliar with situations like this one, in how it will affect the market.
I used “semi-professionals” about analysts who mostly have used identifiable methods and logics, e.g. when they clearly are analysing some data logically and mathematically rather than guessing a result. They will usually fill in something of interest about the topics they’re writing about.
They will have a Major claim against KPMG. Offset costs may even help earnings
Meanwhile, where is the promised wholesale customer tracking Herbalife promised this month?
Hopefully they get those figures out by the end of the month.
@Jettrader
It’s more complicated than that. Herbalife doesn’t meet the requirements for being listed as a publicly traded company on the NYSEX (or wherever it’s listed) when the auditing reports have been withdrawn. Normally it can’t borrow any money either, due to uncertainty about its financial situation.
Neither Bill Ackman nor Carl Icann have made any statements about the new situation. I don’t think any of them were prepared for it. All the financial bloggers have also been relatively quiet, e.g. on “Seeking Alpha” and “the Motley Fool”.
Daniel Loeb has previously announced that he has heavily reduced his stake in Herbalife. He was one of the hedge fund managers initially betting against Bill Ackman, a $200 million bet. Neither he is making any statements about the new situation.
So we have a situation where the people who normally are eager to analyse something and make statements about it suddenly have decided to keep quiet. That’s normally not a good sign.
The inside trader has been named and shamed:
http://www.bloomberg.com/news/2013-04-09/herbalife-s-kpmg-auditor-was-a-cheerleader-too.html
Herbalife has addressed those two issues in a press release …
Quoted from:
blogs.wsj.com/marketbeat/2013/04/09/herbalife-doesnt-expect-nyse-delisting-after-kpmg-resignation/
“We believe …” means “It’s still a risk of being delisted, but not so high”.
KPMG
Scott London has told his version of the story in a short interview. The background story was about discussions with a golf pal in the golf club, who later was investigated by the FBI because of suspicious trading pattern.
It’s not related to Bill Ackman or Carl Icahn, or any other of the hedge fund managers involved in the Herbalife story.
I think CNBC nailed it when describing Mr. London’s actions as “The Dumbest Insider Trading Scheme Ever Alleged”:
cnbc.com/id/100628391
This might be interesting:
http://www.nypost.com/p/news/business/salesman_suit_says_herbalife_scheme_NgnHOfDuug18p0mQmj5l7L
Meanwhile we’re still waiting on those wholesale customer figures…
Article updated with CEO Michael Johnson’s announcment that the company has delayed the release of Herablife’s wholesale customer statistics.
The RICO (racketeering) angle is not new, but it’s a relatively recent twist (last 10 years or so?) When Proctor and Gamble had a tussle with Amway in court, I think P&G hired a Mafia expert (the guy who literally wrote the RICO laws for the Feds) and had him analyze how close Amway is to the Mafia.
The similarities are pretty interesting, until you realize he’s probably cherry-picking the evidence. 🙂 (i.e. to a hammer, everything looks like a nail) Still, it is interesting to note the similarities. 🙂 Like… did you know that Amway was controlled by 9 “Families”? 🙂
I don’t know what her chances are though. I can see some lawyer picking up her case and hope to get a settlement out of Herbalife, i.e. hush-money.
i told you herbalife is a GOOD boy !!
bloomberg businessweek released a thesis about it all !
http://www.businessweek.com/articles/2013-05-23/herbalife-pyramid-scheme-or-juggernaut-ceo-michael-johnson-fights-back#p3
now tell me if ackman has so much ‘purchasing’ power, with his hedge fund underperforming and all 🙂
This is BS. Other MLM companies track their sales so there’s no excuses.
I’m taking they tried to track it and didn’t like what they saw. This should be a loud and clear warning and signal to the FTC to get off their butts and demand the figures Herbalife will not make public (affiliate revenue/retail revenue).
Herbalife know exactly what is happening, they’re just trying to play ignorant.
If Michael Johnson actually thinks that (don’t need to know how much was retailed as it’s not his business), he’s delusional. He’s the head of a MLM company, not a regular company. If he doesn’t treat the company as a MLM company, then he’s going to get railroaded by either by the FTC or the DSA itself, as he’s going to endanger the entire industry.
As the “survey” was supposed to come out already… The implication is whatever results they got was NOT favorable to the company, so he’s trying to bluster his way through, i.e. the data doesn’t prove I’m not a pyramid scheme, so I’m going to insist the data’s irrelevant through kooky logic.
Costco is not MLM, neither is Heinz, thus the comparison logic is irrelevant.
This signifies DOOM for Herbalife. Their early rebuttal (January) is not too bad, and does raise a few points against Ackman’s analysis. This rebuttal however, is going to doom the company.
The ONLY THING that separates MLM from pyramid scheme is the Koscot test, where salespersons can only be paid on SALES to ENDUSERS. This has ALWAYS been bedrock of the ENTIRE MLM industry since 1979 when FTC settled with Amway.
And now, Johnson claims that they don’t follow the Amway definition?
Herbalife is DOOMED!
Furthermore, Herbalife makes its affiliates sign the Amway Safeguard “10 retail sales rule”
So they *do* track, or they are SUPPOSED TO TRACK such sales.
There *is* requirement of such info from the distributors.
Either somebody at the company didn’t “get the memo”, or they are seriously talking out both sides of their mouths.
You have almost convinced us about that. 🙂
DSA Board of Directors:
http://www.dsa.org/forms/committee/CommitteeFormPublic/view?id=7F3000604E6
At the top of the list:
Mr. Brett R. Chapman
Chairman
Herbalife
i do not have to even bother. Herbalife’s deep pockets will buy out public opinion through the press.
They will lobby the government and crony up to the FTC and ackman’s hedge fund will get squeezed, till herbalife does a roundabout and goes private .
this is how it will end gentlemen, the end is clear before the story even gets off the ground properly.
New email address?
Ackman won’t lose on this. His short already yielded profits. (And Karl Icahn yielded profits too, having bought in when it’s at its lowest)
The question is simply how will Herbalife shoot itself? It will change, of that there’s little doubt. It can shoot to shoot itself in the foot and limp for a while, or it can shoot itself in the gut and die a long lingering death… Or it can shoot itself in the head. 🙂
Maxing out a credit card isn’t the same as having deep financial pockets. Herbalife has borrowed money to buy back shares, and has between $500 million and $1 billion in debt.
Post #19:
In case of trouble, it will technically be owned by the banks rather than the shareholders.
The share price is reflecting that shareholders BELIEVE Herbalife will be able to perform in the future, but the company is actually owned by the banks.
Almost 30 days from CEO Johnson’s “we will release the wholesale customer data” announcement he made on May 2nd… and still nothing.
This was kind of interesting though, apparently a Herbalife distributor in Israel went off the rails:
Note that Herbalife only took action after it the behaviour was exposed in a local newspaper. I find it hard to believe the Israeli chapter of Herbalife weren’t otherwise aware of Gozali’s actions.
Oh and sick of Spanish immigrants being targeted by Herbalife, the Hispanic Federation also called on the FTC to investigate the company:
Are we ever going to see Herbalife’s wholesale customer figures?
Haaretz Daily New of Israel just published a long expose on how one Herbalife “leader” in Israel turned his Herbalife “GTEAM” into a cult of personality, including “dress code”, “weight limits”, “party and booze”, confessions of failure and humiliation, alienation from friends and family, and in the end, sexual abuse of female affiliates.
http://www.haaretz.com/weekend/magazine/the-dream-catcher-a-herbalife-guru-and-his-regime-of-sexual-control-and-humiliation.premium-1.522661