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.