Will Herbalife survive the next few years?
In the wake of the FTC’s $200 million dollar fine issued to Herbalife, the biggest question is whether the company will be viable with a new retail-orientated business model.
With Herbalife’s previous compensation plan primarily paying affiliates to recruit new affiliates, perhaps the best indicator is a look at how that was going for the business.
As revealed via the FTC’s complaint against Herbalife, here’s how the business fared under a recruitment-driven business model.
Herbalife represent, expressly or by implication, that Herbalife Distributors are likely to earn substantial income, including significant full-time or part-time income, from pursuing a retail-based business opportunity.
In reality, however, Herbalife’s program does not offer participants a viable retail-based business opportunity.
The retail sale of Herbalife product is not profitable or is so insufficiently profitable that any retail sales tend only to mitigate the costs to participate in the Herbalife business opportunity.
The overwhelming majority of Herbalife Distributors who pursue the business opportunity make little or no money, and a substantial percentage lose money.
The overwhelming majority of Herbalife Distributors who pursue the business opportunity do not make anything approaching full-time or even part-time minimum wage because the promised retail sales to customers simply are not there.
The overwhelming majority of Herbalife Distributors who pursue the business opportunity make little or no money from retail sales.
Half of Distributors whom Herbalife designate as “Sales Leaders” average less than $5 per month in net profit from retail alone, and half of these Distributors lose money.
In light of their poor financial results, many Distributors either stop
buying product or leave the organization altogether, resulting in a high turnover rate.
In 2014 nearly 60% of first-time Sales Leaders did not purchase sufficient product to requalify as Sales Leaders.
Retention for non-Sales Leaders, many of whom are pursuing the
business opportunity, is even worse.
An analysis of Defendants’ data shows that the majority of Distributors stop ordering Herbalife products within their first year, and nearly 50% of the entire Herbalife U.S. Distributor base quits in any given year.
Roughly half of all Herbalife Distributors at any given time are in their first 12 months of membership, and roughly 40% of the volume of Herbalife products
sold by Defendants each year is sold to participants in their first year.
During 2009–13, an annual average of approximately 242,000 new
Distributors signed up in the United States.
On average, 89% of those newlyrecruited Distributors, however, simply replaced U.S. Distributors who left that same year, with an annual average of approximately 216,000 Distributors leaving during this time period.
Now bear in mind, the above is the current status of Herbalife with recruitment commissions and no retail sales volume qualifiers.
Today’s FTC settlement agreement sees Herbalife affiliates required to derive at least 66% of their monthly sales volume from retail sales.
And not bullshit “I purchased the product as an affiliate and then gave it to friends and family” retail sales, but “tracked and verified” retail sales.
Unless Herbalife affiliates are selling product to actual retail customers, they aren’t getting paid.
If you thought retention rates in Herbalife were shocking under the recruitment compensation plan, how do you think they’ll be with affiliates forced to make retail sales?
Also what impact will the 66% retail sales volume requirements have on Herbalife top earners? Will there even be any left to parade about at the next Herbalife event?
All of this, in my opinion, spells disaster for Herbalife in the long-term.
Affiliates were already leaving in droves… because they couldn’t make retail sales and/or recruit new affiliates to cover their losses.
Now that commissions require 66% retail sales volume each month, who’s going to stick around?
As evidenced by the lack of retail sales in the previous compensation plan, Herbalife’s products as is don’t appear to be viable at a retail level.
This is going to require a massive shake up of Herbalife’s product offering, from the products themselves to how much Herbalife are charging.
To compete effectively at a retail level, it’s likely the price of Herbalife products will have to be reduced. This will correspond with an overall reduction of commissions paid to affiliates who do manage to qualify.
With the “overwhelming majority” of Herbalife affiliates currently not making part-time minimum wage, reduced commissions is going to make that achievement all the more difficult.
The metric to keep an eye on in the future is Herbalife’s revenue.
The first few reports over the coming months might misleading show growth (as with Vemma, the MLM industry might temporarily rally around Herbalife to generate artificial retail sales).
After that however, Herbalife’s overall sales revenue will be a fraction of what it was before. That’s going to be a huge hit to the company’s bottom line and seriously question the long-term viability of Herbalife going forward.
Whether that’s reflected in Herbalife’s share-price remains to be seen. Whereas I’ve completely ignored Herbalife’s share-price up to now, it might actually be worth paying attention to six months to a year from now.
Despite the reality of being forced to apply a retail orientated compensation plan to an affiliate-base that has consistently failed to generate significant retail sales for decades, Herbalife management remain upbeat about the future.
In a press-release issued shortly after the FTC’s settlement announcement, Herbalife CEO Michael Johnson declared;
The terms of the settlement in no way change our business model as a direct selling company but simply build upon current procedures.
The settlement is an acknowledgment that our business model is sound and underscores our confidence in our ability to move forward successfully, otherwise we would not have agreed to these terms.
Personally I’m starting to think a major problem with Herbalife might be its current executive management.
Denial as a business strategy hasn’t worked out so far. Continuing to remain in denial will just result in more of the same.