Center for Ethical Organizational Cultures Auburn University http://harbert.auburn.edu This case was prepared by Michelle Urban, Katy Melloy, Carin Malm, and Emily McGowan for and under the direction of O.C. Ferrell and Linda Ferrell. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material. ©2013 Multilevel Marketing Under Fire: Herbalife Defends Its Business Model INTRODUCTION Herbalife International is the third largest direct-selling, multi-level marketing company in the world. Its product line consists of weight-management and nutrition products. These products are not sold in retail stores; rather, consumers interact with independent contractors to order the products. Herbalife’s headquarters are located in Los Angeles, California, and they operate in several countries throughout the world. Herbalife is a publicly traded company that is both loved and hated by investors and consumers. This case first discusses the history of the company from its founding to its present status, followed by a description of the types of products Herbalife offers. Then we will get into a discussion of multilevel marketing and the role of independent contractors in the direct-selling model. Next will be a discussion of pyramid schemes and why they are often confused with the multilevel marketing model. We then examine Herbalife to determine whether it is a pyramid scheme. We will illuminate the role of hedge fund investor William Ackman behind the backdrop of Herbalife’s business model and show his contentions with the company and some of the criticisms against him. The case shows that while Ackman’s accusations may be the most widely known, there are other accusations (mostly referring to pyramid schemes) that Herbalife has had to face over the course of its existence. The case ends with a brief overview of Herbalife’s social responsibility program and conclusions. HISTORY Herbalife is a company that focuses on nutrition, weight-management, and personal care products with independent contractors in more than 90 countries. Mark Hughes founded the company in 1980 out of a desire to create a safe alternative to other weight loss products. Herbalife’s first sales were made from out of the trunk of Hughes’ car in Los Angeles, California, and two years later the company reached $2 million in sales. Herbalife was taken public in 1986 on the NASDAQ stock exchange. Since then, Herbalife has become a multi-billion dollar global company In 1999 Hughes planned to take the company back to the private sector by purchasing all of its remaining shares, but this attempt was stopped as investors sought legal action. The next year, Mark Hughes died unexpectedly at the age of 44. Christopher Pair, who was Herbalife’s former Chief Operating Officer (COO), then became President and Chief Executive Officer (CEO) of the company. His reign at Herbalife was cut short as he stepped down one year later. An Internet retailer, Rbid.com, made a bid of $173 million to acquire Herbalife, but the Mark Hughes Family
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Center for Ethical Organizational Cultures Auburn University
http://harbert.auburn.edu
ThiscasewaspreparedbyMichelleUrban,KatyMelloy,CarinMalm,andEmilyMcGowanforandunderthedirectionofO.C.FerrellandLindaFerrell.Itwaspreparedforclassroomdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrative,ethical,orlegaldecisionbymanagement.Allsourcesusedforthiscasewereobtainedthroughpubliclyavailablematerial.©2013
MultilevelMarketingUnderFire:
HerbalifeDefendsItsBusinessModelINTRODUCTION
HerbalifeInternationalisthethirdlargestdirect-selling,multi-levelmarketingcompanyintheworld.Itsproductlineconsistsofweight-managementandnutritionproducts.Theseproductsarenotsoldinretailstores;rather,consumersinteractwithindependentcontractorstoordertheproducts.Herbalife’sheadquartersarelocatedinLosAngeles,California,andtheyoperateinseveralcountriesthroughouttheworld.Herbalifeisapubliclytradedcompanythatisbothlovedandhatedbyinvestorsandconsumers.
Thiscasefirstdiscussesthehistoryofthecompanyfromitsfoundingtoitspresentstatus,followedbyadescriptionofthetypesofproductsHerbalifeoffers.Thenwewillgetintoadiscussionofmultilevelmarketingandtheroleofindependentcontractorsinthedirect-sellingmodel.Nextwillbeadiscussionofpyramidschemesandwhytheyareoftenconfusedwiththemultilevelmarketingmodel.WethenexamineHerbalifetodeterminewhetheritisapyramidscheme.
WewillilluminatetheroleofhedgefundinvestorWilliamAckmanbehindthebackdropofHerbalife’sbusinessmodelandshowhiscontentionswiththecompanyandsomeofthecriticismsagainsthim.ThecaseshowsthatwhileAckman’saccusationsmaybethemostwidelyknown,thereareotheraccusations(mostlyreferringtopyramidschemes)thatHerbalifehashadtofaceoverthecourseofitsexistence.ThecaseendswithabriefoverviewofHerbalife’ssocialresponsibilityprogramandconclusions.
HISTORY
Herbalifeisacompanythatfocusesonnutrition,weight-management,andpersonalcareproductswithindependentcontractorsinmorethan90countries.MarkHughesfoundedthecompanyin1980outofadesiretocreateasafealternativetootherweightlossproducts.Herbalife’sfirstsalesweremadefromoutofthetrunkofHughes’carinLosAngeles,California,andtwoyearslaterthecompanyreached$2millioninsales.Herbalifewastakenpublicin1986ontheNASDAQstockexchange.Sincethen,Herbalifehasbecomeamulti-billiondollarglobalcompany
In1999Hughesplannedtotakethecompanybacktotheprivatesectorbypurchasingallofitsremainingshares,butthisattemptwasstoppedasinvestorssoughtlegalaction.Thenextyear,MarkHughesdiedunexpectedlyattheageof44.ChristopherPair,whowasHerbalife’sformerChiefOperatingOfficer(COO),thenbecamePresidentandChiefExecutiveOfficer(CEO)ofthecompany.HisreignatHerbalifewascutshortashesteppeddownoneyearlater.AnInternetretailer,Rbid.com,madeabidof$173milliontoacquireHerbalife,buttheMarkHughesFamily
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Trustrejectedtheoffer.In2002,theinvestmentfirmJ.H.Whitney&Co.purchasedthecompanyalongwithanotherinvestorandtookitbacktotheprivatesector.However,in2004,HerbalifewentpubliconceagainandwastradedontheNewYorkstockexchange.MichaelO.JohnsonhasbeenHerbalife’sCEOsince2003.Thecompanycurrentlyemploys6,200peopleandhasalmostthreemillionindependentcontractorsthroughouttheworld.
PRODUCTS
Herbalifesellsweight-management,targetednutrition,energyandfitness,andpersonalcareproducts,allintendedtosupportahealthylifestyle.Additionally,thefirmoffersasetofcoreproducts:Formula1NutritionalShakeMixisaproteinandfibershakewithseveralminerals,vitamins,andnutrientsofferedinsevenflavors;Formula2MultivitaminComplexisamultivitaminthatcontainsover20vitamins,minerals,andherbsessentialtohealthyliving;andFormula3CellActivatorpromotesabsorptionofmineralsandvitaminswhileimprovingenergylevels.ThesethreecoreproductsareattheheartoftheHerbalifeproductlineandserveasthebaselinefornutritionandweightmanagementgoals.
Theweight-managementlineconsistsofavarietyofFormula1proteinshakes,supplements,weight-lossenhancers,proteinbars,andsnacks,allservingthepurposeofhelpingcustomersattaintheirweightgoals.Therearethreeweight-managementprogramsets,eachwithacombinationofshakes,supplements,andenhancersdesignedfordifferenttypesofweightmanagementneeds.Eachcomponentofthislinecanalsobepurchasedseparately.ThePersonalizedProteinPowderandtheProteinDrinkMixofferanalternativetotraditionalmealswhileprovidingenergyandcurbinghungercravings,whetherconsumersjustwanttoloseormaintaintheirweightorbuildmusclemass.Theenhancersandsupplementsofferamixofvitamins,minerals,herbs,andnutrients.Forexample,ProlessaDuoandSnackDefenseworktostaveoffhungerinordertocontrolweightgainandhelpthebodyprocesssugarsmoreefficiently.Otherenhancers,suchasTotalControl,boostmetabolism,energy,andalertness,whileThermo-Bondhelpsthedigestivesystem.Cell-U-Losshelpsthebodyeliminateunnecessarywaterandrejuvenateskinwithitscombinationofherbalextracts.Anassortmentofhealthysnacksandbeveragesarealsoofferedinthisline,suchasproteinbars,soups,teas,andsoynuts.
Targetednutritionproductsincludedietaryandnutritionalsupplementsthatcontainherbs,vitamins,minerals,andothernaturalingredientstostrengthenspecificareasofthebodythattendtobeproblematicformostpeople.Forexample,Tri-Shieldhelpstheheartstayhealthybymaintaininggoodcholesterollevelsandprovidingantioxidants;OcularDefenseFormulaandJointDefenseAdvancedoffersupporttotheeyesandjointsofagingadults;ActiveFiberComplexandAloeVeraPowderhelpsthosewithdigestiveissues;RoseGuardandSchizandraPlusstrengthentheliver,immunesystem,andcells;andRelaxNowandSleepNow,whicharepartofthestressmanagementline,servetopromoteeaseandrest.Herbalifealsooffersnutritionproductsspecificallyforwomen,men,andchildren.
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Herbalifealsoprovidesenergyandhydrationdrinksforthoseengagedinsportsandfitnessactivities.CustomerscanchoosefromanassortmentofbeveragessuchasLiftoff,afizzydrinkmixthatenhancesclarityandrehydratesthebody,ortheycanchoosesupplementssuchasN-R-GNature’sRawGuaranaTablets,whichalsopromotementalclarity.Herbalife24isthesportsdrinklinethatincludesformulasforhydration,prolongedendurance,restorationofstrength,andrecovery.
Personalcareproductsincludeskincleansers,moisturizers,lotions,shampoos,andconditionersfromavarietyofdifferentlines.HerbalAloeStrengtheningShampooandConditioner,handandbodywash,cream,soothinggel,andbathandbodybarisclaimedtoimprovethelookandfeelofhairandskin.TheMultivitaminlineissimilartotakingamultivitamineverydayandincludesacleanser,toner,moisturizer,sunscreen,eyegel,andcreaminfusedwithvitaminsforskin.RadiantCscrubcleanser,skinbooster,andbodylotionclaimtorenewandrehydratetheskinwithaconcentrationofvitaminC.Otheritemsincludeanti-agingproductsandfragrancesformenandwomen.
MULTILEVELMARKETING
Directsellingisthemarketingofproductstoultimateconsumersthroughperson-to-personsalespresentationsathomeoronline.Peopleareattractedtodirectsellingformanyreasons.Somearepassionateabouttheproductandwanttopromotethecompany.Otherswanttoreceiveadiscountontheirpersonalorders.Manyfindworkingasadirectsellertobeaflexible,part-timeopportunityforextraincome.Additionally,someindependentcontractorssimplyenjoythesocialaspectofdirectselling.Withinthedirectsellingmodelaretwocompensationmodels:single-levelmarketingandmultilevelmarketing.Single-levelmarketingiswhenacontractormakesacommissionforarrangingasaleorearnsamarginasareseller.Multilevelmarketing,sometimescallednetworkmarketing,isacompensationwhereincontractorsearnincomefromtheirownsalesofproductsaswellascommissionsfromsalesmadebythosetheyhaverecruited.Salesareneverforced,asalegitimatecompanydoesnotforcedownlinesales.
However,itisnotnecessaryforcontractorstorecruitotherindividualsinordertoearnmoney.Itisachoicemadebythecontractoriftheywanttoincreasetheirearningsbymakingacommissionfromthesalesoftheirrecruits.Approximately71to72percentofHerbalifemembersaresingleleveldistributors,meaningtheydonotsponsorotherHerbalifedistributors.ThismeansthattheseHerbalifemembersbuyproductsfromthecompanyatadiscountandhavethecompletefreedomtodeterminepricingaswellasinalldecisionsinvolvingtheirfinalcustomers.Sincemanyofthesememberssimplywantadiscountontheseproducts,theymaynotbeasinterestedinmakingprofitsbutsimplyenjoytheopportunitytoreceivethesediscounts.Furthermore,rewardsarenotgivensimplyforrecruitinganothercontractor.SeeTable1forthetoptendirectsellingcompanies.
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Table1:Top10DirectSellingCompanies
CompanyNameandProductLine 2013Revenue(USDBillions)
1 Alticore(Amway)
Nutrition,Beauty,BathandBody,Home,
Jewelry,FoodandBeverage,Fragrances
$11.8
2 Avon
Cosmetics,SkinCare,Fragrance,PersonalCare,
HairCare,Jewelry,Gifts
$9.95
3 Herbalife
Nutrition,WeightLossManagement,Personal
Care
$4.80
4 Vorwerk
HouseholdAppliancesandCosmetics
$3.70
5 MaryKay
Cosmetics,SkinCare,BodyandSun,Men’s
Product’s,FragranceGifts
$3.60
6 Natura
Cosmetics
$3.20
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7 NuSkin
SkinCare
$3.18
8 Tupperware
FoodStorageandPreparation,Cookware,
ServingItems,Cosmetics,BeautyProducts
$2.67
9 Belcorp
BeautyProducts
$1.96
10 Oriflame
Cosmetics
$1.95
Sources:DirectSellingNews,“2014DSNGlobal100List,”DirectSellingNews,2014,http://directsellingnews.com/index.php/view/2014_dsn_global_100_list(accessedMay22,2014).
Anotheraspectofmultilevelmarketinginvolvesinternalconsumption,whichisthepurchasingofproductsatadiscountfromthefirmforthecontractor’sownuse.Mostretailersprovideinternalconsumptionincentivesbyofferingdiscountstoemployeeswhopurchaseproducts.Departmentstores,automobilemanufacturers,andairlinecompaniesprovideincentivessuchasdiscountsthatencourageinternalconsumption.Manypeoplebecomeresellerstogetdiscountsonproductsfortheirownuse.Therefore,theclaimthatinternalconsumptionisunacceptableisrefutableonthebasisthatthevastmajorityofcompaniessellingconsumerproductsencouragetheiremployeesorindependentcontractorstopurchasetheirproducts.Manyindividualscommittedtotheseproductsbelieveinthebrandsfortheirownpersonaluseandwantto‘spreadtheword’bycreatingabroadersalesandcommunicationnetwork.Somedonotevennecessarilycareaboutmakingaprofitfromthebusiness.Thisisacommonandlegalapproachfordirectsellingproductsaroundtheworld.Infact,mostdirectsellingcompaniesusemultilevelmarketing.AtHerbalife,thereisnolimittothenumberoflevelsofrecruits.
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Despitethelegitimacyofmultilevelmarketing,Chinahasrestricteddirectsellingtosingle-levelmarketingonly.Thesecountriesbelievemultilevelmarketingislinkedtofraudulentactivitiessuchaspyramidschemesbecauseoftheassumptionthatdiscountsareusedtoforceinternalconsumption.China,forexample,allowsdirectsellingcompaniestodobusinesswithintheirbordersiftheysignacontractsayingtheywillnotemploythemultilevelmarketingaspectofdirectselling.Insteadofhavingindependentcontractorsrecruitothers,theyselltheirproductsfromretailstores.
INDEPENDENTCONTRACTORS
Therearenearly3millionindependentcontractorsofHerbalifeproducts,andallofthempersonallyusetheseproducts.ManyareattractedtothelowstartupcostofsellingHerbalife.Thestartupcostforapart-timecontractoris$57.75forakit.Forthisprice,theywillreceivethemini-InternationalBusinessPack,whichincludesforms,applications,atotebag,andsamplesofvariousHerbalifeproducts.Informationalandtrainingmaterialseducatethecontractoronusingandretailingtheproducts,businessbasics,andhowtobuildasalesandmarketingplan.Alternately,ifacontractorwantstoworkfull-time,theycanpurchasethefullInternationalBusinessPackfor$89.55.Thispackcomeswithallofthematerialsthatthemini-packoffers,butwithmoreproductsamplesandinformationonhowtorunyourbusiness.Thereisnofeetojoin,andtheonlymoneyspentisforthevalueofthekit.
Contractorsenjoydiscountsoffproducts,rangingfrom25to50percentdependingonthelevelofcontractorship.Herbaliferesellersoftenpurchasetheproductsthemselvesandthenresellthemdirectlytobuyers;however,itispossiblefortheresellertomakethesaleandgettheproductdirectlyfromHerbalife.Resellerscanreselltheproductsatanypricetheywant.EachHerbalifeproducthasacertainnumberofValuePoints,andthenumberofValuePointsacontractoraccumulatesdetermineswhatlevelofcontractorshipheorshehas.PersonallypurchasedValuePointsareawardedbasedonthevolumethatacontractorpurchasesfromHerbalifeusinghisorherHerbalifeidentificationnumber.RoyaltyOverridePointsareaccumulatedbasedontheTotalVolumeofproductssoldbypersonally-sponsoredsupervisorsthattheresellerhasrecruited.
TogofrombasicdistributortotheSeniorConsultantlevel,aHerbalifemembermusthaveaccumulatedaminimumof500VolumePointsinonemonth.TobepromotedfromSeniorConsultanttoSeniorContractor,acontractormustaccumulateatleast1,000personallypurchasedValuePointsinoneorder.LevelsafterthatincludeQualifiedProducer(2,500VolumePointsaccumulatedin1to3months),Supervisor(4,000ValuePointsinonemonth,2,500ValuePointsineachoftwoconsecutivemonths,or5,000personallypurchasedValuePointswithin12months),andWorldTeam(2,500ValuePointsineachof4consecutivemonths,10,000VolumePointsat50percentinonemonth,or500RoyaltyOverridePointsin1month).OnceacontractorreachestheSupervisorlevel,theproductdiscountisincreasedfrom25percentto50percentandaprofitcanbemadeonsalestoothercontractors,whichcanreachuptofivepercent.
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IntheeventthatacontractornolongerwantstosellHerbalifeproducts,thecompanywillbuybacktheremaininginventorythecontractorhasonhand.HerbalifegoesbeyondtheDirectSellingAssociation’sethicalguidelinesforbuyingbackproductsbyreimbursingthedistributorforeverythingthatheorshepaidforinitially(100percentbuybackpolicy).Thecompanyalsodiscouragescontractorsfrominventoryloading,whichtheFederalTradeCommission(FTC)hasdefinedasapracticerequiringacontractortomakealargepurchaseofalargeamountofnonreturnableinventory.Torenewtheirmembership,contractorspaya$10annualmembershipfeetoHerbalife.
TheHerbalifebusinessmodelhassucceededduetotheirexcellentproductsandcustomersupport.Mostindependentcontractorsdonothaveaphysicalstorelocationbutpracticedirectsellingfromhome.Theyarenotemployees,butbusinesspeoplewhochoosehowtheywanttooperate.Therearestrictcompanypoliciesandlegalrequirementsthatcontractorsmustabidebythatregulateproductinformation,salestechniques,advertising,leadgeneration,socialmedia,andrelatedissues.Forinstance,memberscansellonline,butthereareadvertisingrestrictionsforonlinesales.Theproductscannotbesearchableonlinebytheirprice,andtheonlywayapotentialbuyercangetmoreinformationisbygettingapasswordfromthereseller.Thisfacilitatesaconversationbetweenthebuyerandreseller,allowingarelationshiptodevelopeventhroughonlinetransactions.Contractorsarenotabletoresellproductsonauctionsitesorinretailstores(excludingChina).
Herbalife’ssellingpoliciesareguidedbytheprinciplesoftheWorldFederationofDirectSellingAssociation(WFDSA)andtheDirectSellingAssociation(DSA)intheUnitedStates.TheWFDSApromotesethicalpracticesindirectsellinggloballythroughadvocacyandstrongrelationshipswithgovernment,consumers,andacademia.TheDSAalsoemphasizesethicsandrequiresthatmembersadheretotheircodeofethics(SeeTable2).HerbalifeisamemberoftheDSAandabidesbytheircodeofethics.Thiscodeofethicsrecognizestheimportanceofafairandethicalapproachtodirectselling,sincedirectsellingrequiressensitiveandpersonalone-on-oneinteractionthatcanleadtounduepressuresplaceduponconsumers.Thecodehasnotolerancefordeceptiveorunlawfulpracticesregardingrecruitsandcustomers;requiresthatsalespeopleprovideaccurateandtruthfulinformationabouttheprice,quality,promotion,etc.oftheproducts;illuminatesandenforcestheneedforaclearrecordofthesalesmadebycontractors;necessitatesthatwarrantiesandguaranteesbefullyacknowledged;requiressalespeopletoclearlyidentifythemselvestocustomersandmaintaintheconfidentialinformationoftheircustomers;hasnotoleranceforpyramidschemes;andprovidesguidelinesoninventorypurchases,earningsreporting,inventoryloading,payingfees,andtraining.
Table2:DirectSellingAssociationCodeofEthics
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Asaconsumeryoushouldexpectsalespeopleto:
• Tellyouwhotheyare,whythey’reapproachingyouandwhatproductstheyareselling.
• Promptlyendademonstrationsorpresentationatyourrequest.
• Provideareceiptwithaclearlystatedcoolingoffperiodpermittingtheconsumerto
withdrawfromapurchaseorderwithinaminimumofthreedaysfromthedateofthe
purchasetransactionandreceiveafullrefundofthepurchaseprice.
• Explainhowtoreturnaproductorcancelanorder.
• Provideyouwithpromotionalmaterialsthatcontaintheaddressandtelephonenumberof
thedirectsellingcompany.
• Provideawrittenreceiptthatidentifiesthecompanyandsalesperson,includingcontact
informationforeither.
• Respectyourprivacybycallingatatimethatisconvenientforyou.
• Safeguardyourprivateinformation.
• Provideaccurateandtruthfulinformationregardingtheprice,quality,quantity,
performance,andavailabilityoftheirproductorservice.
• Offerawrittenreceiptinlanguageyoucanunderstand.
• Offeracompletedescriptionofanywarrantyorguarantee.
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Asasalesperson,youshouldexpectaDSAmembercompanyto:
• Provideyouwithaccurateinformationaboutthecompany’scompensationplan,products,
andsalesmethods.
• Describetherelationshipbetweenyouandthecompanyinwriting.
• Beaccurateinanycomparisonsaboutproducts,servicesoropportunities.
• Refrainfromanyunlawfulorunethicalrecruitingpracticeandexorbitantentranceor
trainingfees.
• Ensurethatyouarenotjustbuyingproductssolelytoqualifyfordownlinecommissions.
• Ensurethatanymaterialsmarketedtoyoubyothersinthesalesforceareconsistentwith
thecompany’spolicies,arereasonablypricesandhavethesamereturnpolicyasthe
company’s.
• RequireyoutoabidebytherequirementsoftheCodeofEthics.
• Safeguardyourprivateinformation.
• Provideadequatetrainingtohelpyouoperateethically.
• Baseallactualandpotentialsalesandearningclaimsondocumentedfacts.
• Encourageyoutopurchaseonlytheinventoryyoucansellinareasonableamountoftime.
• Repurchasemarketableinventoryandsalesaidsyouhavepurchasedwithinthepast12
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monthsat90percentormoreofyouroriginalcostifyoudecidetoleavethebusiness.
• Explaintherepurchaseoptioninwriting.
• Havereasonablestart-upfeesandcosts.
Source:DirectSellingAssociation,“SummaryVersionoftheDSACodeofEthics,”DirectSellingAssociationhttp://www.dsa.org/ethics/shortcode/(accessedJuly9,2013).
A2013surveyconductedbyNielsen,areputableglobalinformationmeasuringcompany,showed(withoutinterferencefromHerbalife)thenumberofend-consumersHerbalifeserves.Thestudy,whichtookplaceonlineoverthecourseoftwomonths,sampled10,525consumersandwasbalancedintermsofdemographics,income,andgeographicplacement.Theresultsindicatedthat3.3percentofthegeneralpopulationmadeaHerbalifepurchasesometimeoverthelastthreemonths.Thispercentageofthepopulationtranslatesinto7.9millioncustomers,whichdoesincludeHerbalife’scontractors.Accordingtothedata,however,thenumberofcontractorsisapproximately550,000,indicatingthatthenumberofendusersishigherthanthenumberofindependentcontractors.Additionally,thestudyshowedthatthosewhomadeapurchaseinthelastthreemonthstendtomakeHerbalifepurchasesconsistently(approximatelyeverytwomonths),andthatthemostpopularproductsarethosehavingtodealwithweightmanagement(95percentofthosewhomadeapurchaseinthelastthreemonths).
OneofthebiggestargumentsagainstHerbalifeisitslinecommissions.Currently,Herbalifecontractorscanearncommissionsonwhateveryrecruitbelowthembuysorsells.Therearenorestrictionsonthenumberoflevelsofrecruitsthatcontractorscanearnacommissionon,unlikesomeothermultilevelmarketingcompanies.
PYRAMIDSCHEME
Therearefourdefiningcharacteristicsofapyramidscheme.Thefirst,whichisdictatedbytheFederalTradeCommission(FTC),isthatconsumersorinvestorsarepromisedlargeprofitsbasedprimarilyonrecruitingotherstojointheirprogram.Thepromiseisnotbasedonprofitsfromanyrealinvestmentorrealsaleofgoods.Second,accordingtotheSecuritiesandExchangeCommission(SEC),thepromiseofhighprofitsrestsonnothingmorethanaconsumerorinvestorhandingovertheirmoneyandconvincingotherstodothesame.Third,theFederalBureauofInvestigation(FBI)warnsthatpyramidschemescanbeintheformofmarketingandinvestmentfraudswhenanindividualisofferedacontractorshiporfranchisetomarketaparticularproduct.Therealprofitisearned,notbythesaleoftheproduct,butbythesaleofnewcontractorships.Lastly,theCaliforniaDepartmentofJusticeidentifiesthedifferencebetweenapyramidschemeandalegitimate
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multilevelmarketingplan.Inamultilevelmarketingmodel,moneyisonlymadethroughtheeventualretailsaleoftheproducttoanenduser.Inanillegalpyramidscheme,theparticipantsatthetopofthepyramidearnmoneywhennewmembersarerecruited.Eachnewmemberisthenrequiredtorecruitnewparticipants.Asthisprocessgoeson,thepossiblepoolofparticipantsshrinks,makingithardforthoseatthebottomtogainareturnontheirinvestment.Apyramidschemewillultimatelycollapseduetoalackofnewrecruitsandisthereforeunsustainable.Anotherimportantpointisthatapyramidschemethatseemstoofferaproductwillhavelittletonomarketvalue.Therecruitsarebeingsoldonanideaoramodel.
Pyramidschemescanbehardtoidentifyclearly,buttheFTChaswarnedconsumersabouttworedflags.Thefirstisinventoryloading,whichlookssimilartointernalconsumptionbecauseitencourageslarge-scalepurchasesofnonrefundableproductsbyadistributor.Notonlyisinventoryloadingaredflag,butitisalsoillegal.Thesecondisalackofretailsales.Ifasupposedbusinesshasbothofthesecharacteristics,itispossiblethatitisapyramidschemeandnotabusinessatall.Anotherwayofdetectingapyramidschemeisbyexaminingtheintentionofthebuyer.Ifthebuyerpurchasedaproductheorshereallydidnotwantjusttoparticipate,itisanindicationthatitcouldbeapyramidscheme.Itisforthesereasonsthatsomedirectsellingbusinessesusingthemultilevelmarketingcompensationmethodcanappeartobepyramidschemes.BecauseHerbalifesellsnotonlytheirnutritionproductsbutalsoabusinessopportunity,thefirmhasbeenaccusedofrunningapyramidscheme.
ISHERBALIFEAPYRAMIDSCHEME?
In2012HerbalifewasaccusedofbeinganelaboratepyramidschemebyhedgefundmanagerWilliamAckman.Ackmanhadbet$1billioninashortsaleoffHerbalife’sstock.Shortsellingoccurswhenaninvestorsellssharesborrowedfromalender(e.g.abroker)inthebeliefthatthestockwilldecrease.Theinvestortakesthemoneyforthestocksale,buteventuallymustre-purchasethestockandreturnthemtothelender.Ifthestockhasgonedown,theinvestormakesaprofit.However,ifithasgoneup,theinvestorlosesmoneybecauseheorsheisbuyingbackthesharesatahigherratethanthepriceatwhichtheyoriginallysoldthem.
Ackman’saccusationsagainstHerbalifeincludedthefollowing:1)themajorityofcontractorsforHerbalifelosemoney,2)Herbalifepaysmoreforrecruitingnewcontractorsthansellingactualproducts,and3)onlythetop1percentofcontractorsearnmostofthemoney.Theaccusationisaresultoftheconfusionthatcomesfromthewaytheirearningstructureoperates.AckmanarguedthatHerbaliferecruitscontractorsunderfalsebeliefsthattheycanearntheincomeofthoseatthetopbysellingtheproduct,andthattherealmoneycomesnotfromsellingproductsbutfromrecruitingothercontractors.Hisreasoningisthatcontractorsearnrewardsforeverymembertheyrecruit,andeverymembertherecruitsrecruit.Howevertheterm“rewards”ismisleading.Inamultilevelmarketingcompensationmethod,contractorsearnacommissiononthesalesoftheirrecruits.
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Theterm“rewards”impliesthatthereissomeamountofmoneygivenforsimplyrecruiting.However,thisisnothowHerbalifepaysitscontractors.Herbalifeoperatesalittledifferentlythanothermultilevelmarketersinthatmosthaveacut-offonwhatlevelofrecruitsacontractorcanearncompensationfrom.Herbalifedoesnothaveacut-off(althoughtheaverageisapproximatelysixlevelsdownline).Whilethischaracteristicdiffersfromothermultilevelmarketingcompanies,itisnotenoughtoclassifyHerbalifeasapyramidscheme.
AnothercontentionofAckman’sisthatwhenanindividualgoestopurchaseHerbalifeproducts,distributorstrytoconvincehimorhertobecomearecruitratherthanremainacustomer.Hearguesthattheonlythingkeepingthecompanyrunningisnewrecruits,anditwillsoonrunoutofavailablepeopletorecruitintothebusiness.AckmanallegesthatHerbalifeentersnewcountriesafterthecurrentpoolofrecruitsinaparticularcountryisexhausted.
Ontheotherhand,manyconsumersandorganizationsbuyanduseHerbalifeproductsandseethemashigh-qualityandcredible.Forexample,LosAngelesfireandpolicedepartmentofficersuseHerbalifeproductsintheirfitnesscenters.HerbalifeproductshaveevenbeenadoptedbysomeChineseOlympicteams.Additionally,becausethenumberofendusersislargerthanthenumberofindependentcontractors,supportersofHerbalifeclaimitcannotpossiblybeoperatingapyramidscheme.ThissupportsthefactthatHerbalifeusesavalidandsuccessfulbusinessmodel,whichisproducingprofitsdirectlyrelatedtoproductsalesandallowingthemtoexpandglobally.
Ackman,however,hasmadeclaimstoinvalidatethesenumbers.Heclaimsthatthesurveymeasuringthenumberofcontractorsversusendconsumerscontradictstwoothersthatwerereleasedbythecompany.HealsostatesthatHerbaliferefusestomakethedetailsofitsrecruitingprocesspublicknowledgesoitcanbescrutinized.Ackman’scompanyhasaccusedthesurveysampleofbeingtoosmall,makingtheresultsoverlyoptimistic.Hetakesissuewiththefactthattherearenotenoughspecificsinthesurvey(pricesconsumerspaidandanitemizedbreakdownoftheproductspurchased).
Herbalifehasalsobeenaccusedofissuingfalseaccountingstatements.Therehasneverbeenanylegalaccusationabouttherecordingofsales.Accordingtoallegations,productsaresoldtocontractorsandareshownasretailsalesonthecompany’srevenue.Thecompanydoesnotalwaystracewhethertheproductwasconsumedbythecontractor(i.e.,internalconsumption)ortowhomthecontractorsoldtheproduct.Thecriticismisthatthecompanyshouldnotbemakingmoneyoffthecontractorsbutshouldonlyrecordrevenuesmadefromendusers.Thosewhocriticizeinternalconsumptionbycontractorsoremployeeswithinacompanyfailtorecognizethatthisisanacceptablepractice.Coca-Colahas100percentinternalconsumptionbecauseallofitsproductsaresoldtoresellers.Costcoalsohas100percentinternalconsumptionbecauseallofitsproductsaresoldtoCostcomembers.Thisshowsthatthepercentageofinternalconsumptionisnotbyitselfenoughtoindicateapyramidscheme.Therehasneverbeenmajorcriticismsofcompanies
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encouraginginternalconsumptionexceptwiththedirectselling,multilevelmarketingcompensationmodel.
Second,sometimeswhennewcontractorsarerecruited,theyneedtobuyproductsthattheycanconsumethemselvesorselltoothers.ThesepracticeshavecausedsuspicionamongHerbalife’scritics.Ontheotherhand,acontractorisonlyrequiredtobuymoreproductsaftertheinitialpurchaseiftheywantorneeditforpersonalorbusinesspurposes.Onceindividualssignuptobecontractors,theyindicateiftheywanttheproductsforpersonaluseortomakeavailableforsale.Ifthecontractorhasrecruitsunderthem,theyhavetheopportunitytoearncommissionsbasedonthesalesofthoserecruits.Ontheotherhand,ifthecontractordoesnotcareaboutthecommission,theydonothavetopurchaseanythingmore.InthecaseofHerbalife,theamountofproductscontractorsarerequiredtopurchaseislowerthanmanyothermultilevelmarketingbusinesses.
Thereisalsoacriticismthatalargenumberofcontractorsarenotsuccessfulinsellingtheirproducts.Theeaseofentryandextremelylowcostofbecomingacontractormakesitpossibleforthosewithlittleexperiencetoenterthebusiness.Eveniftheyarenotsuccessfulatdirectselling,thecostofentryislessthan$100andtheystillhaveproductsthattheycanconsume.Herbalife’srecordsshowthatonly1percentofitsregisteredcontractorswillmake$100,000fromthebusinessintheirlifetime.AckmanhasarguedthatthenumbersHerbalifereportsarefalse.Heestimatestheirretailsalestobeonly3percentoftheirrevenue,whiletherestismadebyrecruitingpractices.AckmanalsoimpliedthatHerbalifesaturatesmarkets,requiringittogetmostofitssalesformnewundevelopedmarkets.
Thesediscrepanciescanbeexplainedwhenthetypesofcontractorsareanalyzed.Therearethosethatsignuponlytogetthecontractor’sdiscountontheproductbecausetheywanttheproductforpersonaluse;thosewhoonlywanttoselltheproductsasasourceofadditionalincome;andthosethatwanttosellasafull-timebusinessopportunity.Furthermore,everykindofdirectsellingbusinessrequiresalargeamountofefforttomakeagoodprofit.EvenwithbusinesseslikeHerbalife,ifacontractorwantstomakealivingfromdistributing,relationshipswithcustomersmustbemaintained,andrelationshipswithrecruitsmustbemaintainedtoencouragethemtomakeasmanysalesandnewrecruitsaspossible.Manywhobegininanydirectsellingbusinessareeithernotwilling,orlackthebusinessknowledge,toputinthatmucheffort.Thosewhosignupforthisopportunityasasidejobonlyworkpart-timeorless,dependingonhowmuchextramoneytheywanttomake.Intermsofmarketsaturation,itwouldappearthatAckmanisincorrect.Herbalifereceivesapproximately90percentofitssalesfrommarketsinwhichithasdonebusinessforatleasttenyears,andgrowthinmaturemarketsaregrowingbydoubledigits.
Herbalifehasdefendeditselfagainstallegationsofbeingapyramidscheme.ItrespondedtoAckman’schargesinJanuary2013.However,thecompany’sstockfell43percentfourdaysafterAckman’saccusationsto$24.24,whichwasthelargestdropthecompanyhadseeninseveral
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months.InresponsetoAckman’slobbyingefforts,HerbalifehiredalobbyteamconsistingofGloverParkGroupandthePodestaGroup.
CRITICISMAGAINSTWILLIAMACKMAN
Asmentionedearlier,inaccusingHerbalifeofoperatingapyramidscheme,WilliamAckmanbetagainsttheirstocktotheamountof$1billion.Initially,theaccusationscausedHerbalife’sstocktodrop,benefitingAckman’scompanybecauseofhisshortsale.Ackmanhadpledgedtogiveanyprofitsfromtheshortsaletocharity,buttomanypeopletheshortsaleandsubsequentaccusationsappearedtobeaseriousconflictofinterest.
AnotherissueinvolvedlettersfromsupposedvictimsofHerbalife’sdeceptivepractices.BecauseoneofAckman’scontentionsisthatHerbalifetargetsminorities,Ackman’scompanyhaspaidcivilrightsorganizations$130,000tocollectnamesofpeoplewhowerevictimsofHerbalife.However,theNevadaAttorneyGeneralfoundissueswithsomeoftheseletters.ThreeofthelettersfromnonprofitgroupssignedbyHispaniccommunityleaderswereidentical,andnoneoftheleaderscouldidentifyanyHerbalifevictimsbyname.Otherattorneysgeneralhavehadsimilarexperiences.Someoftheleaderswhohadallegedlywrittentheletterslaterdeniedtheyhadwrittenthem.Thiscouldrepresentquestionableconducttoencourageregulatorstoact.
ShortlyafterAckman’saccusations,anotherinvestor,CarlIcahn,cametothedefenseofHerbalifeandbecameamajorityshareholderandboardmember.ThishelpedboostinvestorconfidenceinHerbalife,andtheirstockbegantoincrease.ThiswasbadnewsforAckmanwhenhewasforcedtocoverhisshortsell.Hetookalosson8millionsharesofstock.However,thestateofHerbalifewasstilluncertainamidaccusations,investoruncertainty,andHerbalife’sstrongstancethatitwasnotoperatingapyramidscheme.Pyramidschemestakesometimetorevealthemselves,soitwasjustamatterofwaitinguntilHerbalifeeithercrumbledorsucceededbeforeanyonecouldbecertainaboutthefutureofthecompany.
AnarticleintheMarch15,2014issueoftheEconomistaswellasTheNewYorkTimesprovidedacriticalassessmentofAckman’sattemptstousestate-of-the-artlobbyinginWashingtontosupporthis$1billionshortbetagainstHerbalife.Ackmanhasbeenattheheartofwell-executedlobbying,althoughheclaimstohavespentonly$264,000onhislobbyingcampaign.Ontheotherhand,Ackman’scompany’slobbyingbudgetwasseventimesthatmuch.AccordingtotheEconomist,AckmanseeshimselfasamoralcrusaderagainstHerbalife,buthiscriticsseehimassimplya“greedybillionairewhoisnowexploitingAmerica’snewlylaissez-faireattitudetopoliticalspendinginpursuitofabigfinancialpayday.”AckmanhasgainedsupportfromoneU.S.senatorandaU.S.CongresspersonwhohaveaskedfortheFTCtoinvestigateHerbalife.TheFTCdidbeginaninvestigation,andHerbalifeclaimsthattheywelcometheopportunitytovettheirbusinessmodelandputtheseattacksbehindthem.
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THECONTROVERSYCONTINUES
Despitethecompany’srecentsuccess,theallegationscontinue.SpecialinterestgroupssuchastheHispanicFederationandtheNationalConsumersLeaguearetakingissuewiththecompanyandurgingtheFTCtoinvestigateHerbalife’soperations.NotonlyaretheycontinuingtheclaimthatHerbalifeisoperatingamassivepyramidscheme,buttheyarefurtheringtheargumenttosaythatthecompanyistargetingvulnerablegroupsincludinglow-incomeHispanicimmigrantsandlow-incomeAfricanAmericans.TheallegationsagainstHerbalifeincludeaggressiverecruitingtechniques,promisesofgettingrichwithminimalwork,andtakingadvantageofpeoplewithlittleornobusinessexperience.
TheclaimsarosefromtheproliferationofnutritionclubsthathavebeenestablishedinLatino/HispaniccommunitiesinSouthernCalifornia.NutritionclubsinvolvecommunitymemberswhopayamembershipfeetodiscusshealthissuesandconsumeHerbalifeproductsinasocialsetting.ThepopularityofthesenutritionclubsoriginatedinMexico,whichiswheremostoftheimmigrantsinSouthernCaliforniaimmigratedfrom.HerbalifeclaimsthatthenutritionclubsstartedarisingintheseareasbecauseHispanicssawhowsuccessfultheywereinMexicoandwantedtoimporttheideatotheUnitedStates.Othersclaimthattheseclubsareharmingthecommunitybecausetheyturnouttobetoocostlyforthosewhorunthem,andtheyenduplosingmorethantheybargainedfor.CongresswomanLindaSanchez,whorepresentsSouthernCalifornia,haswrittenalettertotheFTCaskingtheagencytoinvestigateHerbalife.ShecitedtheintensemediacoverageandoutreachfromspecialinterestgroupsandconstituentsasreasonsfortheFTCtoinvestigatethecompany.SimilarclaimsalsoaboundinNewYork.NewYorkCityCouncilwomanJulissaFerrerashasalsowrittentotheFTCadvocatingforaninvestigation.
DesmondWalsh,PresidentofHerbalife,maintainsthatthecompanydoesnottargetspecificdemographicsandthattheriseofnutritionclubsinLatino/HispaniccommunitiesisaresultofimmigrantsseeingthebusinessopportunityandimportingtheclubsfromMexico.Anotherissuewiththeseclubsisthatownersareoperatingthemoutoftheirhomesandmakingandsellingshakes.TheLosAngelesDepartmentofHealthhasclosedsomeoftheseclubsasitisillegaltomakeandsellfooditemsoutofone’shome.Theseclubshavetofollowthesameregulationsasrestaurants,requiringpermitsandothersortsoftime-consumingandexpensivegovernmentalredtape.CriticsclaimthatHerbalifedoesnotadequatelytraintheircontractorsinareassuchasbusinessandlaws,sotheyaredestinedtofail.Herbalife,ontheotherhand,refutesthoseclaimsandstatesthattheyencouragetheircontractorstoabidebytheirlocallaws.
InFebruary2013,itwasreportedthatHispanicsmakeup60percentofHerbalife’scustomerbase.Onereasonmaybebecausetheyaregoodatdirectsellingduetotheirlargenetworkbaseandrelationshipbuildingtendencies.TheSecuritiesandExchangeCommission(SEC)iscurrentlyconductinganinvestigationintoHerbalife’sbusinessoperations.
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OneoftheirownformercontractorsfiledaClassActionComplaintagainstHerbalifeclaiming,amongotherseriousallegations,thatthecompanyisoperatingasapyramidscheme.Someofthekeyallegationsprovidedinthisparticularcaseincludeundisclosedfacts,suchasalargemajorityofallcontractors(approximately71percent)makefew,ifany,retailsalesandareforcedtoself-consumetheHerbalifeproducts.Herbalifewilllikelycontinuefacingsimilaraccusationsinthefutureandmustremainproactiveinaddressingthem.
In2014AckmanprofiledHerbalife’stopdistributorsandcontinuedhislobbyinginWashingtontohaveHerbalifeinvestigatedbytheFTC.TheFTCannouncedthatitwasinitiatingaprobeintoHerbalife’sbusinesspractices.Herbalifehasrespondedbylaunchinganewwebsite,iamherbalife.com,thatfeaturesdozensofpositivetestimonialsfromusersofitsproducts.OneofAckman’saccusationsisthatthecompanysellsaquestionableproducttogullibleimmigrants.ResearchshowsthatHerbalifesalescontinuetoincreaseandthatithasmillionsofcustomerswhoarenotindependentcontractorsordistributorsusingitsproducts.WhilemultilevelmarketingcompensationsystemshavebeenexaminedbytheFTCinthepast,thelawsassociatedwithpyramidschemesareconsideredambiguousbysomestakeholders.Oneofthekeyfactorsinapyramidschemeisthatthereisnoproductsell-through,andinthecaseofHerbalife,theyhavedefinitivelydemonstratedthatthesalesaredrivenprimarilybysellingproductstoconsumers.
However,theconceptofinternalconsumption—althoughlegitimate—continuestobequestionedbyregulators.Thebeliefprevailsthatalargeamountofinternalconsumptionindirectsellingcompaniesindicatesapyramidscheme.In2012aU.S.judgeorderedanorganizationcalledBurnLoungetodisbandandreimbursecustomers$17millionaftertheFTCdeducedthatthecompanywasoperatingapyramidscheme.BurnLoungemarketeditselfasawayforentrepreneurstoselldigitalmusicandearnlargeincomes.Participantspaidtoenterthescheme.Verylittlesaleswererecorded,and90percentofparticipantsdidnotactasindependentdistributorssellingaproduct.
BurnLoungeappealed.TheystatedthattheFTCdidnothaveenoughevidence.Theappealin2014washeldbytheNinthCircuitCourtofAppeals.Theimplicationsofthiscaseforthemultilevelmarketingdirectsellingindustryweresignificant.IntheinitialjudgmentagainstBurnLounge,itwasruledthatsalesofproductstoultimateusersdonotincludesalestoparticipants.Itwasfearedthatalegaldecisioncouldrulethatthemajorityofproductsmustbesoldtopeopleoutsidethecompany’snetwork.Inotherwords,amajorityofsaleswouldhavetobemadetoendconsumers,withsalestodistributorsnotcounted.Thispossibilitycouldhaveputlimitationsoninternalconsumption.
ThefederalappealscourtupheldtheFTC’sdecisionthatBurnLoungewasoperatinganillegalpyramidscheme.However,therulingwasviewedfavorablybythedirectsellingindustryoverallbecauseBurnLoungewasdeterminedtobeapyramidschemeduetothefactthatparticipantshadtopaytojointheschemeandweremainlymotivatedbyrecruitingothersintothescheme(versus
17
sellinganactualproduct).ThebiggestrelieffororganizationslikeHerbalifeisthatthecourtdidnotrulethatcommissionsgeneratedfromgoodssoldtoindependentcontractorswasillegal.Likeanyotherreseller,theyhavetheoptionofconsumingtheproductandsellingittoothers.Itwouldbeimpossibletoknowtheexactpercentageoftheproductbeingconsumedbytheindependentcontractorversussalestoconsumers.
Ratherthanfocusingupontheamountofconsumption,thedecisionseemedtofocusmoreuponwhethertheemphasisofthebusinessinvolvessalesofproductsorrecruitment.Otherareasofemphasisinvolvehowtheseorganizationscalculatecommissionsandtheimportanceofsellingtheproductforthesuccessfuloperationofthebusiness.Theintentforpurchaseisalsoacrucialcomponent.Ifthepurchasesaredrivenbytheproduct’svalue,insteadofbymoney-makingventures,thenitismostlikelyalegitimateoperation.
Additionally,theBurnLoungedecisiondescribedsometeststhatcouldindicateapyramidscheme.Specifically,redflagsincludefocusingmoreuponrecruitmentthanmerchandise,payingbonusesprimarilyonrecruitmentactivity,promotingtheprograminsteadofsellingtheproduct,havingparticipantspurchasetherighttoearnprofitsthroughtherecruitmentofotherindividuals,developingstrongincentivesforrecruitment,motivatingpackagepurchasesbytheopportunitytoearnmoney,andmakingitunlikelythatmeaningfulretailsaleswilloccur.Althoughsomeofthesebythemselvesarenotnecessarilyredflags,severalofthemtakentogethercouldindicateapyramidscheme.BecauseHerbalifecontractorssellproductsofvalue,participantsdonothavetopaysimplytoparticipate,andretailsalesdooccur,thislegaldecisionlendsmorecredencetoHerbalifeasalegitimatebusinessmodel.
HERBALIFE’SSOCIALRESPONSIBILITY
HerbalifeisproudofitsCorporateSocialResponsibilityprogramandbelievesitbestsumsupthecompany’stopvalueofdoingtheright,honest,andethicalthing.Thesemethodsandpoliciesrelatetothedirectingandadministeringofshortandlong-termgoals.TheyareputinplacetoensureaccountabilityandeconomicefficiencyforHerbalife’sstakeholders.HerbalifeisproudthatbecauseofthesepoliciestheymetindependencecriteriaalmostayearearlyandmeetallNYSE-listedpubliccompanyrequirementsfortransparency.
Herbalife’sbusinessethicsallowsittoupholdthehighestethicalstandardsintheoperationofthecompany.CEOMichaelJohnsonhassaidthatitsreputationisitsgreatestasset,anditsCorporateCodeofBusinessConductandEthicsreflectsthis.Herbalifeencouragesfairinteractionsandgoodjudgmentbetweenanypersonsassociatedwiththecompanyandcustomers.ThereareguidelinessetinplaceastohowcontractorsandemployeesofHerbalifeshouldinteractwithsuppliers,competitors,businesspartners,andthegovernment.Herbalifeencouragesobediencetolawsandsetsboundariesongiftsandentertainment,describingthedifferencebetweensmallgiftsforhospitalityandbribes.Thecompanydiscouragesconflictofinterestsituationsaswellasinsider
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tradingandofferthreemethodsofreportingunethicalbehaviorthroughthecompanyhotline,website,orbycontactingtheGeneralCounsel.Individualswhodonotcomplyaredisciplined,suspended,orterminated.Herbalifealsorequiresannualethicstrainingforallemployeesworldwide.
AnotheraspectofitsSocialResponsibilityprogramincludesitsphilanthropicefforts.TheHerbalifeFamilyFoundation(HFF)andtheCasaHerbalifeprogram,foundedin1994byMarkHughes,providefundingandvolunteerismtocharitableorganizationstakingcareofchildren-at-riskaroundtheworld.HFFworkstoimprovenutritionandhelpwithdisasterreliefefforts.HerbalifehasalsopartneredwiththeGlobalAllianceforImprovedNutrition(GAIN)andDSMNutritionalProducts,aproducerofvitaminsandnutritioningredients,tohelpdelivernutrientstowomenandchildrenaroundtheworld.ThispartnershipisundertheumbrellaofGAIN’sFutureFortifiedcampaign.
Lastly,asapartofHerbalife’sCorporateSocialResponsibilityprogram,itengagesinEmployeeWellnessandLiveGreenenvironmentally-consciousinitiatives.Thecompanyencouragesandincentivizesemployeestobecomeandstayhealthyandparticipateinfitnessactivities.Suchincentivesincludecomplimentaryproductsandlowerindividualhealthinsurancecosts.ThecompanyhasevenbeenrecognizedbyMen’sFitnessmagazineas“Oneofthe15FittestCompaniesinAmerica.”Throughenvironmentally-consciousinitiatives,LiveGreenandthe3Rs–reduce,reuseandrecycle–Herbalifemakesitseffectontheenvironmentapriority.
CONCLUSION
Herbalifehasfacedseveralallegationsovertheyearsbutcontinuestobesuccessful.Asof2013thecompanyreachedworldwidenetsalesof$4.8billion,upsignificantlyfrom2012inspiteofAckman’saccusationsandlobbyingcampaignagainstthecompany.Herbalife’sstockpriceclimbedtoover$80asharein2013duringthetimethatcriticismswerebeingleviedagainstthecompany.Ontheotherhand,Herbalife’sstockdroppedafterChinainitiatedaninvestigationintothemarketingpracticesofNuSkinEnterprisesandtheannouncementoftheFTC’sinvestigation.Thestockissellingforover$50ashare,whichisstillsignificantlyhigherthanitsearly2013value.
Itsproductsareexclusivelysoldbynearly2.3millionindependentcontractorsin90differentcountries.Herbalifesponsorsseveralprofessionalathletes,teams,andsportingevents.Additionally,thecompanyisproudofitsCorporateSocialResponsibilityinitiatives.Herbalifeisasuccessfulcompany,butethicalissueswillcontinuetoensue.Trustinbusinessisatalowpointinoursociety.Marketingisoftenseenasapartofbusinessthatissuspect.Adirectsellingfirmreceivesadditionalscrutinyasitisfocusedonpersonalsellingtodistributeallofitsproducts.
Herbalifecontractorsdonothavetheoverheadexpensesthataretailstorewithabuilding,fixtures,utilities,andotherexpensesrequires.Therefore,themarkuponproductssuchascosmetics,nutritionalsupplements,jewelry,andclothingmaybesimilarinboththeretailstoreandindirectselling.Adirectsellingcompanyisaflatorganizationwithlowoverheadandcompensationsystems
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forthenetworkofsalescontractorsthatmaketheproductavailabletofinalconsumers.Theconceptofinternalconsumption,whichexistsinnearlyallbusinesses,isconsideredquestionablebysomecriticswhofailtounderstandthatthereisnothingillegalorunethicalaboutinternalconsumption.
Ontheotherhand,somedirectsellingcompanieshavebeenassociatedwithinventoryloading,sometimescalledgaragestuffing,whensalescontractorsareencouragedtobuymoreproductsthantheycanconsumeorsell.Thisethicalbreachhasnothingtodowithacompanybeingapyramidschemejustbecauseitusesamultilevelcompensationmethod.Allbusinesseshavecompensationmethodsthatrewardsalesmanagersandhigher-levelmanagers,includingtheCEO,forperformance.Everybusinesshastoproducerevenue,andthemarketingfunctionisexclusivelyinchargeofdevelopingsales.
However,companiescanfightagainstcriticismoftheiroperationsbymaintainingtotaltransparencyconcerninghowtheirsalesincentivemodelswork,andthereshouldbeduediligencetoensurethatsalescontractorsarenotexploitedinanyway.Herbalifecontinuestohavemanyloyalcontractorsthroughoutouttheworld,showingthatthefirmhasmanysupporterswhobelievethecompanyisalegitimateandsuccessfulbusinessoperation.
QUESTIONS
1. WhyhasHerbalife’smultilevelcompensationmodelbeenconfusedwithapyramidscheme?2. Describethedifferencesbetweenalegitimatebusinessmodelandapyramidscheme.3. HowhasHerbalifedemonstratedsocialresponsibility?
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