Herbalife is a global nutrition company that sells weight management, targeted nutrition, energy, sports & fitness, and other nutrition products. Unlike a traditional consumer product company, Herbalife distributes its products through a global network of four million “members”. (1) In effect, it is a direct sales multi-level marketing program (MLM) in which members are compensated both for the sales that they generate and the sales that the people they recruit generate. Herbalife’s business model, which is supposedly focused on sales of products to retail customers, is misaligned with its operating model, which drives sales within the Herbalife network and rewards members significantly more for recruiting new members than for retail sales.
Herbalife’s business model is simple: develop nutrition products and sell as many of them as possible to retail consumers. The company sells over 150 products which through variation total more than 5,000 SKUs. (1)
Secondarily, Herbalife’s goal is to create a sustainable income for its direct sales members (and therefore itself).
Herbalife members purchase product from the company at a 25-50% discount to retail price for either personal consumption or sale to retail customers. If they sell the product directly to a retail customer at full price, then their profit is equal to their 25-50% discount. (2) Additionally, members are encouraged to recruit new members to sell on their behalf. They are incentivized to do this because they can earn commissions on their recruits’ sales. For example, if someone I recruit makes a sale, not only do they get that retail profit, but Herbalife will give me a cut of the money that my recruit paid them for the product. (2)
While initially this operating model would seem to be in alignment with Herbalife’s business model because it drives sales, those sales aren’t to retail customers. As outlined in Pershing Square’s 2013 “Robin Hood in Reverse” presentation, in response to an inquiry about what percent of the company’s overall sales are to retail customers, Herbalife responded:
“We don’t track this number and do not believe it is relevant to the business.” (3)
One would think that if Herbalife’s members/distributors aren’t selling to retail customers then they wouldn’t be incentivized to stay in the program. In fact, Herbalife members earn more than 10 times as much from Recruiting Rewards as they do by selling products to retail customers. (4)
So if Herbalife’s operating model isn’t set up to drive sales to retail customers, then surely it must create sustainable income for its members through commissions on sales to other members?
The economic reality is that 89% of members receive $0 in gross commissions. (4)
Herbalife is parading around as a retail nutrition company when in fact it is a recruitment firm. Its business success is not predicated on selling its products to end consumers, but rather, continually recruiting new members to maintain or grow its captive base of consumers. The company’s members are more incentivized to recruit than to sell and while recruiting by its very nature might increase sales, it is unsustainable. Otherwise, Herbalife’s member network would eclipse the total world population.
(2) Who Wants to be a Millionaire – http://www.factsaboutherbalife.com/media/2013/01/Who-wants-to-be-a-Millionaire.pdf
(3) Robin Hood in Reverse – http://www.factsaboutherbalife.com/robin-hood-in-reverse/
(4) Vemma Comparison – http://www.factsaboutherbalife.com/media/2015/09/Vemma-Comparison-v11.pdf