Herbalife - Pyramid scheme or not?

[kevsta]

Has anyone been following the Herbalife billionaire battle? summarized nicely here, with the CNBC debacle between Ackman and Icahn.

www.zerohedge.com/news/2013-01-25/ultimate-hedge-fund-deathmatch-icahn-and-ackman

Following the epic rap battle we noted yesterday, today saw probably the greatest, most enthralling and at the same time most pathetic segment on CNBC (which may or may not have been taken over by Jerry Springer's desperate for ratings producers) ever as '********ting' Bill Ackman took on 'Cry-baby' Carl Icahn in a no-holds-barred discussion that covered everything from religion, ethics, trust, blasphemy, greed, desperation, and independence. CNBC's Scott Wapner found himself in the middle of a clash of the titans. The full clip has to be seen to be believed but our bevvy of quotes, tweets, and quips should summarize what happens when two Billionaire BSDs get into a pissing competition live on TV.

up until Icahn threw everything he has into Herbalife I always thought it was a classic MLM pyramid scheme, defined by the fact distributors have to buy products before they can sell them, as opposed to say Avon where distributors order product only on receiving the customer's order.

but as disagreeable as Icahn is, I find it difficult to believe he's as stupid as he sounds on the TV, so was wondering if anybody has direct experience or knowledge of the financial structure.

 

[geni]

MLM pyramid scheme:

http://www.cockeyed.com/workfromhome/workfromhome_s.html

 

[kevsta]

MLM pyramid scheme:

http://www.cockeyed.com/workfromhome/workfromhome_s.html

perfect, thanks. yes this is quite damning

http://www.cockeyed.com/workfromhome/small_business.html

If you leap into Herbalife determined to start at that advanced level, you need to buy $4,000 worth of products.

This allows you to get the products from Herbalife at 50% below retail. (the $4000 worth of stuff costs you $2000).

To help you with your big purchase, they send you a list of the top 100 credit card companies in the country.

so what does Icahn know that nobody else does?

why would he publicly step in and throw his full weight and cash behind them? he's just had 2 of his own staff appointed to the board.

and if it trades on the NASDAQ for many years, the model must still make money, which I thought was difficult to do on an ongoing basis, with these schemes?

probably a good amount of their new distributors leverage up on credit cards to get into it in the first place so their "profits" probably come partially from bank credit card writedowns lol

 

[kevsta]

so what does Icahn know that nobody else does?

why would he publicly step in and throw his full weight and cash behind them? he's just had 2 of his own staff appointed to the board.

he cant genuinely believe they're a legit business with good growth prospects into the future. so its likely the combination of the financial opportunity to make money by forcing a short squeeze on the shares, and personal motive, ie destroy Ackman at the same time

 

[icerat]

up until Icahn threw everything he has into Herbalife I always thought it was a classic MLM pyramid scheme, defined by the fact distributors have to buy products before they can sell them, as opposed to say Avon where distributors order product only on receiving the customer's order.

(1) Why would you think that would make something a pyramid scheme? That's how most small retail operations work, they have to buy stock before they can sell it.

(2) It's actually not true for Herbalife anyway, as distributors can take orders from customers first if they want

A pyramid scheme is defined by what's known as the "koscot test", you're paid for recruiting people, and the revenue is unrelated to the sale of product to end users. Herbalife's model is not based on either of these.

 

[Stomatopoda]

Sadly, not all pyramid schemes are illegal, even though it's blatantly obvious to everyone who doesn't have money in MLM that they should be.

 

[kevsta]

(1) Why would you think that would make something a pyramid scheme? That's how most small retail operations work, they have to buy stock before they can sell it.

(2) It's actually not true for Herbalife anyway, as distributors can take orders from customers first if they want

A pyramid scheme is defined by what's known as the "koscot test", you're paid for recruiting people, and the revenue is unrelated to the sale of product to end users.

hmm. thanks. yes. not sure why I thought that, I think I partially heard some discussion and somebody talking about that by comparison to Avon.

Herbalife's model is not based on either of these.

it isn't, or it's technically not supposed to be? there's a lot of effort put into recruiting "Work from Home" ers who are quite likely not to ever recoup their original layouts?

Sadly, not all pyramid schemes are illegal, even though it's blatantly obvious to everyone who doesn't have money in MLM that they should be.

ya but not that many have been on the NASDAQ 30 years either..

 

[icerat]

hmm. thanks. yes. not sure why I thought that, I think I partially heard some discussion and somebody talking about that by comparison to Avon.

Probably some competitive marketing speak. "we're not like so and so because ..."

it isn't, or it's technically not supposed to be? there's a lot of effort put into recruiting "Work from Home" ers who are quite likely not to ever recoup their original layouts?

Recruit a million people in to Herbalife you won't make a cent unless someone buys products, and if they don't use them they can return them for a refund (and you have to return any profit based on that sale)

As Herbalife pointed out in their response to Ackman, an awful lot of people register with them primarily to buy products at a cheaper price (ala Costco). They are not operating a business and not attempting to profit. A few years ago the FTC proposed some new "business opportunity" regulations and in their discussion they noted this was common with MLM companies.

Ackman believes, contrary to the FTCs own statements on the issue as well as various legal precedents, that anyone who registers as a distributor cannot simultaneously be considered a legitimate customer, thus he considers much of Herbalife's sales to be illegitimate.

He quotes a well known anti-mlm critic, Robert FitzPatrick, who has been making the same argument for some decades, with no legal success. FitzPatrick and his colleague Jon Taylor have however been very successful in promoting themselves and their positions with the media and public (and alas, several influential "skeptics") but continually get shot down in the courts, to the extent that in a recent case involving Amway, a California court rejected FitzPatrick as an "expert" and wouldn't accept his affidavit. That didn't stop the media reporting the plaintiffs had provided "expert evidence" (ie FitzPatrick's affidavit) that Amway was a pyramid scheme.

ya but not that many have been on the NASDAQ 30 years either..

All pyramid schemes are illegal virtually everywhere. There is no such thing as a "legal pyramid scheme". Anyone who says otherwise is using a different definition of "pyramid scheme" so needs to define what they mean.

There's actually quite a few publicly traded MLM companies, many of which have been around for decades. Avon converted to a multi-level compensation model some years ago. Buffett's Berkshire Hathaway owns an MLM, The Pampered Chef. Unilever operates an MLM in India and Africa (Hindustan Unilever Network). Amway's local subsidiaries are publicly listed in Malaysia and Thailand.

The first company to use an MLM compensation model was Nutrilite, which was merged in to Amway in the 1970s. It's been operating now continuously for nearly 80 years. That alone should be enough to give one pause to wonder if how you think MLM operates is actually how it does operate.

 

[kevsta]

Probably some competitive marketing speak. "we're not like so and so because ..."

Recruit a million people in to Herbalife you won't make a cent unless someone buys products, and if they don't use them they can return them for a refund (and you have to return any profit based on that sale)

As Herbalife pointed out in their response to Ackman, an awful lot of people register with them primarily to buy products at a cheaper price (ala Costco). They are not operating a business and not attempting to profit. A few years ago the FTC proposed some new "business opportunity" regulations and in their discussion they noted this was common with MLM companies.

Ackman believes, contrary to the FTCs own statements on the issue as well as various legal precedents, that anyone who registers as a distributor cannot simultaneously be considered a legitimate customer, thus he considers much of Herbalife's sales to be illegitimate.

it doesnt sound like this is necessarily so cut and dry to me?

http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

If this is what it takes to make it to the top of the Herbalife pyramid — establishing your own Internet Marketing-based biz opps, without even the pretense of selling products — then it’s clear that systems like Dahl’s Income At Home must have the tacit approval of the company. And if Herbalife’s immense profitability is "based primarily on recruiting," not on "profits from any real investment or real sale of goods to the public," then we have the Federal Trade Commission’s definition of a pyramid scheme.

When asked about this, Julian Cacchioli, Vice President of Worldwide Corporate Communications at Herbalife, sent an official statement via email.

"In 2012," he wrote, biz opps like Online Business Systems and Income At Home "represented less than one percent of our sales." He added that the number of vendors using "registered business methods" — the Herbalife term for approved biz opps — is "steadily decreasing."

When posed a similar question on a stockholder conference call last year, an Herbalife representative was either unable or unwilling to disclose the percentage of Herbalife products sold to distributors versus the percentage sold to the general public because, the rep claimed, "we don’t have visibility to that level of detail."

Yet now, somehow, the company has a sufficient level of detail to determine much more precisely the complicated statistics regarding how many distributors use companies like Income At Home versus those who don’t.

 

[icerat]

it doesnt sound like this is necessarily so cut and dry to me?

http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

Things are rarely cut and dry

IMO (and I haven't analysed them all) most of these "online marketing" /"lead generation" opportunities most likely do fall under the definition of pyramids, since their revenue (which has nothing to do with Herbalife per se) primarily comes from sign-up fees and compulsory subscriptions to electronic products of little or no retail value.

That doesn't make Herbalife a pyramid, or even illegitimate. I note the article says these "marketing" groups generate less than 1% of Herbalife's revenues. Furthermore this article indicates Herbalife themselves were warning people about Shawn Dahl more than a month before the Verge article about him was posted.

 

[!Kaggen]

Interesting presentation

http://factsaboutherbalife.com/wp-content/uploads/2013/01/Who-wants-to-be-a-Millionaire.pdf

 

[icerat]

Interesting presentation

http://factsaboutherbalife.com/wp-content/uploads/2013/01/Who-wants-to-be-a-Millionaire.pdf

That's the presentation that Ackman kicked this all off with. It's been analysed to death elsewhere, and responded to by Herbalife and Icahn amongst others.

There's more than a few very elementary errors and misunderstandings in that presentation, along with a smattering of authentic concerns. It reads well to people who haven't studied the industry and the laws surrounding around it however, so it does the job brilliantly if you're trying to profit from a short!

Or at least it did until Icahn and Loeb put their considerable heft behind Herbalife.

 

[!Kaggen]

That's the presentation that Ackman kicked this all off with. It's been analysed to death elsewhere, and responded to by Herbalife and Icahn amongst others.

There's more than a few very elementary errors and misunderstandings in that presentation, along with a smattering of authentic concerns. It reads well to people who haven't studied the industry and the laws surrounding around it however, so it does the job brilliantly if you're trying to profit from a short!

Or at least it did until Icahn and Loeb put their considerable heft behind Herbalife.

Please point me in the direction of the various analyses you refer too.

 

[ConspicuousCarl]

It doesn't have to be a total dichotomy. An MLM could be a pyramid scheme in some ways but not in others.

What defines a pyramid scheme is not just the structure (most things have a pyramid-like structure), but the motivation for joining. If you join because you want to make money selling the product and also maybe getting commissions for the work of the people you recruit, it's MLM. But if you only (or primarily) join because you plan on making money by recruiting people who plan to do the same, it's a pyramid scheme. In that case, it's all about making money by passing debt downward.

The key to making MLM transformable into a functioning pyramid scheme is the ability of a new recruit to lose money while generating money for the level above (via either up-level commissions or sign-up bonuses) even if just for a short time. If that is possible, you could have an organization with some members selling legitimately and others scheming. Even one individual could be a salesman one month if he generates profits from sales in January, and a pyramid schemer the next month month if he makes commissions from new recruits in February who end up losing money.

For most (all?) of these MLMs, it's just an inefficient way to sell a common product and members are unlikely to make much money without mixing in at least some pyramid scheming. The only way to make a conclusion is to examine the actual numbers to see what is actually happening. In most cases, it is revealed that most members end up losing money (not just not profiting), and that loss was upstream profit for someone else... i.e., a pyramid scheme.

 

[icerat]

Please point me in the direction of the various analyses you refer too.

Wow, there's many, on both sides! This fight has been going on for some months now. Here's a quick selection -

Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid

In Defense Of Herbalife: Arguments Against Ackman's Short Thesis

I Visited An Herbalife Nutrition Club And Saw Why Bill Ackman Got His Short Thesis Wrong

Herbalife: Putting Bill Ackman's Arguments In Perspective

 

[icerat]

It doesn't have to be a total dichotomy. An MLM could be a pyramid scheme in some ways but not in others.

Modern pyramid schemes, which typically do have some kind of "product" (unlike "classic" pyramids like the Airplane Game) could be considered subsets of multilevel marketing.

What defines a pyramid scheme is not just the structure (most things have a pyramid-like structure), but the motivation for joining. If you join because you want to make money selling the product and also maybe getting commissions for the work of the people you recruit, it's MLM. But if you only (or primarily) join because you plan on making money by recruiting people who plan to do the same, it's a pyramid scheme. In that case, it's all about making money by passing debt downward.

This isn't really an issue of motivation for joining rather than stucture per se. In legitimate MLMs (take members of the DSA as a functional starting point) you never make money simply through the act of recruiting someone.

Where motivation comes in to play is motivation for purchase of any products the system offers. If you're purchasing them purely because you think doing so (and getting others to do so) will somehow make you rich, then they're not legitimate retail purchases and you're in pyramid scheme territory.

It's from this that your thesis about something being able to be both a legitimate MLM and an illegal pyramid scheme has some truth. Indeed Amway kicked out a significant portion of their US salesforce some years back because they believed the way the group was operating meant their sales were not legitimate and they were potentially operating as an illegal pyramid. (it's worth noting they were also breaking Amway's rules in doing so)

The key to making MLM transformable into a functioning pyramid scheme is the ability of a new recruit to lose money while generating money for the level above (via either up-level commissions or sign-up bonuses) even if just for a short time.

This makes no sense, the possibility to lose money while someone "higher up" in your supply chain makes money exists in all distribution channels. Having said that, a lack of buyback/refund policies (which help prevent this) is considered one of the warning signs something is an illegal pyramid rather than a legitimate MLM

 

[Joecool]

"They don't get paid for recruiting" is a weak defense.

Why do these schemes place such an emphasis on recruiting if there is no direct payment? Same can be said of Amway.

They recruit because you need downline to make purchases in order to make some money. While there's no direct payment for getting a recruit, they emphasis is there because there's no real money without downline purchases of product and training.

 

[Puppycow]

Herbalife tanks after senator calls for probe

California attorney general to meet with Herbalife critics, group says

I think it's still up though from where Ackman shorted it.

 

[timhau]

I think it's still up though from where Ackman shorted it.

Yup. According to your first link, he announced his short position in December 2012; Herbalife started December 2012 around $47, and then in mid-month tanked from roughly $44 to $27 within a week, which would be consistent with Ackman either taking a massive short position or announcing it. Right now, Herbalife hovers around 63 bucks.

 

[Joecool]

Probably some competitive marketing speak. "we're not like so and so because ..."



Recruit a million people in to Herbalife you won't make a cent unless someone buys products, and if they don't use them they can return them for a refund (and you have to return any profit based on that sale)

As Herbalife pointed out in their response to Ackman, an awful lot of people register with them primarily to buy products at a cheaper price (ala Costco). They are not operating a business and not attempting to profit. A few years ago the FTC proposed some new "business opportunity" regulations and in their discussion they noted this was common with MLM companies.

Ackman believes, contrary to the FTCs own statements on the issue as well as various legal precedents, that anyone who registers as a distributor cannot simultaneously be considered a legitimate customer, thus he considers much of Herbalife's sales to be illegitimate.

He quotes a well known anti-mlm critic, Robert FitzPatrick, who has been making the same argument for some decades, with no legal success. FitzPatrick and his colleague Jon Taylor have however been very successful in promoting themselves and their positions with the media and public (and alas, several influential "skeptics") but continually get shot down in the courts, to the extent that in a recent case involving Amway, a California court rejected FitzPatrick as an "expert" and wouldn't accept his affidavit. That didn't stop the media reporting the plaintiffs had provided "expert evidence" (ie FitzPatrick's affidavit) that Amway was a pyramid scheme.



All pyramid schemes are illegal virtually everywhere. There is no such thing as a "legal pyramid scheme". Anyone who says otherwise is using a different definition of "pyramid scheme" so needs to define what they mean.

There's actually quite a few publicly traded MLM companies, many of which have been around for decades. Avon converted to a multi-level compensation model some years ago. Buffett's Berkshire Hathaway owns an MLM, The Pampered Chef. Unilever operates an MLM in India and Africa (Hindustan Unilever Network). Amway's local subsidiaries are publicly listed in Malaysia and Thailand.

The first company to use an MLM compensation model was Nutrilite, which was merged in to Amway in the 1970s. It's been operating now continuously for nearly 80 years. That alone should be enough to give one pause to wonder if how you think MLM operates is actually how it does operate.

Bull. Where is it said that Herbalife is a buyer's club? Or Amway for that matter?

Herbalife (and Amway) are legal by letter of the law, but neither can assure anyone that their IBO's (independent reps) are not running illegal pyramid schemes.