subject: Herbalife Scam? [print this page] Entrepreneurs who are searching for a home business have asked me if Herbalife is a scam or a reliable business opportunity. Apparently greater than their concern for the products, most entrepreneurs want to know if the Herbalife business model is a pyramid scheme. This is a reasonable question for anyone who's searching for a dependable business that they can work from home. My objective is not to form a judgment for or against Herbalife's products or management decisions. Instead, my intent is to uncover data obtained from official company reports that may help interested readers to make an informed decision.
Let us examine Herbalife itself. Founded in 1980 by Mr. Mark Hughes, Herbalife is a network marketing company (MLM) that offers products for nutrition, weight-management and personal-care. A 2008 corporate annual report claims that they have 1.9 million distributors in 72 countries, with annual sales of 3.8 billion dollars. Of the 1.9 million distributors, the 2008 report estimates that 505,000 were "sales leaders." This is their term for distributors who 1) actively sell the products and 2) recruit other distributors into their "down-lines," or sales teams. Sales leaders are paid a commission on 1) their own sales and on 2) sales made by other sales leaders who have been directly or indirectly "recruited" into their personal down-lines. Sales leaders may also receive bonuses and other commissions calculated on a percentage of overall corporate sales volume.
The official company report estimates that 80% of Herbalife's 2008 net sales took place outside of the United States. Other than in China, the worldwide sales system-network marketing (MLM)--is similar to that used in the U.S.. China published regulations in 2005 preventing the use of "pyramid promotional schemes." Quoting once again from the 2008 Herbalife annual report, "These regulations require us to use a business model different from that which we offer in other markets. In China we have company operated retail stores that sell through employed sales-management personnel to customers and preferred customers." Some non-employee sales representatives are also permitted in select provinces to sell "away from fixed retail locations."
Herbalife's 2008 report also claims that they are "A world-class company with visionary leadership to support your business." The report also states: "Herbalife's mission for good nutrition, a healthy, active lifestyle and financial well-being helps millions of people reach their ideal weight, look and feel healthier, and earn what they're worth."
The following statement of gross compensation is taken from their 2008 Annual Report.
"Herbalife Ltd. Statement of Average Gross Compensation
of U.S. Supervisors in 2008
Herbalife offers its Distributors an opportunity to achieve a lifetime of better health through its scientifically advanced weight-management and nutrition products. While many of our Distributors join the Herbalife family simply to enjoy our life-changing products, others want to share their results and take advantage of the many income benefits our business opportunity provides. With Herbalife, you can work part-time and earn a supplemental income or focus solely on your Herbalife Distributorship and increase your financial potential. It's completely up to the individual how much he or she wants to achieve! A Distributor earns profits by buying Herbalife products at wholesale and reselling them at retail. If the Distributor wants to increase his or her involvement in the business and enjoy the possibility of higher levels of income, he or she may sponsor others into the business and develop an organization.
Over 25% of Distributors reach the rank of Supervisor and above ("Leader"), qualifying them for additional compensation which is paid by Herbalife based upon the sales production of those they have sponsored directly and indirectly. The annual gross compensation paid by Herbalife to all Leaders during 2008 averaged $2,200. Over 42% of Supervisors are "Active" (defined as those who generated at least 2,500 points of volume in 2008 after becoming Supervisor). The annual gross compensation paid by Herbalife to Active Leaders during 2008 averaged approximately $5,200. ACTIVE LEADERS
Earning % of Total % of Active Average
Level Leaders Leaders Earnings (USD)
President's Team 0.2% 0.5% $ 475,789
Millionaire Team 0.7% 1.6% $ 80,983
GET 2.2% 5.1% $ 17,785
World Team 2.7% 6.4% $ 4,479
Supervisor 36.4% 86.4% $ 440
Total 42.2% 100.0% $ 5,245"
The same document states: "We are listed on the prestigious New York Stock Exchange, are members of Direct Selling Associations around the world, and have brand visibility through sports sponsorships."
A highly significant section of the very same report states: "Holders of our common shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law. Our corporate affairs are governed by our amended and restated memorandum and articles of association, and by the Companies Law (2007 Revision) and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Island law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or board of directors than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area."
In summary, Herbalife is a Cayman Island Corporation with 1.9 million distributors, of whom 505,000 are "sales leaders." The average yearly income during 2008 for all Herbalife sales leaders was $2,200 each. Of their "active sales leaders," 86.4% were paid $440 for the year. 6.4% were paid less than $5,000, and 5.1% received an annual wage of $17,785. This means that 97.9% of their "active sales leaders" earned less than $20,000 for an entire year's work.
Do you recall the Herbalife mission statement from above? It states: "Herbalife's mission for good nutrition, a healthy, active lifestyle and financial well-being helps millions of people reach their ideal weight, look and feel healthier, and earn what they're worth."
If a Herbalife Scam exists, it's that Herbalife management feels that 97.9% of their active sales leaders are "worth" something less than $20,000 per year.
The business model that Herbalife uses appears to be legitimate in many countries other than China; however the income distribution heavily favors the top 0.5% of active sales leaders. Many thousands of workers at the base of the structure produce most of the sales and money that gets paid out to a few at a narrow top. Does this structure resemble a pyramid to you?
