Herbalife is a global nutritional organization whose products are sold solely through independent distributors. Some have asked whether Herbalife is a legitimate business, Ponzi scheme, or pyramid. Herbalife makes clear that it is a valid business in which compensation to its members is based exclusively on product sales, rather than recruitment of other members.
Compensation is reliant upon the dollar amount of Herbalife products members sell each month, which in turn determines the eligibility amount of volume discounts received by the member. Members and independent distributors buy products from Herbalife to sell to their own customers. Members look for new customers and sometimes recruit new members to sell Herbalife in order to grow their business. Earnings come from an individual’s retail sales. Once the member reaches the level of supervisor, earnings are based upon the sales of the members recruited. This is also known as multilevel marketing. The greater the volume sold, the greater the discount on products, which helps distributors make more money.
Herbalife considers its business to be a legitimate economic opportunity and not a scheme. Its distributors and members are not considered employees but rather entrepreneurs or independent business people. Nonetheless, each individual is required by the company to adhere to all Herbalife policies and legal requirements in every country in which the product is sold.
Herbalife was founded in 1980 by Mark Hughes. Hughes died in 2000 as a result of an accidental overdose of prescription medication and alcohol. It has made substantial gains since 1988, going from almost no financial value to now being worth over $4 billion dollars in 2010. In 2009, Herbalife endured some financial instability which was attributed to the economic downturn.
Herbalife experienced a roller coaster ride on the stock exchange, opening up over 4% and then quickly dipping down to 1% by the middle of this afternoon. By day’s end, the stock ended up closing at 7%. The turbulence came as a result of investors deliberating the announcement that Herbalife will repurchase $1.5 billion in stock, which is twice as much as the previous $653 billion authorization.
Herbalife announced in December the completion of a re-audit conducted by its independent registered public accounting company, PricewaterhouseCoopers LLC. The re-audit was on the company’s consolidated financial statements for fiscal years of December 2010, 2011, and 2012. There was also an audit of the performance of Herbalife’s control over their financial reporting.
Nonetheless, Herbalife’s most vocal critic, Bill Ackman, released what is being called an “in-depth study on deceptive practices and recruitment systems” on one of the largest Herbalife sellers in Canada. Ackman, whose company is Pershing Square, says he and his company will continue to publish details on deceitful practices of Herbalife executives, including a member of the Board of Directors.
In spite of the outcry’s of Bill Ackman over the past year against Herbalife, (which has from time to time driven the stock of Herbalife down), Herbalife maintains that it operates under fair and legal business practices. It asserts that it is a legitimate business and not a scheme.
By: Wendy Waring