The company released a statement late last week apparently intended to ward off a renewed attack by Ackman’s investment firm Pershing Square Capital. Pershing Square has announced a webinar set to air tomorrow that will present the findings of its ‘investigation’ of Herbalife’s nutrition clubs.
Nutrition clubs are a business model in which independent distributors rent out store fronts or pricier digs to use as a venue to introduce new customers and potential distributors to Herbalife’s products and business opportunity. Herbalife staged a press event last year in which members of the media (this reporter included) toured a nutrition club in Orange County. The club, run by one of the company’s top earning distributors, was located in an upscale retail development and was tastefully appointed. The tour did not, however, address the criticism that Ackman has raised, namely that many distributors catering to lower demographic neighborhoods (many of them Latino) rent out commercial space without sufficient guidance as to how much traffic in both product sales and new distributor sign-ups is necessary to support the cash outlay. Ackman has alleged that this is indicative of the company’s practice of exploiting minorities, especially Latinos.
Herbalife, for its part, emphasizes the social aspect of its nutrition clubs. Many of these clubs take a weight-management angle in their approach to potential customers, and Herbalife says research shows that weight loss regimens are easier to stick with and more successful with social support.
“Nutrition clubs advance Herbalife's mission of helping people lead healthier lives. Our community-based approach to health and wellness is well recognized as an important tool in helping create and sustain changes in behavior,” the company said.
Herbalife also staged a news conference at a distributors meeting in Chicago on Friday to up the anti-Ackman pressure. The conference apparently sparked little interest on the part of news organizations. In a company statement presaging the meeting, distributors said they were asking for an end to “lies and smears” about the company, and questioned Ackman’s motitvation in championing Latino causes.
Pyramid scheme assertion ‘simply false’
In its statement, Herbalife responded in turn to some other criticisms that Ackman has raised. In alleging that the company is a ‘pyramid scheme,’ Ackman has charged in the past that the company’s business model is based primarily on recruiting new members and selling them the business opportunity, and that the products themselves are a mere side show. The company calls this assertion “simply false,” and counters that it has been in business since 1980 and offers ‘world class’ products in more than 90 countries. This success would only be possible, Herbalife says, if the company’s protein shakes, vitamins, dietary supplements and energy and fitness drinks met consumer expectations. “There is proven demonstrated demand for Herbalife products by millions of consumers,” the company said.
Herbalife further stated that it has a full buyback program in which distributors can get a full refund for products purchased within the previous 12 months. In recent quarters, fewer than 1% of sales were subject to a buyback, the company said. “In fiscal year 2013, Herbalife reported US net sales of approximately $881 million. During that same period, Herbalife had 525,251 members in the United States. Under Herbalife's buyback policy, each resigning members was entitled to return all of their unsold and unconsumed products and obtain a refund. A pillar of Pershing Square's thesis is its assertion that there is no genuine consumer demand. Thus, Pershing Square's thesis is built upon the proposition that last year, roughly a half million people collectively decided to simply discard $881 million worth of Herbalife products rather than get the refund to which they were entitled,” the company said.
Herbalife is reportedly under investigation by both the Federal Bureau of Investigation and the Federal Trade Commission. Herbalife has had a policy of not commenting on ongoing investigations, though CEO Michael Johnson told the Wall Street Journal he welcomes the opportunity to set the record straight on the company.