Herbalife clarifies position of distributors who sign up only for discounts

By Hank Schultz

- Last updated on GMT

Related tags Herbalife Management

Herbalife clarifies position of distributors who sign up only for discounts
Herbalife moved again to respond to criticisms of its business model by renaming a category of participants in its multi level marketing organization from “distributor” to “member.”

The term was meant to clarify where these people stood in the organization, Herbalife CEO Michael O. Johnson said in a second quarter earnings call with analysts. Criticisms of the company’s business model have focused on this group, and whether they are induced to make large investments in products which they cannot ultimately resell.

“It's really a sense of substitution of the term ‘member’ for the term ‘distributor,’ recognizing that the majority of people who historically completed a distributor application are joining for the purpose of a wholesale discount. They have no intention of doing the business as you know over 70% people did not. So, this change is simply reflective of the reality of our business and is intended clarity to an existing situation,”​ Johnson said.

“These changes will help clarify misinformation introduced into the market and spread to special interest groups here in America who have been badly deceived about how our business really works,”​ he said.

No auto ship to customers

Some other MLMs set up auto ship agreements with members of their sales organzations that might be analogous to Herbalife’s redesignated group to encourage large, discounted, regular shipments of products.  It’s not a model Herbalife intends to adopt, said president Des Walsh.  Walsh said the company bases its business on face-to-face interaction, a sales method supported by the fairly new innovation of nutrition clubs, which for the most part are small storefronts leased by distributors as platforms to build their individual businesses.

“In our business it's all about the personal interactions between a distributor and their customers. And so from that perspective the idea of simply product shipping automatically just doesn't automatically gel with that. We want to encourage regular contact,”​ Walsh said.

Strong quarter for growth

The renaming announcement came in another statement of record earnings by the company. The company recorded $1.2 billion in net sales in the quarter, a year-over-year rise of 18%. Volume grew in all of Herbalife’s markets, with China rising 49% and South America increasing 33%.

As far as individual products are concerned, sales of Herbalife’s leading product, its Formula 1 meal replacement shake, increased 16%.  And the company’s Herbalife 24 sports nutirition line is giving rise to a new business model that expands beyond the nutrition club idea, Johnson said.

“Herbalife 24 is emerging as a product and a brand for endurance athletes and those looking for great sports nutrition. There are now Fit Club business models based on Herbalife 24 that are creating opportunities for a whole new generation of Herbalife customers and distributors,”​ Johnson said.

More transparency

Johnson said there has been an upside the stock price turmoil that the company has experienced that began when influential analyst David Einhorn asked a couple of pointed questions in an earnings call a couple of years ago and accelerated more recently when money manager Bill Ackman famously took his huge short position on the company’s stock.  The upside, Johnson said, is that many independent firms have researched the company’s business practices and in his view have validated what management has been saying all along.

“We also believe that through the in-depth research conducted by so many firms, the investment community as a whole has come to the same conclusion that we already knew. Herbalife is a sustainable, financially strong company with a robust consumer base, loyal to our high quality nutritional products,”​ he said.

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