Herbalife's business model changes should finally put criticisms to rest, CEO says

By Hank Schultz

- Last updated on GMT

Related tags: Multi-level marketing

Herbalife's business model changes should finally put criticisms to rest, CEO says
Herbalife, the network marketing nutritional products giant, has recorded another quarter of double-digit growth, a quarter in which it moved to alter its business model to respond to public criticism, CEO Michael Johnson told analysts in a recent earnings conference call.

In the call, Johnson laid out three key ways in which Herbalife has altered the relationship it has with its distributors.  Some  critics—activist investors, minority group leaders and others—claim that the company takes advantage of less sophisticated distributors who lay out disproportionate amounts of their own capital to buy inventory and lease nutrition club locations only to reap meager, if any, returns. And some critics have gone so far as to call the company’s model a pyramid scheme, in which distributors who have been at the game for a while can see significant returns whereas new entrants earn next to nothing or lose money.

Three business model changes

While not referencing those criticisms directly, Johnson said the company has made three important alterations.  First, it has reclassified consumers who sign up only to get volume discounts and with not intention of starting a business as members.  This will more clearly delineate who are the principal end users of the products, underscoring the company’s “daily consumption”​ mantra that has been repeated for several quarters now.

Second, new entrants who intend to start their own Herbalife network are required to read a statement of average earnings for distributors in their market.  Critics have claimed that some distributors in the company have signed up new salespeople for their own networks with visions of opulence without disclosing the tiny percentage of members who reach those compensation levels.

“While the amount of money earned by many members from simply selling the products may not seem meaningful for some people it is to many of our members. A couple hundred dollars can make a material difference to many, many families in the world,”​ Johnson said.

New distributors must now also complete a mandatory training program on operating a direct selling business. The company has also instituted a policy in which new distributors can return their startup kits and any unsold inventory without a restocking fee or having to pay shipping.

Third, for distributors who want to take the next step and lease a location to open a Nutrition Club, the company has instituted a mandatory additional training program to go with a three-month waiting period after joining the company.

“These changes should eliminate the vast majority of misperception and misrepresentation that have been made about our company, at least to any objective individual,”​ Johnson said.

Earnings details

In the third quarter Herbalife recorded net sales of $1.2 billion, a 19% year-over-year increase. Adjusted EPS of $1.41 is an increase of 44% compared to the prior year period. The company generated more than $220 million in cash flow from operations.

“We’ve continued our strong performance through the third quarter of this year, marking our 16th consecutive quarter of double-digit top line growth,”​ said president Desmond Walsh.

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