Herbalife now free to pursue in-house manufacturing goal

By Hank Schultz

- Last updated on GMT

Herbalife now free to pursue in-house manufacturing goal

Related tags Herbalife Dietary supplement

Nutrition giant Herbalife followed a winding road to the payment of a $200 million fine and an FTC-mandated restructuring.  The network marketing company, with more than $4.5 billion revenue in 2015, can now move forward on its mission of business expansion and product improvement.

Herbalife was founded in 1980 by entrepreneur Mark Hughes with the first version of the company’s Formula 1 meal replacement shake. The company grew rapidly, and Hughes amassed a personal fortune.

But Herbalife rose quickly on regulators’ radars, too;  in 1986 Hughes agreed to pay $850,000 to settle a case brought by the California Attorney General’s Office. Herbalife agreed to 20 changes in the wording of product claims and to make changes in its financial practices. The company's settlement last week with FTC echoes some of those same concerns, and while the fine Herbalife will have to pay is hefty, many observers remarked that things could have been worse; in recent years the commission has ordered the closure of network marketing firms Vemma and Burnlounge on charges that they were illegal pyramid schemes. 

Supply chain management

Herbalife grew strongly throughout the 1980s and started operations overseas during that decade on its way to operating in more than 90 countries today. Along the way the company acquired a huge suite of products made at various locations. In an effort to better manage this huge supply chain Herbalife in recent years has been on a talent buying spree within the dietary supplement industry. The splurge brought on board the likes of Bill Frankos, PhD, onetime director of FDA’s Division (now Office) of Dietary Supplements.  Frankos was at the agency when the final dietary supplements GMP rule was pushed through.  Herbalife has also hired Andrew Shao, PhD, who previously was senior vice president of scientific and regulatory affairs with the Council for Responsible Nutrition and herbal ingredients expert Stephen Dentali, PhD, previously chief science officer of the  American Herbal Products Association.

The company has also moved aggressively to bring its manufacturing in house. In 2012, CEO Michael Johnson said that the company, which was manufacturing less than one third of its own products at that time, had set a goal “to self-manufacture as much as two thirds of our inner nutrition products including the extraction of the raw botanical ingredients used in our products today.”

He added: “We believe that to be a leader in the nutrition and supplement industry with regulators around the world it is important that we be in more control of the manufacturing process for a greater percentage of our products.”

Since that time Herbalife paid $22 million to purchase a manufacturing facility in North Carolina and built an herbal extraction facility in China. According to Fortune​ magazine, in addition to the FTC fine, Herbalife spent an estimated $76 million responding to Ackman’s challenge and another $44 million on expenses relating to regulatory inquiries since 2014. 

Having put that probe to rest with a settlement that is being seen within the industry as more lenient than had been expected, Herbalife can now devote more funds toward meeting Johnson’s goal laid out in 2012. According to the company's 2015 annual report Herbalife now makes 50% of its products in its own facilities and spent $79.1 million on capital expenditures in the fiscal year.  Those capital expenditures include breaking ground on an additional manufacturing facility in China in the fourth quarter of 2015.

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