Another MLM feels the sting of post-Herbalife restructuring

By Hank Schultz contact

- Last updated on GMT

Another MLM feels the sting of post-Herbalife restructuring
Network marketing company Mannatech says it is rounding the corner on business disruptions caused by changes made to better comply with US laws against pyramid schemes.

The agreement network marketing giant Herbalife reached with the US Federal Trade Commission, which included an eye-opening $200 million fine, has sent shock waves through the multi level marketing (MLM) sector. Herbalife is the world’s third largest MLM, according to industry trade magazine Direct Selling News​, and the largest devoted entirely to the sale of nutritional products.

Herbalife agreement offers roadmap

Herbalife agreed to alter its compensation plan to place the emphasis on building sales organizations for the ultimate goal of selling products to end users. The company’s prior compensation structure, which gave rewards to distributors simply for signing up new distributors, was on the edge if not fully over the line into pyramid scheme territory, according FTC.In the agreement, Herbalife committed to a new accounting structure, which is meant to place more visibility on product sales to end users, and less on products purchased by distributors to meet volume goals.

In the wake of that agreement, other MLMs devoted to the sale of nutritional products that were not in FTC’s cross hairs unilaterally made changes of their own. Usana announced a new compensation plan around the same time. Mannatech did as well, a switchover that has affected its bottom line.

The changes hit home both in terms of the number of distributors on the company’s rolls (fewer after the switch), and in lower sales. Some of the company’s previous sales were in “pack sales” which were purchased by distributors. These were similar to the volume requirements Herbalife had for distributors to qualify for certain compensation levels. The charge by critics of the industry is that at least some of that product ends up in distributors’ garages and not in the hands of end users, giving a false picture of the success of the company and of the industry.

“With the introduction of the new compensation plan, we have also experienced the consolidation effect among our associates,”​ said Mannatech president and CEO Al Bala. Bala made his comments in an earnings call with analysts that was posted in transcript form on the site seekingalpha.com​.

“This account consolidation has in part been responsible for the reduction in a number of new and continuing independent associates and members position held by individuals in Mannatech from 222,000 to 215,000, a 3% reduction... In Q4, we experienced a 19% decline in recruiting, which is largely attributable to the change in associate behavior, favoring new customer acquisition over new associate recruiting,”​ Bala continued.

Earnings details

Mannatech, which sells a variety of dietary supplements and personal care products, reported 4th quarter 2017 net sales of $46.4 million, an increase of $3.8 million or 8.9% as compared to $42.6 million in the fourth quarter of 2016. On a constant dollar basis, net sales for fourth quarter 2017 increased by $2.8 million as compared to the prior year. As for the year, overall net sales decreased by $3.6 million to $176.7 million for 2017 as compared to $180.3 million for 2016. During 2017, the company’s net sales declined 3.3% on a constant dollar basis.

Asia to the rescue

Mannatech, which is based in Coppell, TX in the greater Dallas-Fort Worth area, now derives most of its revenue from sales in Asia, which is a common theme in the MLM sector. Sales in North America have been declining, while sales in Europe and the Middle East have been flat. Sales in Asia have been on the rise, however.

“Our net sales increase (in the fourth quarter) was a result of some very strategic seasonal limited-time offer promotions in some of our fastest growing markets including Korea, Hong Kong and China e-commerce,”​ Bala said.

“We believe the fourth quarter results represent a very positive step for the new Mannatech after two years of a very arduous, transformative journey, which included a complete rebrand of the company, a new compensation plan, expansion in China through a cross-border e-commerce platform and the introduction of new blockbuster product categories such as our TruHealth family of products, which focuses on healthy fat loss and body composition, and has quickly become our second largest family of products globally,”​ he concluded.

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