Herbalife is the latest of US based network marketing companies selling nutritional products that has been hurt by China’s official ‘100-day review’ of the sector, which took place earlier this year. Although the review process is now complete, the questions it has raised among consumers continue to reverberate and have hurt confidence in the sector.
Problems in the provinces
And it has raised questions in the minds of provincial officials, too, who hold a significant amount of power over what kind of companies can do business within their jurisdictions. Fellow nutritional products MLM Usana noted in its recent earnings report that some provinces were still preventing sales meetings from taking place.
Herbalife, in an earnings call with analysts on Friday, noted that it has had difficulty resuming full operations, too.
“It's obviously taking time as a number of the approved meetings and attendees continue to expand. But we are still below the level seen prior to the 100-day review. These meetings are critical in the short term to rebuild new cohorts of members to offset the impact of the 100-day review,” said John DeSimone, Herbalife co-president and chief strategic officer.
Herbalife tracks its performance both through net sales figures as well as an internal measure it calls volume points. Reporting both is meant to help the company get a handle on how much of the products sold are getting to end users and how much is being held in inventory by independent distributors.
Being more open about those sorts of measures, as well as how it categorizes active distributors verses people on the company’s books who just signed up to get product discounts, is part of Herbalife’s agreement with the US Federal Trade Commission. In 2016 Herbalife agreed to pay a $200 million fine and make a number of business practices changes to settle allegations that the company was operating an illegal pyramid scheme.
Volume in China declines 37%
In any case, the company reported a 37% volume point decline in China since the announcement of the 100-day review. Herbalife changed its full year performance guidance to a range of a 1.7% decline to as much as a 2.8% increase.
As a way to try to rebound more quickly, the company announced changes to allow Chinese consumers to more easily order its supplements and meal replacement shakes directly online. MLMs always walk a fine line in the digital sales universe; if it’s too easy for consumers to order directly, it would tend to undercut the efforts of its independent distributors to sell the products face to face and to build captive sales organizations of others to do so as well.
CEO and chairman Michael Johnson said the company believes there is still underlying consumer demand for its products, which was not destroyed by the 100-day review, only temporarily diminished. And he noted that the kind of products Herbalife sells fit well into the country’s official Health China 2030 initiative which among other things is trying to fight the rising rate of obesity.
“I don't know if meetings will ever get that to where it was. We can assume it will and we believe it will, but there's no guarantee it will. Right now we're about two-thirds in level. There are certain big cities right now where they're still not approving meetings,” he told analysts. The call was posted in transcript form on the site seekingalpha.com.
Herbalife’s share price dropped more than 7% on Friday after the earnings announcement. The company’s shares are trading at about $38 today, off from a 52-week (and all-time) high of almost $59 a share in January. (Herbalife’s shares split two-for-one several years ago.)