Shouldn't the war on obesity be fought on battlefields that have an opponent? Herbalife (NYSE:HLF) is now entering into Cambodia. This comes at a time when obesity is rampant in the United States and the culprit people love to blame are the fast-food giants such as McDonald's (NYSE:MCD), a company that has no locations in Cambodia. Burger King Worldwide (BKW) only just last year entered the country. It's ironic that the number one obesity fighter, Herbalife, is in a country ahead of the number one blamed for obesity, McDonald's. Is this a sign that Herbalife is running out of new markets to expand into?
No question up until this point, Herbalife knows what it's doing financially-speaking. Its last quarter results were nothing short of fantastic. Its sales and income are near record levels. The cash in the bank has never been fatter: getting closer to $1 billion even after all the stock buybacks it has done. Sales for its Asia Pacific region are actually higher than in the United States even after dropping 3% last quarter.
On Oct. 31, 2013, Herbalife announced it is expanding to Cambodia. This marks its 15th country in the Asia Pacific region and the 86th country worldwide. Senior VP William Rahn stated,
Our focus is to deliver good nutrition through our products, personalized coaching and a social environment that inspires our customers to eat better, engage with each other, maintain a healthy weight and pursue a healthy active lifestyle. We are grateful to the Government of Cambodia for their support and look forward to providing good nutrition to the people of Cambodia.
There are 15.2 million people in Cambodia. While the obesity rate in the United States is around one out of three adults, in Cambodia it is closer to one out of 50. There is a potential market, countrywide, of only maybe 300,000 obese Cambodians. Compare that to 105 million in the United Sates or 350 times as much. If Herbalife uses its financial and managerial resources to expand into such a tiny market, what does that say about its overall growth opportunities? According to analysts such as Bill Ackman, it's a sign of market saturation and upcoming contraction in sales and profits.
Consider this. McDonald's has well over 34,000 restaurants in 119 countries. Even after all these decades of worldwide expansion, McDonald's continues to grow restaurants and expand, continually finding new markets that love its fatty foods. Even still, McDonald's has yet to expand to Cambodia. It apparently finds plenty of other markets more lucrative to open up in. It sounds like Cambodians either don't have the money or the taste for obesity-causing foods. Given that, it doesn't seem like a lucrative move on Herbalife's part.
On the flip side, Burger King Worldwide did in fact finally enter Cambodia last year, so maybe Herbalife wants to get ready before the population's waistlines begin to rise. Seems like a bit of a stretch, I know. Burger King itself has been rapidly growing its stores all over the place in part to counter its anemic same-store sales growth of around 0.9% last quarter. One would think there's more opportunity elsewhere for Herbalife to counter obesity other than near a handful of Burger King restaurants in a country with a nearly nonexistent obesity rate.
In Herbalife's earnings reports, it provides details based on region. It has six different operating regions around the world: North America, Asia Pacific, Europe-Middle-East, Mexico, South America, and China. All of them are showing phenomenal growth except one region -- the Asia Pacific region where Cambodia is located. While China saw a 71% increase, South American saw a 32% increase, and North America where it all start tacked on a 9% gain, the Asia Pacific region dropped by 3%. Where's the appeal to spend resources in this little country that's part a region that's appears to have already seen its best days?
Herbalife has guided for 2014 sales growth of 10%. Given its extremely high turnover rate among its "distributors" and all of the countries it operates in, it's hard to imagine that it truly has that good of a handle a year out on what sales will be. Expanding into Cambodia seems analogous to throwing a bunch of stuff against a wall and hoping some of it sticks. While it's paid off so far for Herbalife as evidenced by its financial results, there's no telling if it will be as successful in the future. Follow the Asia Pacific sales trends and which way they turn. As for me, I'll be staying away from Herbalife, but I may catch a Whopper next time I'm In Cambodia.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.