Herbalife's Gold Standard Guarantee Is 'Fool's Gold'

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 |  About: Herbalife Ltd. (HLF)
by: Matt Stewart

Summary

Herbalife's PR campaign ticks up.

The company is swimming towards Amway.

Still far from Koscot.

Yesterday Herbalife (NYSE:HLF) issued a press release with a link to a new website iamherbalife.com. This website features a bunch of Herbalife propaganda as well as a database of "Selfies" of people whose lives have been changed by Formula 1.

In the press release, the company made reference to its new Gold Standard Guarantee. According to the company, this guarantee is the gold standard in the industry. I suppose this is a bit like saying that in the land of the blind the one eyed man is king. Herbalife's consumer protection program is a day late and a dollar short.

In this article, I would like to explore the reasons why.

First, let's review the Herbalife Gold Standard:

  • Business Packs can be fully refunded within 90 days even if you don't return the package
  • Unused inventory can be returned up to 1 year from the date of purchase
  • The company will pay for the return shipping (not the Shipping distributors paid to acquire the product)
  • Distributors must sign a form indicating they understand these guarantees
  • New distributors will be given an income disclosure

Make no mistake, absent Mr. Ackman's relentless campaign against this company there is no way this company would have voluntarily implemented these policies. Most of Herbalife's policies are still designed to hose the junior distributors at the bottom of the pay plan. Some examples include:

  • usurious shipping and handling fees
  • price discrimination against junior recruits
  • off-book business development programs
  • inventory loading to "buy" a 50% discount
  • over-saturation of local zip codes with distributorships
  • nationally run websites that sell product at 35% to 40% of SRP (see herbalwell.com)
  • an endless chain of recruiting as a matter of policy

Sadly, I could go on.

Still, we are now supposed to accept the view that Herbalife offers a gold standard consumer protection program. Sadly, this program is Fool's Gold.

Herbalife is a stubborn mule of a company. The idea that the company is concerned with the welfare of its junior recruits is as absurd as it is cynical. The reason this company makes so much money is because it takes advantage of its most junior recruits with a well-designed confidence game. Most don't make any money, most last less than a year, most churn out of the business with their wallets empty and their pride wounded. Of course, all of those in the upline make out like bandits. Why? Because they are bandits.

Q. Why has Herbalife implemented this Gold Standard program. The answer is perhaps less obvious to some. Herbalife is snuggling up to the rules in the Amway decision in order to give regulators the idea that their compensation plan does not promote inventory loading nor does it deceive recruits with exaggerated earnings claims. Effectively, the company is attempting to introduce polices that function like Caveat Emptor provisions.

If the company tells new recruits up front that their risk will be mitigated by an inventory return policy, presumably the company's legal advisors seem to believe that this will shield the company from an FTC fraud allegation.

Poppycock.

Anyone with a scintilla of common sense should be able to see through this cynical notion.

First, notwithstanding the notifications given to distributors by the company's documents it is obvious that Herbalife recruiters continue to peddle rags to riches stories verbally across this country day in and day out.

Second, new distributors must still pony up for an inventory load if they want to get a 50% discount on product and have any chance of competing in the consumer market as a retailer.

Third, inventory buyback polices don't provide recovery for wasted human capital, damaged reputations, nor downtrodden self-esteem. Human capital has an opportunity cost. Those who chase the Herbalife fraud misallocate their capital - not just working capital.

Fourth, the company's pay plan still sponsors an endless chain of recruits.

Fifth, compensation is still not tied directly to retail sales nor are distributors required to demonstrate that their business efforts actually yield retail sales to ultimate users.

To summarize, Herbalife's Gold Standard Consumer protections are "Fool's Gold"

Still, perhaps we can help the FTC and the company implement some consumer protections that might actually steer the company clear of a prosecution under the Koscot test.

Here are some ideas.

#1 Stop charging your distributors different wholesale prices for inventory. Give anyone who wants to retail Formula 1 50% off SRP without demanding an inventory load.

#2 Stop selling Supervisorships for $3k a pop.

#3 Shut down all lead generation businesses and/or terminate any distributor who operates one of these businesses. Fine distributors who lie about income potential. Start with John Tartol.

#4 Only pay commissions when a distributor can produce evidence of a retail receipt defined as a sale to someone who is not part of the distributor network.

#5 Measure and limit the number of distributor licenses and/or Nutrition Clubs you allow in a given zip code.

#6 Limit your downline to 3 levels.

#7 Lower your shipping and handling fees.

#8 Stop training your distributors to recruit. Teach them how to become successful retailers.

#9 Bring your Nutrition Clubs out of the shadows. Get them licensed as Food Service Establishments. Collect sales tax.

#10 Shut down your current pay plan which is an obvious pyramid scheme.

Herbalife's senior management team and board of directors operate the company like an axis of weasels who will do anything they can to preserve the most sinister elements of the Herbalife pay plan. Why? Because the pay plan as written is the golden goose that lays the golden eggs as it confiscates capital from junior distributors.

This, of course, is the reason why regulators like the FTC and SEC need to intervene and intervene aggressively.

Left to their own devices, what consumers get is absurdity like the company's lame Gold Standard guarantee or Build it Better program - conjoined, of course, with the usual ad hominem attacks on Mr. Ackman and Pershing Square.

Herbalife is a fraud because it meets the Koscot test. The company's new inventory return policies do little to nothing to protect business opportunity seekers from tagging themselves to the bottom of an endless chain of recruits. Nor does it seem to prevent the statistical evidence that most new recruits will fail within a year.

Herbalife is a pyramid scheme, Gold Standard or not.

The sooner the FTC shuts it down the better.

Disclosure: I am short HLF. 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.