I have been an independent analyst of the U.S. weight loss market for 25 years, and will argue in this article that Herbalife has a very very slim chance, probably zero, of being shut down by the government. I respectfully disagree strongly with anyone that feels that this will happen, for a variety of reasons related to the weight loss market in which HLF competes, past actions of the FTC and other agencies, and the multi-level sales model that HLF and many other companies have used for many years.
First, HLF sells meal replacements (nutrition bars, powder shakes) designed to help people lose weight. in addition, it sells some appetite suppressants and metabolism boosters. Meal replacements have become increasingly popular in today's weight loss market, since they are inexpensive, convenient, and readily accessible via retail and MLM channels. They are also very safe and have not been associated with any negative side effects. Literally dozens of retail and private label brands exist and physicians often use them in their practice.
The OTC diet pills, which often contain a variety of herbs and caffeine, have come under scrutiny in the past, as they sometimes produce rapid heartbeats, nervousness, etc. They are stimulants. The FTC has scrutinized these diet aids for a long time, and has fined companies selling them (deceptive advertising, outrageous weight loss claims), in some cases asking the manufacturer to remove the product from the market. Hydroxycut is one such retail brand that was removed. However, the company reformulated the ingredients and Hydroxycut is once again being sold, in a slightly different iteration. But, the FTC did not put the manufacturer out of business.
In any case, I am not aware of any past action over the past 25 years where a meal replacement shake or bar was taken off the market, and these are the products that comprise the bulk of Herbalife's weight loss product sales. Therefore, at most, if there was a problem with HLF's other diet pills, at most they'd have to reformulate the product to eliminate any possible side effects. This is easily accomplished.
Secondly, since there are at least two dozen MLM companies operating in the U.S., all following basically the same sales model. If the government shut down HLF, they'd be forced to investigate the other MLM operators. The FTC is understaffed as it is, and conducting 24 separate company investigations would be an impossible task.
Following are the MLMs that we at Marketdata Enterprises have identified for a new report about to be released this week, about the MLM market for weight loss products: Advocare, AMS health Sciences, Conklin Co., GNLD Intl., Immunotec, Isagenix, Lifestyles USA, Lifewave, Loving Works, Mannatech, Morinda, Nature's Sunshine, Neways USA, NHT Global, Nikken, Pharmanex (div. of Nu-Skin Intl.), Reliv Intl., Shaklee, Sportron, Symmetry Corp., Synergy Worldwide, Univera, USANA Health Sciences, Nisalus (Blyth Corp.), and Vollara.
Third, MLM as a sales method is increasing in popularity in the U.S. Based on data from the Direct Selling Association, a total of $31.6 billion worth of products were sold this way in 2012. In addition, there are 16 million independent distributors or contractors engaged in this work. MLM positions have become more popular since the Great Recession as a job alternative, since one does not need a special license, certification or permit, and the work hours (from home) are flexible. In many cases, this is the only type of work the unemployed have been able to find.
Granted, the earnings are paltry, both on a part-time and full-time basis, with the exception of a lucky few that got in on the company in the beginning. Nevertheless, it's unlikely that in a tough economy, the government would step in and declare these millions of jobs to be illegal. That would not help their PR.
The fact is, MLM companies such as Shaklee, Nu-Skin and many others have been operating in the U.S. since the 1990s or earlier. Several years ago, Medifast came under a similar attack and they were found to be a legitimate operation (Take Shape For Life MLM division). Consequently, for the above reasons, it is my opinion that HLF will NOT be shut down, and is not an illegal "pyramid scheme." Sorry Mr. Ackman and other critics, but you are fighting a losing battle.
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. I have no business relationship with any company whose stock is mentioned in this article.