I am a Canadian living in the USA. In yesterday's news, Burger King agreed to acquire Tim Hortons. Tim Hortons is an iconic Canadian quick serve restaurant chain that sells primarily coffee and donuts, primarily in Canada. Mr. Ackman is spending quite a bit of time lately in the True North Strong and Free. Tim Hortons, Valeant, Canadian Pacific. All of these companies are central to Pershing Square's portfolio. So far, at least, Mr. Ackman has the Midas touch in Canada. I think this Halloween Mr. Ackman should consider the following
It sort of speaks for itself don't you think?
Kidding aside: What do Canada, donut stores, burgers and such have to do with Herbalife?
If you believe Herbalife, there's a global obesity epidemic going on out there. Here's a little factoid that maybe you didn't know. Canadians eat more donuts per capita than any other country on earth. Now, it seems, they may chase their morning treat with a Whopper. Herbalife must be licking its chops.
One would think that Canada would be one of Herbalife's most successful markets seeing how it's a Global Nutrition Company and All? Donuts = Obesity. Obesity = Opportunity.
Well you would be wrong. Herbalife's sales in Canada are a rounding error. Canada and Mexico both account for roughly 2% of Global GDP each. Mexico generates 11% of Herbalife's business volume; Canada less than 1%.
In Herbalife's segment reporting Mexico and North America are reported as two separate regions. Funny, my geography teacher always told me that Mexico was part of North America and that Mexico, Canada and the USA form the bulk of the trade in NAFTA (the North American Free Trade Agreement).
So, why does Herbalife perform so poorly in Canada?
Here are a few thoughts on the matter. Survey says?
- Because Canadians are all Hanging Out at the Donut Shops
- Because Beer tastes better than Formula 1
- Because it's hard to Crosscheck somebody when holding a Milkshake
- Because Poverty isn't rampant in Canada
I'll leave you to vote accordingly. Granted, this survey is totally unscientific. Still, it is kind of fun.
Tim Horton, for those who don't know, was a famous Canadian hockey player.
He played defence for the Toronto Maple Leafs and Buffalo Sabres. He wore #7 and was considered a tough and rugged champion. After his playing career was over he started a business with a partner selling coffee and donuts. Tragically, he was killed in a car crash. His name lives on today in every small town in Canada.
Mark Hughes was a California boy who started a pyramid scheme out of the trunk of his car 34 years ago. He also died tragically in 1980 after a 4 day drinking binge. His pyramid scheme was purchased by a private equity firm, taken public, and turned over to Michael Johnson to run. Today, the scheme operates in 91 countries around the world and is successful in some of the poorest neighborhoods on the planet.
Amazingly, however, not in Canada.
Q. If Mark Hughes was still running Herbalife today, would we even question the idea that he's a con artist like Glenn Turner?
Q. What is propaganda?
According to Merriam-Webster it is defined as:
Ideas or statements that are often false or exaggerated and that are spread in order to help a cause.
Pershing Square refers to Herbalife's confidence game as "The Big Lie".
By now Herbalife investors should be aware that a pyramid scheme is, effectively, a game. The incentive system is designed to yield a specific mathematical putcome. Those who join late transfer value to those who joined early. Mark Hughes knew this well. Michael Johnson picked up where Mark Hughes left off. The game is wrapped in a well-orchestrated and well executed veneer of legitimacy. Here's how it works.
For those who are new to the Herbalife story, Herbalife is a recruiting scam. More specifically, the company promotes a "business opportunity" scam. Every single day the company and its recruiters recruit new and optimistic people into a labyrinth of deception that "in practice" is just a mathematical fallacy.
Recruits are told that if they just follow the simple algorithm that is presented to them in the Marketing Plan that they, too, can climb all the way to the President's team. Mathematically speaking, of course, this is a lie.
The reason it is a lie is obvious to see. If we imagine all 3.9 million of Herbalife's current salespeople trying to build out their downlines the collision course is obvious. Using a simple geometric progression where each distributor recruits "5" who recruits "5" who recruits "5", the hypothetical number of distributors worldwide multiplies to just shy of 500 million people in short order. This idea is both nonsensical and absurd. If you join Herbalife today you might be distributor # 3,900,001. This tilts your odds of success decidedly against you just a wee bit.
Still, Herbalife recruiters around the world tell their new offspring that the road to well is paved with duplication.
Here's what #1 distributor in the world Susan Peterson told trainees at an Extravaganza.
"Listen, if you want to recruit somebody that likes the products and would like to be your discounted customer because they love the products and they love you and they want to be with you I would say keep doing that. It's wonderful. But you can't count that in business building recruiting. If you want to move your check you need to find other people that want to make money and represent the Herbalife products and the Herbalife opportunity. People who are like you and who want to be distributors. See, the word is "distributor"… so my point is this. As you leave here you need to make a pledge to yourself to go out there and find people who are looking for opportunity, that want to change their family's life and change their financial situation. That is the people you need to work with. That is the people you need to find. And believe me, there has never been an easier time to find people like that. Okay. Because our economy is bad in America… and if you're not going after this Shame on You… this is the time to work, this is the time to recruit, this is the time to build a new organization. This is the time. There has never been a time this easy."
Now imagine all of these trainees heading out there to follow Susan's advice. What is the end result?
If you said "most of them don't succeed." then you are starting to understand how pyramid schemes work "in practice". When participants focus their time and energy on recruiting new salespeople and encourage them to do the same market saturation unfolds. The proof of market saturation for Herbalife rests in its recruiting and churn statistics.
- Since the end of 2007 over 10 million people have been recruited into Herbalife's network.
- Over the same time frame over 8 million people have quit.
I like to call this statistic "harm" and not "churn". I think regulators will agree. Still, Herbalife continues to tell new recruits that it sells a fabulous "business opportunity". That might be true if the majority of people actually succeeded. Of course it is an obvious lie because people don't.
Herbalife also conveniently forgets to disclose the failure rates in its salesforce when it markets the business opportunity. The trouble with that idea is it's illegal. In the original temporary restraining order issued to Burnlounge the FTC's attorneys included the following:
C. Failure to Disclose
A material omission that is likely to mislead consumers acting reasonably under the circumstances is a deceptive act under Section 5. FTC v. Pantron I Corp., 33 F.3d 1088, 1095. Failing, as Defendants have done, to disclose that the vast majority of participants in a multi-level marketing program have not earned substantial incomes is deceptive in violation of Section 5 of the FTC Act. Five-Star Auto Club, 97 F. Supp.2d at 531-32.
For those investors who haven't had a chance to read the Burnlounge TRO, I encourage you to do so. It reveals the great skill that exists within the FTC's legal department.
Herbalife CEO Michael Johnson is a brilliant marketer. You have to give him credit where credit is due. Since he took over as Herbalife's CEO, the company has grown like a weed. Along the way, Mr. Johnson has been paid a fortune. Mr. Johnson's skills are apparent. Unfortunately, they simply amount to propaganda for the most part.
Herbalife's business opportunity is a lie.
History is littered with evil people who use propaganda to advance a myth.
- Hitler blamed the Jews for what ailed Germany's economy after WWI
- North Korea and its "Cult of Personality" is a closed regime that vilifies the West.
- Muslim extremists seek a Pan-Islamic world devoid of secularism and/or any other faith you can think of.
It would be a mistake to characterize Michael Johnson as an analog to Hitler. Hitler was far more evil than Mr. Johnson.
Mr. Johnson advances his own "business opportunity" propaganda behind this moniker.
(Is it me or is it just a coincidence that Herbalife's logo is designed to look a bit like this? Hmmmm? (Herbalife's Holy Trinity: Mark "The Father", Mike "The Son", Distributor Profitability "The Holy...")
Back to Propaganda: great communicators use their skills as propagandists to advance their cause. Michael Johnson's cause that he is paid for by Herbalife shareholders is growing Volume Points around the world.
John Hempton seems to think Herbalife functions more like this company "selling meals".
(Source: Google Images)
Mr. Ackman might prefer it if Mr. Hempton were to use this analogy.
"In Practice" we are probably closer to this:
(Source: Google Images)
Herbalife's nested pyramid schemes (Traditional Pay Plan and Club 100) are wrapped in a well-crafted veneer of legitimacy. Here's a roster of people on the payroll who lend it credibility.
- LA Galaxy Soccer Team
- Cristiano Ronaldo
- Lionel Messi
- Lou Ignarro (Nobel Laureate)
- Richard Carmona (Former Surgeon General)
- Madeleine Albright(Former Secretary of State)
- Antonio Villaraigosa (Former Mayor of L.A.)
- Michael Johnson (Former CEO of Disney International)
Herbalife is also a publicly traded company that is backed by the likes of investors like:
- Carl Icahn
- William Stiritz
- Soros Investment Management, etc.
Q. What do all of these people have in common?
The answer is they are victims of Mr. Johnson's propaganda skills. Recall, Herbalife's original charlatan was a huckster named Mark Hughes. Glenn Turner from Koscot must have inspired Mr. Hughes. 34 years ago he sourced a high gross margin protein powder and poured this rocket fuel into the tank of a fledgling pyramid scheme. 34 years later the scheme has proliferated into over 91 countries around the world. Mr. Hughes died in 1980 after a 4 day drinking binge. Little did he know that Mr. Johnson would one day take up his cause. Every nook and cranny where GDP per capita is less than $5,000 seems to be fertile ground for the con. Everywhere the scheme finds traction economic failure is left in its wake.
One of my favorite sayings is: "Even a blind squirrel will find the odd acorn."
I also like "In the land of the blind, the one-eyed man is king."
(Source: Google Images)
(QTR's recent blog post humorously suggested that Al Franken might play the role of John Hempton in a yet to be produced "Made for TV" movie about Herbalife. Mr. Franken may have one too many eyes to get the part though I did like his book "Lies and the Lying Liars Who Tell them." It seems fitting in the context of this investment.)
It strikes me as inevitable and somewhat obvious that a recruiting juggernaut like Herbalife that has recruited over 10 million distributors in the past 6 years alone is destined to find some retail customers along the way. John Hempton has identified them and confirmed that they exist. (That's the eye that works)
Meanwhile, as John is sharing milkshakes with the locals in his hometown, Herbalife and its network of distributors continues to recruit "business opportunity" seekers into the very bottom of the pyramid.
Herbalife is always recruiting.
That is what the incentive system pays them to do, that is what the recruiters tell new recruits to do. This is how indoctrination works at Herbalife. This behavior is what makes the company a pyramid scheme. (That's the eye that doesn't work for Mr. Hempton.)
Perhaps the single most critical question regulators will ask as they continue to examine this company is this:
Q. If potential recruits had perfect information about the "business opportunity", how many would still sign-up?
Put another way, if Herbalife told the truth v. sold propaganda to its target market, how many would pay to play?
Dr. Vander Nat is busy calculating the truth about Herbalife right now. At least, I feel confident that hard-core, mathematical analysis of the pay plan is what he is doing. He will examine the pay plan both "in practice" and he will examine it to see how participants behave in an "optimal scenario" where all participants act rationally and seek to maximize the benefits of the pay plan.
I am also confident that Dr. Vander Nat's analysis will prove that in theory and in practice, most participants get trapped at the bottom levels of the pay plan making the promise of rewards unattainable for the vast majority of participants.
Because that is how geometric marketing plans with no speed limits are designed to work.
Put another way, getting to President's Team is a pipe dream by design.
Put another way - this picture is not a picture of this:
(Source: Pershing Square, The Big Lie)
but is rather a picture of this.
(Source: Google Images)
(Hola Senor Dinneen wherever you are.)
As Mssr. Magritte points out surrealistically. "This is not a pipe." "In practice", it is just a drawing of a pipe. The pipe exists in your imagination. It is, literally, a pipe dream. (Descartes would be impressed.)
In like manner, Herbalife's "business opportunity" is also a pipe dream. It doesn't really exist. True: it exists if you are in the upline and got in early to a geography. True: it exists in the imaginations of the Herbalife uberazzi who constantly sell the absurd notion that "Yes" it truly does exist to unsophisticated recruits. Mathematically speaking, however, it clearly does not exist for recent recruits. The evidence is overwhelming.
As analysts, we have the company's track record to prove it. This evidence reveals that the vast majority of people who pursue the business opportunity today fail. Dr. Vander Nat, I am sure, will explain to the world that the reason they fail is a function of design, is not arbitrary at all, and is actually a mathematical certainty.
Such is the downside of listing a Pyramid Scheme on the world's largest stock exchange I suppose. Smart people like Mr. Ackman and Mr. Klafter and Ms. Richard and "Matilda" get to pick through your disclosures. John DeSimone is a very crafty fellow for sure. Unfortunately, Pershing Square is just a wee bit craftier and about as relentless as Susan Peterson at a Herbalife Exravaganza..
Regrettably, a revenge motive from Mr. Icahn got him long 17 million shares of sludge. Meanwhile, while kicking tires on his own 10x EBITDA acquisitions of legitimate Protein Powder companies over at POST (NYSE:POST) the seduction of a temporarily suppressed HLF share price attracted Mr. Stiritz and his capital to the party too. How much that decision ends up costing Mr. Stiritz remains to be seen. $50 x 7.4 million = $370 million of downside.
Still, as Salty Droid puts it in much more "flowery" language than me, Herbalife continues to sell "Unicorns" to the world's faithful.
Seemingly, Michael Johnson hasn't learned any lessons from Martha Stewart. When you get caught with your hands in the cookie jar it is best not to block and tackle your way through it. Conscientious regulators like Mr. Bharara don't like to have their intelligence insulted with belligerence and PR and even more propaganda. Recruiting the likes of Mr. Hoffman from Pepsi will be seen for what it truly is - a desperate move to influence peddle and to draw attention away from the fact that most of your distributors fail miserably.
Put another way, if Mr. Johnson was truly serious about killing his pyramid scheme he would not be hiring gravitas. Instead he would:
- kill his Supervisor program
- track retail sales
- tie all commissions to retail sales
- flatten wholesale pricing
- measure distributor profitablity
- limit distribution licenses by territory
- kill Club 100
- reduce his Shipping charges
- price his wares competitively
- put signs on Nutrition Clubs that say "Open for Business"
- and apologize to humanity for his transgressions having been duped by Mark Hughes himself
Dare to Dream!
Instead, Herbalife and its band of merry men continue to try to sustain one of the most sordid confidence games in history. After all, why kill the Golden Goose, as Top Recruiter John Peterson called it, when you've gotten away with it for 34 years?
Right now, today, as we speak, somebody somewhere is being recruited into this game. Somebody somewhere is paying for a "Consumos" in a Nutrition Club so the they can get a cap and gown and invite their loved ones to take pictures like this taken as a screen shot from this real Herbalife video.
(Club 100 Graduates - Look at how young and skinny and optimistic these young people are. What a total waste of their talents.)
Somebody somewhere is being told by the likes of Susan Peterson or Doran Andry or Leslie Stanford or John Tartol...
"You can do this - if you just work hard enough!"
Trouble is- they can't. That's "THE BIG LIE" that Mr. Ackman is talking about.
Q. Am I obsessed with Herbalife?
A. As former Governor of Alaska might say:
Yes, I have a pecuniary interest in the fate of this company's securities. More importantly, the role of the 5th Estate is to draw attention to harmful practices that victimize real human beings in our global community. Granted, I am no Upton Sinclair but I try to do my part.
So, as long as reporters like Julie Hyman at Bloomberg don't quite seem to understand exactly what Mr. Ackman is saying about this company, my efforts to educate and inform will continue. FYI Ms. Hyman, Herbalife is a:
That is, at least, until the brilliant attorneys who drafted the Burnlounge TRO apply their skills to the good ship Herbalife too.
To close, all propaganda dies when faced with the truth and when confronted by justice. America has a long history of overcoming evil slowly but eventually finds its way.
- Slavery was an abomination.
- Women couldn't vote at one time.
- Poverty persists in this country.
Still, we're working on it as a society.
Q. How does Michael Johnson contribute to the cause?
A. By using all of his talents as a human being to evangelize a mathematical fallacy.
What a total and utter waste.
Fortunately, with the stock now below $50 per share, investors seem to be awakening to the enormity of the Herbalife ruse too.
To close - please enjoy this slice of Herbalife propaganda courtesy of Mr. Johnson. It's a keeper... (Clue: Note how they lead with the Income Opportunity and close with "share this video with ten people, 20 people, etc...")
Caution: Rated "R" due to obscene language.
Whether or not my own images or Mr. Ackman's thesis, messaging, etc. amounts to propaganda or not?
I'll let you be the judge.
That's what makes a market...:)
In the interim, I see the issue like this.
Tim Hortons is a legitmate consumer company that markets profitable franchises to global investors.
Herbalife is a pyramid scheme.
Don't get caught long the common stock.
Note: All Images in the Document Sourced through Google Images unless otherwise Stated
Disclosure: The author is short HLF.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.