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Matt Stewart is a private investor, former vice president & director of RBC Dominion Securities Inc. in Toronto and holds an Honors BA from the University of Western Ontario and an MBA from the F.W. Olin School of Business at Babson College. Matt also represented all BCE common shareholders... More
  • Herbalife - Treadmill To Hell 1 comment
    Jan 18, 2013 3:27 PM

    On the ride to heaven a consumer is informed he'll have the opportunity of sampling both heaven and hell before deciding where he wants to reside for time immemorial. A bit nervous but wanting to get it over with, he decides to sample hell first. After a long elevator ride down, he is greeted by a friendly guy in a tuxedo. Before him is a vast hall filled with great music, a nonstop party, wonderful food and booze, and all his friends who have gone before him. Reminded after a while that it's time to sample heaven, he gets back on the elevator and up he goes.

    Upon arrival in heaven there are lots of little angel wings and soft harp music but no party. Frankly, it suffers in contrast. After floating on a puffy white cloud for a while he's approached by Saint Peter, who asks if he's made a decision. "Yeah, I have. No offense to you, Pete, but this place is pretty boring. I think I'll pick hell."

    With a click of his saintly fingers our consumer finds himself back in hell but this time a nasty-looking Lucifer with horns, tail and pitchfork greets him and he's surrounded by ranting and wailing people boiling in cauldrons.

    "Hey, what's up?" he asks. "This isn't the hell I remember!"

    "That's right, it's not," grins the devil. "The last time you were here you were a prospect. Now you're a customer!"


    Of course what this allegory describes is the experience of the typical Herbalife distributor.

    We can say 3 things categorically about Herbalife.

    1) They do a magnificent job at recruiting distributors. Like the devil in our story above, grand claims of a fancy home and fast cars are laid before prospective business operators by executives and sales leaders alike. This year alone Herbalife has recruited 1.4 million new distributors around the world.

    2) They also do a magnificent job of getting people to try their product. Whether people try their nutritional products out to lose weight or to buy Volume Points to climb the ladder of success, each new distributor steps up to the bar to buy the Herbalife product. This past year in the USA the average active distributor bought roughly $1,200 worth of product.

    3) Most of the individuals who try to sell the product or who just consume it for personal use find out that "...the last time they were a prospect. Now you're a customer." To be blunt, the Herbalife customer experience simply doesn't stick. They bail within a year.

    Consumer products work on multiple levels in order for consumers to perceive value. Some consumer products appeal to consumers at a practical level. Think of a weight loss shake as a way to lose weight.

    This might be a legitimate reason to buy the product. The product may also work at a psychological level by delivering psychological benefits. i.e. If I buy this product and I lose weight I feel good about myself so I get a self-esteem boost.

    Don Draper famously said in Mad Men, "People buy things because it makes them feel good."

    The flip side of this is that people stop buying things because they no longer feel good about them. If a product no longer delivers value, people abandon it. This is the fundamental problem with Herbalife's business model.

    Individuals who join Herbalife to pursue the business opportunity probably like to do so to make themselves feel good. They likely have an optimistic view of their prospects, they likely apply themselves aggressively, follow the sales script, engage in the activities, etc. The early innings are probably rewarding and delusional. There is likely a belief set that "I, too, can be rich." That "I, too, can be successful."

    But, soon enough reality sets-in. The rubber hits the road so to speak and the truth about Herbalife is revealed. The truth about Herbalife is simply this. It is difficult if not near impossible for new distributors to make money selling products and even more difficult to find and recruit down-lines.

    As a result, over 1 million distributors churn out of the Herbalife pyramid each and every year with their tail between their legs - no longer feeling good about themselves, no longer feeling optimistic, and no longer evangelizing the Herbalife brand. Herbalife stays ahead of this churn rate by expanding geographically faster than the churn rates they experience in mature markets.

    At a similar level, those who buy the products simply to consume the products equally abandon the experience. Either they try the products and get bored of them, perhaps reach their goals or just find them unappealing. Nonetheless, most consumers who try Herbalife products abandon them in less than a year.

    Successful consumer products brands accomplish three goals:

    1) they get repeat purchase from customers

    2) they gain reputational goodwill/positive word of mouth from users and

    3) they secure bargaining power with the distributors and retailers who sell their products

    If Herbalife were a dominant consumer product, end-users would be clamoring for the product due to positive word of mouth, distributorships would be limited and restricted, exclusive territorial franchises would likely be granted. Market penetration would not be achieved by selling many to one but rather from one to many in given locales.

    But alas, Herbalife's brand enjoys no such equity. It is a brand that is sold, not bought. It is a brand that is pushed with a business opportunity not pulled. And, most importantly it is a brand where satisfaction and repeat purchase behavior are exceptionally poor.

    Since 2010 over 3.5 million people around the world have been seduced by the Herbalife brand promise only to end-up walking away.

    Yet still, the Devil does his work, one poor, economically troubled customer at a time.

    The thing about word of mouth, however, is that it cuts both ways. Witness the "pop and drop" phenomenon displayed in mature markets around the world. What this really is at a grassroots level is the result of those who have been burned by the brand warning their neighbors not to get sucked-in to a similar fate.

    32 years and counting is a long-time for a pyramid scheme to keep cycling. Like a massive hurricane, it swirls around the earth sucking-up unsophisticated victims wherever it goes. But ultimately, the music stops.


    Because there is nobody left to lie to...nobody left to sell the dream to...nobody left to convince.

    All the prospects will have been prior customers. This, in the end, will be Herbalife's fate.

    Lieberman told us on Jan 10th that 73% of American households are aware of the Herbalife brand even as less than 5% actually consume it. This begs the question "what are the other 68% missing?" or do they already know?

    Successful consumer products don't need pyramid schemes to gain market dominance. This is the truth about Herbalife...a weak brand with a questionable future.

    32 years in business and only 3 million distributors in 84 countries around the world selling $1,300 worth of merchandise a year each.

    Not exactly the stuff that dreams are made of.

    If Herbalife's distributors can't make money, ultimately its shareholders will not make it either. Herbalife is a Short.

    Disclosure: I am short HLF. 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.

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  • Well written and very compelling, although to me you are preaching to the converted, as I spend much of my professional time in a largely pro bono effort to advocate for better regulation of the MLM industry. I have never shorted a stock myself, and do not intend to start now, but I sincerely hope that your short is successful. You could have written this ten or twenty years ago and would have been as true then as it is today. What if anything has changed to make this a good investment thesis?
    21 Jan 2013, 07:53 AM Reply Like
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