The World Is Fat: The Law Of Supply And Demand And The Western Diet

| About: Herbalife Ltd. (HLF)
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By Luigi Gratton M.D., M.P.H., and Herbalife Vice President of Worldwide Product Marketing

During his presentation on Herbalife (NYSE:HLF) in December, Pershing Square hedge fund manager Bill Ackman told investors a number of reasons for his belief that the company is a "pyramid scheme." One of his allegations was that Herbalife was using its recent sales growth overseas to mask dwindling revenues in more mature markets, where the alleged scheme had played out.

He even got some chuckles when he questioned why the nutrition company would be selling weight-loss shakes to, of all people, Africans.

"Ghana?" he said in mock surprise. "They're selling a weight loss product in Ghana?"

Although my forte is public health, not corporate finance, I can tell you with confidence that Herbalife's expansion into places like Ghana is a matter of simple supply and demand.

First, to correct Ackman's assertion, Herbalife's revenues from new markets like Ghana, which the company entered in 2011, are small compared to the growth in established markets like the United States. The company derives only 8 percent of its overall revenues from markets opened within the last nine years [see page 70].

But all indications are these new markets will continue growing. Herbalife doesn't break down most net sales by country, but our numbers have shown steady growth in the Europe, Middle East and Africa region [EMEA], from nearly $528 million in 2010 to $628 million in 2012--a nearly 19% increase [see page 10].

Countries like Ghana are contributing to that trend. The reason: Obesity has become a global epidemic.

For the first time in history, obesity has replaced hunger as a leading contributor to chronic health conditions, according to the comprehensive 2012 Global Burden of Disease study-released a week before Mr. Ackman's presentation.

No longer are the health and economic effects of over-eating confined to America, where an estimated 62 percent of the population is either overweight or obese. With globalization and the spread of the Western diet, the world is not only flat - it's fat. There has been a global surge of diabetes, cancer, heart disease and back problems.

Yes, even in Ghana. Although sub-Saharan Africa hasn't been hit nearly as hard as elsewhere, more advanced countries like Ghana are showing signs of the obesity blight. The Ghana Medical Journal has estimated that 65 percent of the women in Accra, the nation's capital, are either overweight or obese when compared to the body mass index published by the World Health Organization. Concluded the Journal: "The prevalence of obesity in West Africa rapidly increased during the last two decades of the 20th Century and continues to increase in the 21st Century."

I saw this for myself during a brief visit to Accra last summer to train 1,200 Herbalife distributors.

Instead of a backwater filled with emaciated tribesmen, as Mr. Ackman would have us believe, I found a buzzing hub of West Africa's second-largest economy. There was poverty and traffic, to be sure, but also an abundance of elegantly dressed and plump people. The drive in from the airport featured a parade of neon signs and handmade placards for fast food joints and sugared sodas. The hotel snack bar did a brisk business in cookies, chocolate and chips.

There was a clear need for help (demand), as the rising Ghana middle class finds itself seduced by convenience and snack foods. And the middle class is increasingly reaching for nutritional shakes (supply) as a way to control their caloric intake while receiving the recommended daily requirements of protein, vitamins and minerals. Hundreds of scientific papers have explored the efficacy of nutritional shakes for weight management-evidence endorsed by the European Food Safety Authority and the Academy of Nutrition and Dietetics. Of course, successful weight management also demands will power and moral support. Herbalife also offers that moral support through its network of distributors, who serve as personal weight coaches to their clients.

A worldwide trend creates a growing customer base clamoring for products to address their needs - sounds like a successful business formula to me. For Herbalife, it has been in Ghana, as well as the more mature markets such as the United States, where contrary to Mr. Ackman's claims, business, along with waistbands, continues to expand.

Certainly Mr. Ackman couldn't have been that ignorant of the basic economic and behavioral dynamic fueling Herbalife's success.

Or maybe it is business, after all. Herbalife's success presents a challenge to Pershing Square's other investing strategies. In recent years, Mr. Ackman's fund has invested in four of North America's biggest fast-food companies, worldwide names that peddle donuts, triple-decker burgers, fries and oversized shakes. Herbalife's battle against obesity would flatten out the supply curve for these staples of the modern Western diet - staples that have made Mr. Ackman and his fellow investors rich.

Meanwhile, the damage they are doing to the rest of us, even in Ghana, is no laughing matter.

Disclosure: I am long HLF. I am Herbalife's Vice President of Worldwide Product Marketing.