The basis of Ackman's argument is his analysis that HLF has no real retail sales because they do not track or provide retail data. He claims that HLF must keep replacing distributors and generate sign-up fees to be sustainable, therefore its a pyramid scheme. Here is why he is dead wrong:
HLF is health food and supplement manufacturer selling to wholesalers/distributors who pay to join HLF and gain access to product line. Distributors in turn sell the product at a price they set. The distributor either makes money or not on each sale depending on how they run their independent business. As with any industry, the manufacturer only tracks its revenue from products sold to the first level (distributor). It doesn't track the retail sales data generated from millions of independent distributors and it doesn't have to tack it.
Why must HLF track such data just because it uses a direct selling method? It shouldn't because no other manufacturer in any other industry is required to track such data. It would be costly and time consuming as well.
It doesn't matter if a distributor is the end customer who consumed the product or not. Either the distributor will consume it at the discounted price or it will be sold to a non-distributor at whatever price the distributor decides to sell it. In many cases, distributors start out as retail customers. Because they like the product they decide to become a distributor to gain benefits of discounts and even make a little money by sharing the product with others. Just because the company doesn't track retail sales data doesn't make it a pyramid scheme.
Moreover, the Ackman analysis that there is no retail market is flawed. The company makes most of its money from selling product NOT from recruiting and distributor sign-up fees.
First, HLF has some of the industry's lowest sign-up fees. The fees are so low that the company would have went out of business long ago if it were relying on such fees to sustain itself. Second, sign-up fees are usually one time events, not recurring. The majority of commissions earned by distributors are based on total product sales volume of the distributor and his/her developed group. In many cases most product sales are set-up on auto-ship monthly. Many distributors stay on for months and some for years. So HLF is selling a lot more product and taking in much more revenue from product sales not from sign-up fees.
To say a company that is selling over $3.5 billion of product annually with only a little over $100 million in sign-up fees is pyramid scheme is absurd.
Therefore, it is not a pyramid scheme as this short seller and others would have you to believe simply to create fear and drive down the stock for a quick profit.
" The company makes most of its money from selling product NOT from recruiting and distributor sign-up fees. " How should the author prove this statement?
Sentiment: Strong Sell
Good argument. One thing, though. Ackman has a billion dollars on the line, and he has said that if the government decided that HLF is legal, he will lobby to get the law changed so that it is illegal. Just like you should not fight the Fed, you should not fight someone who can spend hundreds of millions to destroy a company.
Great post. I am not even sure the HLF distributors would be willing to share the pricing information that they agree to with their end customers! Secondly, most companies using a two tier stratedy refrain from asking for end customer pricing as it opens the doors to potential "antitrust issues" should employees use the information to dictate to the distributor end customer pricing.
I am interested in knowing if a distributor must show evidence of an end order prior to being able purchase HLF products. That may be the only sticking point I see in this scheme. If the distributors are simply ordering to stock their own warehouses without having an order from a customer, that could pose certain issues as well.
See Also: Compensation Based on Retail Sales, Not on Mere Recruitment -
Herbalife's distributor compensation plan offers compensation that is directly linked to the generation of product sales. It does not award any compensation for mere recruitment³.
An Herbalife distributor can earn income through:
Mark-up of a product's price from the wholesale price paid to the retail price;
Wholesale commissions on product sales of a downline distributor;
Royalty Overrides calculated as a percentage of the suggested retail price of a downline
Supervisor-level distributor's sales volume;
Production Bonuses calculated as a percentage of a senior-level distributor's entire downline organization's product sales volume, subject to meeting minimum sales levels; ranges from
2% to 7%; and
The Mark Hughes Bonuses, awarded annually to the most successful Herbalife distributors who have demonstrated superior leadership and motivation in the past year; up to 1 percent of product retail sales is given annually, with $52.3 million in awards in 2012.
None of these components are earned without product sales behind them, and all are directly linked to the amount of product sales. Herbalife's compensation structure caps royalty overrides at 44% of Herbalife product sales revenue, so compensation cannot rise without limit or be greater than the company's sales revenue, no matter how the distributor network grows over time. Herbalife thus fails to meet the fundamental test of a pyramid scheme, because its compensation is directly related to sales volume (not to recruiting) and therefore its business cannot collapse under the weight of its compensation plan.
HLF, like all legit MLMs, have non-inventory loading policies -
See- Discouraging distributors from inventory loading-
Herbalife discourages both new and ongoing distributors from loading up on inventory that the distributor cannot sell, or does not want to consume, in the near term. A sponsor of a new distributor is expressly forbidden from requiring the new distributor to maintain a minimum stock level of products or materials. Ongoing distributors are similarly not permitted to stock up on products primarily in order to advance their position in the Marketing Plan and face sanctions if they do so. Instead, the company tells distributors that "Products purchased from the Company are intended to be sold and distributed to retail customers and downline Distributors, or used for Distributors' and their immediate families' own personal consumption."
An illegal pyramid has no incentive to promulgate a no-inventory-loading policy, because any product it might sell would have little or no real market value, so discouraging inventory loading would result in no product being bought at all and thus no fueling of the pyramid scheme that gives commissions on mandatory purchases by new recruits.
Maybe w you should have waited until you could write something that makes sense. What you ve written is gibberish. Mom pro is not a positive in my opinion . . . It I like admitting outré a #$%$.
OK folks, here the the true facts. I have been reading, watching and listening to all of the whining and absurd opinions of HLF and you should mark this post. HLF is NOT a SCAM. It is a ligit company generating a lot of money along the way. I truly believe most investors in the stock market do NOt research the companies they buy stock into including HLF. I wish you all good luck in your stock adventures as I do not own any stocks as I am not in the market at the present time. Personally I feel the market it is not going up for the right reasons and a huge correction is coming. Remember what goes up, always comes down GLTA
Sentiment: Strong Buy
No HLF distributor would be allowed to order large inventory stores like that suggested. HLF, like most legit MLM companies, have limits on the amount of inventory that can be ordered and kept on hand. This eliminates buying product to achieve compensation levels. However, it is important to carry some inventory because many times product is given away at demonstration parties and clubs to prospects and many people want product immediately and don't want to wait for shipment. Therefore, they borrow from other distributors who have inventory and replace it when their own order comes in.
Note, I consider myself a pro because I have achieved the highest level of income and success from numerous MLM companies over the last 25 years. I went long HLF because I know the industry and think Ackman is wrong. He is nothing more than a short seller stock manipulator and HLF will be around much longer than he will be.
If he has 20k of product in his garage is because he suks as a seller and hasn't been doing what he is suppose to. So what!!! I order thousands of dollars worth of HLF products a month I a double my money easy just selling daily consumption!
Sentiment: Strong Buy