[Photo by Brian Blanco/AP Images] Although Herbalife CEO Michael Johnson has stated that his company will not have to substantially change its business practices, the terms of the FTC settlement not only say that Herbalife owes $200 million to its distributors, but that it will also have to make substantive changes going forward.
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Who Is Herbalife, And What Is Its Business Model?
As part of the settlement, Herbalife agreed that it will now differentiate between distributors who buy products at a discount and those who are selling directly to consumers, as opposed to other Herbalife members.
Hedge fund investors who bought stocks in the company are being residually disappointed as the company faces new (strict) sanctions and other things that are affecting the way they are allowed to conduct business.
Do you think that the FTC was right to extract a $200 million settlement from Herbalife, or do you think the company is a pyramid scheme that should have been shut down? At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified.
Most Herbalife participants earn little or no profit, or even lose money, from retailing Herbalife products. “Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure”.
This model could mean the company promises its recruited members that they have the ability to move up the ladder and make a substantial living with the company, yet only a few distributors make it to the top of the pyramid to reap the big pay checks.
Mr. Ackman tried to show the FTC, along with consumers, for years what he thought about HerbaLife – which was that it was nothing but a pyramid scheme created to rip off its consumers.
Finding themselves unable to make money, the FTCs complaint alleges, Herbalife distributors abandon Herbalife in large numbers.
CNN Money reports that Herbalife is a multilevel marketing company, similar to household names like Mary Kay and Tupperware, that relies on distributors recruiting other distributors to sell products.
In the absence of a viable retail-based business opportunity, recruiting, rather than retail sales, is the natural focus of successful participants in Defendants’ business opportunity.
According to Herbalife CEO Michael Johnson, the $200 million FTC settlement and a separate $3 million settlement with IL are proof of a sound business model.
Still, Herbalife was quick to claim victory. [Photo by AP Photo/Manuel Balce Ceneta] In a 2012 interview with Bloomberg, Ackman called Herbalife’s profits “blood money” and pledged to donate his own personal share of profits from the short position to charity.
In a complaint filed in U.S. District Court in Los Angeles, the agency said Herbalife rewarded distributors for recruiting others to join the company and purchase products instead of basing compensation on “actual retail demand for the product”.
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“While the company believes that numerous allegations made by the FTC are factually incorrect, the company believes settlement is in its best interest because the financial cost and distraction of protracted litigation would have been significant, and after more than two years of cooperating with the FTC’s investigation, the company simply wanted to move forward”, Herbalife said in a written statement.
