E Herbalife: Yes, Alice, There Is A Santa Claus

More analysis of how the MLM model is cannibalizing Avon's basic business, and worsening their problems instead of solving them, is definitely in order. One could hope that with the departure of Andrea Jung, and the company's recent decision to leave the DSA, evidently for being a tyranny of the lowest common denominator, they set the first step to addressing the real issues. Now they need to recognized that MLM was the problem and not the solution. The winners will be the companies that successfully evolve the direct sales model into the Internet age, and MLM is not the answer. There is a place for the joining of skill, know-how and product sales, and the Internet can be a great way to empower that type of economically productive activity, it may be time to bring the Avon lady back.

In fact, Avon may have a wonderful opportunity now to put the whole MLM experience behind it, and re-launch with an improved version of its original business model, just in time when a ton of NuSkin and other ex-MLMers will be scrambling for a good home. If they can figure that move out, they did not leave the DSA for naught. All it takes is a few people on their board with enough sense of economics to understand that the MLM program will continue to decimate their existing business and muddy their reputation.

USANA is not the answer either

As far as public MLMs go, NuSkin (NUS) has had its own problems, but USANA (USNA) has seemed to be the shining star of the sector, but all may not be as it appears. Certainly there is plenty of information on the specifics of USANA for those who bother to look, and the pyramid issue is the most important one.

Ralph Cramden can safely retire

Yes, Alice, there is a Santa Claus, and I've joined an MLM - you could almost hear him say it. Maybe Ralph wanted to lose some weight. Some companies pay salaries, and there is a place for commission sales in some industries, but the realities of the MLM model are that the overwhelming majority lose money. It is not a model where you start out making small money and build up over time. No, in MLM you swim under water for a long time before you make any money - hence the statistic that 99% fail. And people won't continue to work for the song and dance that is invariable misrepresented in "opportunity meetings." They are becoming the butt of jokes. The whole model focuses on misrepresenting the possible as the probable, and exaggerates earnings (of the few "leaders" who act as shills), and ignores or denies expenses of time, money, effort and reputation. This is readily evident in the newest wave of deceptions and dissimilations that pretend that the up-front fees are the only problem. The MLM-concept itself is the problem, and there is nothing you can do to fix it and make it a legitimate business model, because it is an economic and mathematical fallacy. The advance fee scam is just the icing on the cake for many companies, but it is not necessary to create the false promises that appeal to people's gambling instincts, not productive entrepreneurial instincts.

Conclusion: Economic realities will win in the end

Much like the economic realities forced action in the S&L scandal, and the actual failure of Madoff's Ponzi scheme forced the SEC to show up, so also arguing the case law relating to MLM is less relevant than the economic realities which will force change. In short, arguing the twists and turns of case law has its limits, broadly MLM hangs by a thread in the form of the '79 Amway ruling, with which no company complies anyway.

  1. Herbalife is now having to reflect the underlying business deterioration in its reporting, and as noted, the trends suggest downward revisions of forward guidance are more likely than positive surprises. The economic forces at work are inescapable. Moreover saturation is an industry phenomenon, as the research of Prof. William Keep and Dr. Peter vanderNat has shown - increasing numbers of MLM participants are chasing dwindling MLM dollars.
  2. It is a fact of simple economics that MLM is based on a fallacy, and creates an unsustainable model that consists of a series of feeding frenzies, that can only lead to the now well known "pop and drop," growth spurts, but not a sustained business. It all boils down to a deliberate overcrowding of "distributors," and a massive channel conflict, which results in retail margins going to zero, thus exposing the underlying pyramid scheme. Recent actions by Amway, Tupperware, Herbalife, and Oriflame to control "rogue sales," demonstrate that fact. Again, economic realities will prevail. 
  3. A third issue is that the proliferation of MLM companies is such that Herbalife's attrition can only worsen, for assuming no regulatory action people will leave when the grass seems greener on the other side of the fence.

Eventually therefore, the model will self-destruct, and even if the regulators continue to do nothing, the business model is not viable in the long run, not least because the population is becoming smarter about these frauds, and communities are starting to organize, if nothing else because there are too many of these programs. It's fraud of the week time, and people aren't buying it any longer. Educated consumers in this case will not be the best customers. They will run for the hills. The slide continued overnight after the earnings release, with the stock opening up 14% below the last pre-earnings release close, and closing 21% down on the first full day of trading after ER. For Herbalife the time has come for the dumb money to leave.

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Disclosure: The author has no position long or short, nor intends to open one in the near future.

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Old Time Investor 6 years ago Member's comment

Thanks Rogier, do you have any updates on this stock?

Danny Straus 6 years ago Member's comment

Great read!

John Fitch 6 years ago Member's comment

Great read Rogier. Interesting tidbit, Icahn's investment fund lost 5.3% in the third quarter. Icahn is Herbalife's biggest shareholder. Interested to see the share price if/when Icahn starts to pull out.