Good and bad MLMs: Pampered Chef, Herbalife and Nuskin

Aalaya Walker (Florida - Aged 18) was shot (but only slightly injured) when she pre-heated her friend's oven. She was wanting to make waffles.

Her friend, who obviously did not cook much, kept the ammunition in the oven because it was safe there.

There are lots of people in America who don't cook or can't cook and have never learned how. Real estate agents tell stories of people with beautiful appliances who keep all the manuals in the oven because they too never cook.

Many of these people eat a lot of fast-food, are overweight or modestly unhealthy and they miss the family or social aspects of sitting down with a nicely cooked dinner and a couple of bottles of wine and for that matter - perhaps getting plastered.

Enter The Pampered Chef.

Here is The Pampered Chef shtick at its best. The Pampered Chef "consultant" finds a man or woman (usually a woman) who does not cook much if at all - and would never hold a dinner party. She gives them a shopping list...

Two loaves of good bread
A couple of onions
4 small carrots
Some rosemary
Some olive oil
Some chicken thigh or breast fillets
Some cayenne pepper
A bulb of garlic
Any other herbs you like (parsley, sage, rosemary or thyme, whatever you like)
Couple of tins of lentils, Puy lentils if you can find them
Couple of ripe tomatoes
Bag of frozen spinach or fresh spinach
Some bacon
Some asparagus
Some yogurt 

8 friends
4 bottles of wine

It is of course the 8 friends and four bottles of wine that makes this really work. This lot makes one of those wonderful French provincial dishes (peasant food) that all my hedge fund manager friends have presented to them as Haute Cuisine.

The whole thing can be cooked in twenty minutes (see Jamie Oliver's 15 minute version below).




But the "consultant" takes thirty five minutes to cook, giving friendly cooking tips along the way - and sloshing down a little wine. Also they explain the cookbook has lots of other wonderful and easy recipes.

Then they sit down and eat it. To someone who holidays in the South of France and eats in French Bistros this is just a darn nice meal. But to someone whose diet consists of fast food its a revelation - exotic beyond belief. Just so tasty.

And as the wine gets consumed, cook, books, fry-pans and other things are sold.

If all is going well desert gets cooked, mostly at the table. Some eggs are separated and whipped up with sugar. The meringue is dumped in the oven (after the ammo is taken out). Some cream is whipped, strawberries crushed to make a coulis, and Eton Mess is served in nice glasses. All that cooking equipment is sold too.

The consultant becomes friends with two or three of the other guests and organizes another two dinner parties...

This is a real business, it really adds value and it is fun. Hell I would even go but I suspect I have enough frying pans... it is far less exploitative (and far less unreasonable) than a Tupperware Party.

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It is hard to argue that the above scenario is exploitative even if the frying pans are sold at three times fair value. Indeed Doris Christopher who founded the Pampered Chef originally just purchased the kit at The Merchandise Mart in Chicago and marked it up three times.

Walmart cannot sell frying pans this way because they can't get into peoples homes and explain how they are used. In this case what is being sold is "community" - and it can't really be sold any way other than MLM. MLM is a pathway into the community that is not available to a conventional corporate.

The dumbest part of Bill Ackman's presentation (and for a smart man he can be so stupid) is where he complains that Herbalife products are unreasonably priced - and describes the product as a commodity.

Doris Christopher purchased commodity frying pans at Merchandise Mart. What she sold was something else entirely.

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This is all fairly instructive on what makes an MLM a societally value accretive business. Its a good business if it works out how to create value out of community. In that case the MLM really is doing something that conventional retail can't do - and if they capture profits - even considerable profits - doing so - that is just normal business.

And I am going to make a strange argument - MLMs - at least to the extent that they create value out of community - should trade at a premium to traditional retail rather than a discount. Conventional retail is vulnerable to the internet - MLMs doing this sort of business are far less vulnerable... 

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But MLMs are not all good - and the critics do have something to say. MLMs do leave a trail of disappointed distributors - and they are not hard to find.

The Pampered Chef "consultant" who runs the above party may or may not be disappointed if the parties only make her a few thousand dollars "supplemental" income a year. After all she probably likes to cook, likes parties, likes meeting new friends and has a good time doing it. The fact that she does not get rich - or even earn minimum wage per hour for this - is not really material. It may be lightly profitable but good fun. My guess is that the profit share belongs disproportionately to Berkshire Hathaway - and that is the way Uncle Warren likes it. But it is also the way the world is.

There is a problem however if the consultant has to buy tens of thousands of dollars worth of frying pans to sign up as "consultant". She may never recover her investment. I have not talked to many "consultants". There may be a few out of pocket - but I doubt it is tens of thousands of dollars.

Still even Warren Buffett has been in the game of misleading consultants. The forward to The Pampered Chef Cookbook is written by WEB. To quote:

When you read the profiles of The Pampered Chef's Kitchen Consultants in Chapter 8, you may wonder what you are doing in your nine-to-five cubicle while these folks are happily cooking their way to fame and fortune.

Warren: despite your (well deserved) reputation for integrity this is BS and you know it's BS. You are vanishingly unlikely to find "fame and fortune" as a Pampered Chef Kitchen Consultant.

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But misleading consultants is only one of the things wrong with MLM business models. The main other thing wrong is decentralized law avoidance.

Let me give you an example. Nuskin - another listed MLM - sells a variety of vitamin pills through a multi-level structure. Their main product is some exotically packaged pills called "lifepak nano" (punctuation as on the pack). Here, photographed on my desk in Sydney, are some pills...

They are just vitamin pills - there is little that is "special" about them - well except that as the pack says - they have "enhanced molecular delivery" whatever that is...

Here is a list of ingredients...

On the Nuskin website they make some strong claims...


BENEFITS

• Nourishes and protects cells, tissues, and organs in the body with the specific purpose to guard against the ravages of aging each day of your lifespan*
• Superior bioavailability with CR-6 LipoNutrients™ enhances uptake from the gut into the bloodstream and body for maximum anti-aging benefits*
• Advanced anti-aging formula helps protect the body with key nutrients such as NanoCoQ10™ and nano carotenoids*
• Helps maintain normal inflammatory responses in the body*
• Feeds and helps protect the brain with DHA and EPA (two CR-6 LipoNutrient™ softgels contain the same amount of EPA and DHA as two MarineOmega softgels)*
• Offers superior DNA protection against damaging free radical attacks by providing the body with important antioxidants and phytonutrients such as alpha-lipoic acid and catechins*
• Protects cell health with an antioxidant defense network*
• Helps protect cardiovascular health with a comprehensive blend of omega-3 fatty acids and other nutrients
• Provides comprehensive bone nutrition support*
• Promotes healthy immune function*
• Supports normal blood sugar metabolism*
• Corrects nutritional deficiencies*

 You will note that every one of these claims is marked with an asterisk. The asterix is as follows:

*These statements have not been evaluated by the Food and Drug Administration. this product is not intended to diagnose, treat, cure, or prevent any disease. 

The company is careful on its website not to produce any literature that violates Food and Drug Administration law. You can't sell pills in America in breach of FDA rules without risking unpleasant legal complications.

But this is an MLM - and you can bet the distributors are not so careful. These little pills are sold as miracle cures - and Nuskin distributors are the snake oil salesmen of old - blithely violating FDA law and desperately difficult to prosecute because the sales force are not employees of the company.

Decentralised law avoidance is a feature of many MLMs. To my knowledge it is not a feature of The Pampered Chef. The Herbalife sales people I have visited have stuck extremely closely to the company provided (and legally vetted) sales scripts. In the cases I saw that sort of decentralised FDA avoidance was not an issue.

But the Herbalife clubs did not always have cash registers and they did not always have the little A+ or similar to indicate that they had complied with health laws (even though they sold food). In other words there was some low-level decentralised law avoidance.

A ranking of MLMs

I am happy to concede that The Pampered Chef is the gold-standard for MLMs. It makes its money because it packages community - indeed community rather than frying pans is the product.

At the other end Nuskin makes a good proportion of its money because it decentralises FDA non-compliance. [And I am not getting anywhere near the China business of Nuskin which other people have commented on widely...]

Where is Herbalife in this? I haven't seen much decentralised legal non-compliance with Herbalife. Maybe a little around the edges - but it is not the reason the business works. The reason the business works is that diets require community to sell. In that sense Herbalife is far closer to the gold-standard Pampered Chef than say to Nuskin.

In my neighbourhood you can buy your diet protein shakes from the discount shop, the (far more expensive) GNC shop or from the hot fitness or yoga instructor. And the hot fitness or yoga instructor is a better product. (S)he will ring you up and ask how your diet is going... That adds incentive to diet and thus adds value. Its a long way into The Pampered Chef gold-standard territory...

I have more than a few problems with Herbalife - not the least is the (huge) amount paid to the CEO. But Herbalife is fast growing and deeply embedded in communities selling products that need communities to sell.

Relative to The Pampered Chef it is easy enough to find disappointed Herbalife distributors - especially in the Hispanic Community. However there are few around here - and the Herbalife business is growing again in Sydney (despite Bill Ackman's claims of pop-and-drop collapses).

Speaking as a shareholder here - Herbalife has been plenty happy to pay dividends and buy back stock. Over the years it has repurchased (literally) billions of dollars in stock - and the share count has reduced considerably. The shareholder-friendliness is - CEO pay notwithstanding - at the better end of America. And Herbalife is growing.

I am not a lover of the MLM business model and I was (very) surprised when Berkshire purchased The Pampered Chef. However why Bill Ackman chose Herbalife to fight to the death - that escapes me.




John