Wednesday, August 6, 2014

For kicks: just how big is Herbalife? And a simple proof that this is not a pyramid.

Herbalife has 3.7 million distributors. There is very fast turnover amongst the lower-tiers of the distributor tree.

The core bear case for Herbalife is that these distributors are deceived - and that there are not huge numbers of real sales - and that the bulk of the sales are to people who are buying it for the business opportunity rather than to consume the product in its own right.

Indeed for this to be a pyramid at law the company needs to be selling the majority of its product to distributors who are not buying this for deliberate personal consumption but rather for the business opportunity.

If the majority of sales are to people who are not active distributors there is simply no way that this is a pyramid. A reasonable summary of the pre-Burn Lounge law from an anti-Herbalife slant is given by Dan McCrum at the FT.

Even he would concede that if a majority of sales were to people who were not active distributors with a valid distribution contract then Herbalife is not a pyramid scheme.

There are several steps to the argument.

Size of Herbalife sales

A large number of people on Wall Street have positions on Herbalife without having thought clearly about its size. It doesn't appear much in their social circles so it must be small.

Bill Ackman sneers at them when they say their competitor is McDonalds.

So lets detail it accurately.

Herbalife's main product is Formula 1. It is a protein shake powder used in meal replacement mostly for weight loss. According to the annual filings weight loss products (which are mostly Formula 1 and meal-replacement protein bars) are 63.5 percent of all product. Some of this is diet-suppressing herbal teas - but meal replacements alone are probably 58 percent of all sales - completely led by Formula 1. 

Here is an image of several 750 gram packets of Formula 1:

This is the product - above all others - that is associated with Herbalife.

Here is the label which gives a suggested meal-replacement size of 50 grams:

This is a multi-level marketing company. You qualify for various tiers of the distributorship by selling a certain number of volume points in a given time. [For example 4000 or 5000 volume points will qualify you for "supervisor" status depending on how fast you sell them.]

For all Herbalife product the price changes by country - but the number of volume points does not. So whatever country you are in a packet of Formula 1 counts as 23.95 volume points.

During the last quarter Herbalife sold 1.4 billion volume points of product. I have used this slide before showing volume points by region:

1.431 billion volume points would be the equivalent of 59.7 million tins of Formula 1 powder.

Each packet contains 15 fifty gram meal replacements (see the label above). So if it were all meal replacement there would be 896.2 million meals replaced per quarter.

That would be 3584.7 million meals annually.

Not all of this is meal replacement though. My guess [explained above] is that only 58 percent of sales are meal replacement.

That would suggestion 2079.1 million actual meals annually.

Mr Ackman sneers when the company compares itself to McDonalds. But hey - I want to. 

We want to compare this to the size of McDonalds. McDonalds serves roughly 70 million meals daily - or 25.5 billion annually.

Here is the comparison: based on number of meals served Herbalife is about 8 percent of the size of McDonalds. [For comparison Herbalife is about 5 percent of the market cap of McDonalds. It does not make sense to compare revenue because McDonalds has a lot of franchise revenue - but it is - for completeness - roughly 18 percent of the revenue of McDonalds.]

These sales numbers are growing by 5 percent annually although that growth rate is slowing.

Herbalife sales per distributor

The number of sales leaders in the company (again according to the above table) is about 340 thousand. To make the numbers work the average sales leader or their down-line is selling 6100 meals per sales leader per year.

If they can get their average customer to consume 200 meals per year [that is replace four meals per week] then they have about 30 regular customers each - and the total number of Herbalife customers is about 10.4 million.

The total number of distributors of Herbalife is 3.7 million many of whom sign up for their own consumption. [The proportion who sign up for their own consumption rather than for the business opportunity is a very big item of contention. Suffice to say that there are a reasonable number of both...]

This number is increased considerably from when Mr Ackman did his original presentation. The 2011 annual report listed 2.7 million independent distributors. 

Now here is a big observation: My calculation - there is enough Herbalife sold so that 10 million people globally replace 200 meals a year with Herbalife product.

But there are only 3.7 million people with an active distribution agreement.

We have three choices here. Either:

(a). The sales/revenue numbers cited above are completely fabricated, or

(b). The majority of Herbalife product is consumed by people who are not distributors or 

(c). There are massive piles of inventory around not consumed.

I think we can reject hypothesis (a) very easily. The company generates huge amounts of cash and was buying back stock rapidly before Bill Ackman came along without blowing the debt out unreasonably. [They have bought even larger amounts more stock since Bill Ackman and the net debt has now risen sharply.] They would not have had the cash to buy back stock if the revenue numbers were falsified.

And I think we can reject (c) above pretty easily too. I have spent considerable time looking for the inventory and I can't find it. It is not on Ebay or Craigs list (as per this post). Besides you can now return it for a full refund - so having unsold inventory sitting in the garage is stupid and unlikely.

So we are left with the middle choice - the majority of Herbalife product is consumed by people who are not distributors.

Bluntly: there goes the bear case.

The FTC will - after examining all the documents - come to the same conclusion. And at that point I would not want to be short this company.


Corrections and amplifications:

There are two amendments that need to be made to this post. The first is that I got the volume points wrong.

Here is a Herbalife label with volume points:

The 550 gram packet is 23.95 volume points. The 750 gram packet is 32.75 volume points. This would make my comparison less extreme and serves to undermine the argument above.

However the labels (and considerable practice) suggest that the way that this is consumed is mixed with skim milk and some fruit and blended - with the dose being 25 grams not 50 grams.

Putting those things together the calculations are more extreme, not less extreme than in the article above. [My guess - there are more than 15 million consumers who consume reasonable amounts of Herbalife product - meaning more than weekly.]

Bluntly there is too much Herbalife sold for a majority of sales to be internal to the distributor base. The sales must be external.

These numbers are utterly consistent with this press release (link) from Herbalife which suggests that 80 percent of sales are outside the network. In which case the FTC will go away.



Anonymous said...

In the end, a good quarter absolves all sins. Herbalife did not have an especially good quarter. If you're wrong about the stock, it will be because the growth slowed naturally, not whatever Ackman has posited.

Gun to my head: the bears will be right for the wrong reason.

Anonymous said...

"Each packet contains 15 fifty gram meal replacements"

I believe your maths are off.

Porciones por Envase: 30

There are 30 twenty-five gram meal replacements per container.

Which means twice as many meals consumed, at a price of only about $1 per meal. Of course the meals can be consumed up to once every two hours according to the advice of my distributor.

Anonymous said...

John, there's plenty of sad Herbalife auctions on Ebay, for gods sakes. Have you searched ebay for 'Formula 1 Herbalife?' There's nearly 2,000 active listings. There's 3,500 completed listings, thats only back till May.

And, you have admitted that Herbalife are scumbags who take advantage of people, so why can't you accept that people might be too ashamed and embarrassed at having been taken advantage of, and throw the canisters away?

Anonymous said...

The majority of Nutrition club's sales are to Distributors, their families and friends, not third party retail sales.

Distributors are forced to consume hundreds of HLF shakes as that is the hidden "fee" for becoming a supervisor so you can sign up people below you and you can move up the Pyramid. ie Pyramid scheme.

This is clear as day and the public has caught onto the Herbalife deception that they tell new distributors that they can be millionaires if they buy a bunch of shakes and make it to supervisor. What herbalife is selling is a business plan for a fee of $4,000 in shakes. that is illegal.

Anonymous said...

"John, there's plenty of sad Herbalife auctions on Ebay, for gods sakes. Have you searched ebay for 'Formula 1 Herbalife?' There's nearly 2,000 active listings. There's 3,500 completed listings, thats only back till May.

And, you have admitted that Herbalife are scumbags who take advantage of people, so why can't you accept that people might be too ashamed and embarrassed at having been taken advantage of, and throw the canisters away?"

I am writing from India without any stake or understanding of the entire bull/bear case

I am just appreciative of how the Gentleman above me thinks ....Charlie Munger would be proud

I think the owner of the blog can go deeper with regard to the psychological aspects of the business model - I think that is required


John Hempton said...

"The majority of Nutrition club's sales are to Distributors, their families and friends, not third party retail sales."


8% of the number of meals as McDonalds. You strain credibility sir.

I could not get my family to drink five such shakes a year let alone 200.


Anonymous said...

"What herbalife is selling is a business plan for a fee of $4,000 in shakes. that is illegal."

If any of you guys come to India, you'll make tonnes of money

Superb Reasoning


Rellag said...


I love your work. Please don't take any of this personally, which it most certainly is not.

See the World Health Organization BMI statistics for obesity

Using the 2009 data

1/4 of Mexican Adults are classified as obese (23.6%)

against 2.9% for China

Out of shape Mexicans looking for help is at least plausible.

Fat East Asians seeking health benefits from powdered drinks?

Yes, 2.9% of a big number is a big number, but the fatties are going to be "thin on the ground", so to speak.

HLF, broadly, seems more like a product targeted for enabling evasion of local capital controls than a health product.

Relatively high cost per pound, water soluble, cash-based transactions.

Whether that supports a short position or a long position, I'm agnostic.

Switzerland ran a great business for many centuries, until it didn't. I have no view on whether HLF's time is at an end.


Anonymous said...

Seriously John. You are lost in your "analysis". You seem intelligent. Something is clouding your judgment. Your Sisyphusian efforts to defend this company make no sense. Challenge yourself. See and process the other arguments rather than trying to gin up explanations that the company itself doesn't even make.

Evan T said...

dislosure: no position in HLF

If you are trying to take a scientific approach I think you must take the short thesis and work backwards.

The shorts say the distributors, if they ARE drinking the shakes, are just doing it to get rid of them, and not for meal replacement. Is that reasonable?

Lets assume the distributors give away 0% to friends and family. They are going this alone. The distributors would have to be consuming 1000 per year if that were the case.

That is 3 per day. In water, that is 270 calories, in milk, it is 540 calories.

Depending on the country, people consume 2500-3500ish calories per day. Is it reasonable to think that, in their quest to become supervisors and move up the Herbalife food chain, distributors are gulping down 10-20% of the calories in shakes?

That seems perfectly plausible to me.


Tex said...

John, another useful piece of information to have is this: How is the business is presented to prospects? If it is presented like Amway, which I strongly suspect it is, based on the mountains of evidence Ackman has provided that shows HLF to be an Amway clone in virtually every aspect, the opportunity to make money is what is emphasized, not the products. In this case, it is doubtful most people sign up to use the overpriced powdered shakes.

It is much more likely people signed up with the intention to be distributors, then chickened out or got rejected by one person, and decided to literally eat (or in this case, drink) the inventory. This happens in Amway all the time, probably well over half the distributors fall into this category. Who would want to admit they are a coward? It is much easier to claim you just bought the shakes because you wanted to buy overpriced shakes.

Or perhaps they tried hard and failed to sponsor anyone, or sponsored a couple who quit right away (see above) and also decided to eat/drink the inventory. Many of them tried to succeed for over a year, as the upline encourages people to do, and the one year product return limit expires. Also, who would want to admit they are a failure? Again, it is much easier to claim you just bought the shakes because you wanted to buy overpriced shakes.

People are also naturally lazy, particularly group 1, above. Therefore, they don't want to go to the trouble of finding out where to send the shakes, get a box big enough, determine how not to pay for shipping, place the items and packing material inside, take the box to the Post Office, wait in line, and ship it. It's much easier to eat/drink the products, give them to a charity, family, friends, or just let them rot on the shelf until the next time they clean out the closets.

As a former, 16 year Amway "veteran," having conducted extensive research since 2005, and an astute observer of the way people think and act, I know what I'm talking about. I simply don't buy Hempton's story, it is far too simplistic of a reason for Ackman not to have considered or discovered by now. It is implausible to think Ackman would spend $50 million and not already come across this possibility.

By the way, I dismantled the Vandaele report on my blog, sentence by sentence. See the 7/28/2014 post in the news section, section D. My main complaint is there is no basis for any of the statements.

Tex said...

John, your family doesn't live with a dozen people to a room, desperate to make money.

Jason said...

Hi John/Simon & Crew,

I live in Arizona, in a poorer demographic; lower class with aspirations. My demographic is the main clientele for MLM companies like Herbalife.

I checked Craiglist in my area and some people were selling the inventory on there. Not a ton, but a few. (

I have also asked friends and family who constantly get sucked into MLM companies, and they don't think highly Herbalife. They said they didn't like the product or thought the business was too tough. My dad calls it s scam, which is bizarre because he is the easiest to bilk. (He has been involved in other MLM companies and pyramid scheme at one point)

Ackman comes off as an arrogant prick, but he is right about Herbalife. I think in the short run you might do very well with HLF, but in the long run, HLF and lots of other MLM companies out there are bad players in the lower class / aspirational community and will eventually have a hard time increasing revenues.

John, I wish you all the luck in the world, but there has to be better game for you to hunt.

Good luck,

[I don't know why I bothered writing, looks like you don't reply back after the few couple of comments on the first day]

Anonymous said...

I don't really have a dog in this fight, but I'm finding it difficult to distinguish between the claims about HLF being a pyramid (and hence unsustainable by definition) from those that find the business model distasteful and even immoral.

There are lots of businesses and companies that I find distasteful and immoral - and while I'd like to believe they won't last for long, or won't be good companies to invest in, that doesn't make a complete argument for them to go to zero.

Lots of companies 'prey on' the poor by selling them overpriced products they probably shouldn't buy.

Perhaps 'we' can even accept that this is true about HLF (at least hypothetically), but the 'moral' arguments are not clarifying the pyramid aspect.

Anonymous said...

John, when you get a moment you should take a look at tjs partners, who has made comments on your site. His angle has always been an ethical and moral one and how bad the company is. After examining his court battle with Evergreen Hedge from you will get my drift about the hypocrisy of these ethical shorts.

Anonymous said...

Advice from Jacobi and Munger: "Invert, always invert"

What happens to a pyramid scheme when exposed? It collapses under its own weight. Herbalife has been "exposed" for two years. It has not collapsed. Therefore, it is not a pyramid scheme.

-Matt T

Anonymous said...

The fallacy that pyramids saturate and fall apart is wrong, and unfortunately this theory has been promoted by some of the most well known MLM scam "experts," such as Robert FitzPatrick, Bruce Craig, and Jon Taylor. This "unending chain/saturation" theory was also rejected by the courts in 1975, as it simply does not reflect reality. Read this case, particularly section IV: The fact is most illegal pyramids settle into an equilibrium, and constantly churn people through. They look for fresh bank accounts and credit cards, and empty them/max them out, respectively, the person drops out and is replaced. Rinse and repeat.

Anonymous said...

My wife is Canadian but born in Ghana. We both work in Finance in London. Her niece (from Ghaan) stayed with us recently - she's overweight. I was surprised though when she recently signed up to herbalife - its a substantial amount of money for her - £100 or so every month. I think Herbalife continues but at what stock price I have no idea. Whats a reasonable P/E?

Anonymous said...

The Only workable MLM company I know is Amway and the products are not awful, they almost always get used up by end customers

Simple, if the herbalife products are awful it is a pyramid scheme, if they are great it is not !

John, there are far easier stuff to make money on, find easier games to play, it is very difficult to not have a strong opinion after doing so much research, but maybe it is not a bad idea to give up a much loved idea

You are getting into such minute details of the thesis that it is easy to lose out on the big picture

The only question you have to answer is - can this business implode?

That is it, the rest is superfluous

Just buy some out of the money calls on the company and move on to a better risk reward situation :)

Tex said...

Herbalife operates very similar to Amway, the biggest MLM scam on the planet. Read about both of them here:

Anonymous said...


I was not trying to draw strong parallels between Amway and Herbalife

I was trying sincerely to not miss the forest for the trees

Can Amway Implode - If Yes, Bad Idea
Can Herbalife Implode - If Yes, Bad Idea

Let us say that these businesses will not survive if they stop getting new recruits, then these businesses are actually very leveraged, let's call it operational leverage in a way, what comes out is that if the above assumption is right, it is a very fragile business model.

In Case, Amway or Herbalife can survive for a year without adding new recruits and have to be only dependent on existing recruits, if they can survive, the business model is tough to bet against, but incase they cannot, there is something seriously wrong

Bruce said...

Hey John:

What do you think of Amway's political influences? People like to associate MLM companies with scams but these big ones are sort of like legalized mafias. I can find some MLMs' connections to Mitt Romney because he was a Utah politician. I wonder why isn't CNBC blaming Amway or other MLMs for ripping people off using pretty much the same methods.

Anonymous said...

Just curious, since HLF sales leader and members can leave en masses, diet plan has trend and barrier of entry to HLF business is low, how can HLF sustain high ROE for a long period of time.

Tex said...

Anonymous, I was drawing strong parallels between HLF and Amway because there are strong parallels between Herbalife and Amway. Like Herbalife, Amway and most other MLMs have a high turnover, for the same reasons. In fact, Herbalife and most other MLMs operate very similar to Amway, the world's largest MLM scam. Read about them here:

Tex said...

HLF can sustain ROE for a long period of time like most other MLMs do, by lying.

Anonymous said...

You make an assumption that a non-distributor consumes the same amount of product as a distributor self-consumes. Big mistake. I would guess that a distributor on average self-consumes / throws out / gives away 10X the amount that an average non-disributor does.

Anonymous said...

The calcs are wrong. With the 15 servigs/tin and the right volume points you get apprx 4 million/day servings. Distribs are supposed to use the products. With 3.7 million distribs drinking one shake/day there are only 0.3 million going to non-distrib customers.

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