Thursday, July 25, 2013

An incomparable business opportunity allowing men and women to build a home based business of their own...

Herbalife is regularly criticized for selling the "business opportunity" rather than nutrition products. Indeed Bill Ackman (Herbalife's loudest critic) has used the following statements as evidence that what Herbalife sells is a "business opportunity" [which is a pyramid scheme] rather than products for end consumption. Herbalife is - in these statements:
"An incomparable business opportunity allowing men and women to build a home based business of their own", 
"An approach that has a lot to teach anyone who is reaching for the American dream", 
"Truly loved by its customers because it has found a need and filled it exceptionally",
"When you read profiles of the consultants [sales people] you may wonder what you are doing in your nine-to-five cubicles whilst [the consultants] are on their way to fame and fortune".
These statements of course are ample evidence that Herbalife is not really selling product but selling a fraudulent "business opportunity" and is in fact a pyramid.

Except that I am playing a game of misdirection here. These statements are not about Herbalife and they have not been criticized by Bill Ackman.

They are the statements about another multi-layer-marketing scheme - "The Pampered Chef" and they are made by none other than Warren Buffett. Warren Buffett (through Berkshire Hathaway) owns The Pampered Chef and its 60 thousand plus "consultants".

In a future post I plan to talk about why The Pampered Chef is a business worthy of being owned by Berkshire - why it meets Warren Buffett's (very high) business quality hurdle - and how Herbalife has some, but not all of the properties of The Pampered Chef.

But for the moment I want to note a few things.

(a). Herbalife and The Pampered Chef were both founded in 1980. Bill Ackman criticized Herbalife for being a recent company founded in 1980 - see this screen shot from Bill Ackman's presentation.

(b). Herbalife is much bigger than The Pampered Chef and more deeply embedded over the world, and

(c). Herbalife is growing at a high rate both relative to its past and relative to The Pampered Chef. Indeed if you look at Google Trends data Pampered Chef is in a slight decline but Herbalife has more interest than at any time in its history. In the following chart (courtesy Google) Blue is Herbalife searches, Red is "Pampered Chef".

(d). Herbalife is taking off in some large important markets. This for example is the UK:

This is the (potentially vast) market of India:

And even in markets that were once declining is re-emerging strong. (This is Australia...)

Pyramid schemes are expected to collapse under their own weight - and so if Bill Ackman is right it shouldn't matter what I say. But if Google Trends data is right then Herbalife is likely to beat estimates maybe offset a little bit by the strong US Dollar.



John said...

Looking forward to the Pampered Chef post.

Btw, is that book worth reading for investors?

Anonymous said...

John - Very unprofessional of you to conveniently mischaracterize Berkshire's beliefs about Herbalife and the Pampered Chef.

"Charlie Munger, asked if Pampered Chef is like Herbalife: THere's likely to be more flim flam in selling magic potions than pots & pans."

Anonymous said...

I see what you did there. Although it's funny, it's also cheating and a bit sloppy (shortcut-wise), but still good for a few laughs.

Now, a complete side by side Herbalife and Pampered Chef comparison akin to what Ackman did, might reveal a different picture, less funny though.


Anonymous said...

John - not sure that we can read too much into the Google Trends data without some idea of the magnitude of searches: that is, UK searches have risen fivefold this year, yes, but probably from a low base.

And I wonder how much of an increase in interest in the UK case comes from fellow investors in the West End following up the Ackman saga rather than potential Herbalife distributors in the East End?

Anonymous said...

Anonymous at 3:49 PM:

I think you have missed the point: the pull-quotes were from statements made by Berkshire about Pampered Chef. They were presented as statements by (someone) about an unidentified MLM business, with an implication that they were made by HerbaLife about their own business, and that Akerman had (justly, in his mind) criticised them as evidence that HLF was a pyramid scheme.

The issue is that (generally) people don't view Pampered Chef as a pyramid scheme (and I also look forward to that post), and (almost universally) don't view Berkshire as a promoter or pump-n-dump operator. The implication is that if the observation of statements by the shareholder or CEO, Chariman, etc, about the business value of an MLM cannot positively identify a pyramid in the case of Pampered Chef, then it is false to assume that they can be used that way in connection with HLF.

Paul Mason said...

All the analysis you have done does a good job of discrediting part of Ackman's thesis, that Herbalife is a bonafide ponzi/fraud/pyramid scheme, however I don't think you have tackled what I perceive as the key part of his argument, which is the pop & drop pattern. In his presentation on pages 248-263 he runs through it in good detail about the history of the company experiencing severe sales declines after a few years in major markets, and how its recent sales growth has come via reaching into much poorer markets. In the US he mentions company quotes around reaching into markets such as students, and lower socio-economic status communities including the broader hispanic population.
The evidence of clubs you collected featured a hispanic club, but part of Ackman's thesis is that this was in the pop-phase keeping overall US figures up.
Regardless of whether Ackman is right about any other parts of his thesis, if he is right about the pop & drop he will be right about Herbalife as a short, because Herbalife is running out of new markets.

Jono said...

I'd speculate that most of the increase in searches for 'Herbalife' on Google is from the financial industry wanting to know more about Ackman's play. As opposed to new customers for its products.

Anonymous said...

I'd try a google correlate search with their reported revenues (earnings, whatever) and see what pops up, play around with different data sets - the stock price for example - and see if there's anything interesting beyond Ackman and Icahn. I'd do it myself but I had to reset my password the other day and can't recall what it is (and don't want to have to re-sync with my phone). Sorry, but maybe something will turn up.

Jordan S. Terry
Stone Street Advisors LLC

Anonymous said...

John, I agree with Paul. I think one argument of Biil Ackman which you are yet to address is pop & drop pattern of sales in various countries and their subsequent regrouping with new growth countries to show an increased sales from regions.
The google search spikes when Einhorn posed questions to Herbalife.

Anonymous said...

Differences between the Pampered Chef (direct sales) and Herbalife (MLM):

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