Sunday, July 17, 2016

The Herbalife Rorschach Test

On Friday Herbalife agreed a settlement with the Federal Trade Commission (the FTC). The stock popped on enormous volume - but it is fair to say that almost all longs are disappointed with the size of the movement.

Whilst the settlement is agreed there are very substantial differences between what effect the FTC says the settlement will have and what effect the company says it will have.

The company states this:
The terms of the settlement do not change Herbalife's business model as a direct selling company and set new standards for the industry. With the settlement agreement announced today, the FTC's investigation of Herbalife is complete
The FTC state something almost the opposite - stating in their title of their release that "Herbalife Will Restructure Its Multi-level Marketing Operations". They also put out a particularly aggressive press release that stated "it’s no longer business as usual at Herbalife".

The bull case is thus the government risks has gone away and there will be no substantial change in business model. And the bear case is that the conditions placed are so large they will cause the business to collapse in the US and that those changes will be exported globally.

The disagreement regarding this settlement is enormous. The stock traded - and I can scarcely believe this number - 35.3 million shares. Almost 40 percent of all shares changed hands. Obviously some people think this settlement is really good news, some think it is really bad news. And clearly some people are just flat day-traders.

The disagreement is almost total to the facts too. There is a form of settlement in the United States which does not accept nor deny liability but accepts a fine. This settlement does not follow that form. The company disagrees with all facts in the FTC complaint except that the court has jurisdiction.

The only thing that they agree on is that the FTC did not declare Herbalife to be a pyramid scheme. But even that is a limited agreement. The FTC has stated that it did not declare that Herbalife was not a pyramid scheme - they just don't want to use pyramid language.

That said the FTC's rhetoric is unimportant. And for that matter so is Herbalife's rhetoric. They can say whatever they like about the settlement and that does not make it true. What matters is what Herbalife has agreed to do and what effect it will have on the business.

So bluntly what have they agreed:

a) That Herbalife will pay $200 million in restitution - but the details about how that restitution will be paid are left open. [I have a pet suspicion that they will find it hard to find well documented losers who lost anything like $200 million - but again that is irrelevant - Herbalife has agreed to pay it and it is cash out the door.]

b). They have agreed a change in business practices. The exact form requires a fairly detailed understanding of Herbalife's compensation scheme - but this is the list as described on the FTC's website:

  1. The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity. “Discount buyers” will not be eligible to sell product or earn rewards.
  2. Multi-level compensation that business opportunity participants earn will be driven by retail sales. 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. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
  3. Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
  4. Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.

Discount customers

The big condition is the first one requiring a distinction between "discount buyers" and "distributors".

This goes to the crux of one of the biggest Herbalife arguments. By far the bulk of Herbalife distributors do not sell sufficient product to qualify as a sales leader and thus are entitled to almost no checks based on downstream consumption. At the last 10-K Herbalife had approximately 4 million distributors globally. There were "only" 364 thousand "sales leaders". Only a "sales leader" is entitled to checks from the company based on indirect sales down many levels. (There are trivial circumstances non sales leaders will receive checks. These are described below.)

Globally there are about 4 million distributors and less than 400 thousand sales leaders thus there are 3.6 million distributors who are not sales leaders.

We do not know how many of these are in America - but as the sales leaders are about 20 percent in the United States I would guess that 20 percent of the distributors who are not sales leaders are also in the United States. That is about 720 thousand people or almost a quarter of a percent of all people in the United States.

The default for these people will be that they are recategorised as "discount customers" and this will change their relationship with the company. The importance of these changes is open to dispute (and discussed below).

The first way that it will change their relationship is that they cannot harbour any illusions of receiving a check from the company based on downstream sales. If they are customers rather than "distributors" there is no "business opportunity".

I would argue most of them were under no such illusions anyway - but this removes the possibility altogether.

But we can be very precise about the way in which their relationship with the company changes.

In the old days I could buy Herbalife from a distributor and pay full freight. (Some people do.) Or alternatively - for $70 a year - I could sign up as a "distributor" and buy Herbalife (delivered by UPS) for a 25 percent discount. The 25 percent discount applies at almost all levels of purchase (volume points) that are consistent with personal consumption.

There are two advantages for buying it at a 25 percent discount. The first is that I get it cheaper (which is nice if I want to consume it myself) and the second is that I might sell it to someone (at par) and pocket that 25 percent myself. If someone bought it from the company at par and named me as their distributor then I would be entitled to 25 percent of their sales (a check from the company). However at the 25 percent level my volumes must be small. Volumes consistent with a solid diet by three to four people would entitle me to more than 25 percent discount.

Whatever - the volume of checks from the company for 25 percent distributors was trivial. (Sure some was sent but the total dollar value was small. They occurred only in the case that a small distributor convinced someone to buy product from the company at par and name them on the order form as the up-line.)

For a 25 percent customer who never convinced anyone else to order directly from the company (ie most of them) paying full-freight there has been no change.

Calling this person a "discount customer" rather than a "distributor" changes nothing. A 25 percent distributor is still entitled to buy it at a 25 percent discount. And if they actually manage to sell some at par (above list price) they can probably pocket the 25 percent anyway (but they can't formally tell the company). If they managed to convince someone to buy it at full freight ordering direct from the company they have lost that - but in toto this is not very much because 25 percent distributors are buying only volumes consistent with personal use. (Bigger volumes would entitle them to more than a 25 percent discount.)

I have met many 25 percent discount customers and almost none are selling the product ever. By number these are - by far - the bulk of the 4 million Herbalife distributors globally.

The company has always asserted that are not really distributors anyway - they always were discount buyers. By contrast the shorts - led by Mr Ackman - have asserted these people are "distributors" rather than customers - and when they work out the income and failure rate of distributors they always include these people in the denominator which makes the failure rate look high and incomes distributed by the company look pathetic. (After all they are counting in the denominator a huge number of people who were not selling any - so were not entitled to a check from the company anyway).

The volumes associated with these distributors cum discount customers are typically less than 600 volume points per year - an amount entirely consistent with personal consumption of diet products.

There are a small number of distributors who do greater than 1000 volume points but less than 4000. 4000 volume points entitles you to be a "sales leader". These people are entitled to buy the product at 35 percent or 42 percent discount depending on their volume (rather than a 25 percent discount) and if they sell it to someone else they make a somewhat larger "retail profit". None of that changes.

However if this customer were to sign up another discount customer (say at 25 percent) they would be entitled to a check from the company for the difference between the customer's 25 percent and their 42 percent. The aggregate amount of such checks from the company is trivial but they do exist. These people are going to either become distributors (to qualify for this check) or remain as discount customers. To qualify as a distributor they will now need to submit a business plan. My guess is that very few of them will do so. There will be a small loss to the company from people who become distributors accidentally - joining for the discount and selling a little on the side.

The shorts have fairly continuously asserted that the "discount customers" do not exist. Here is a typical Seeking Alpha assertion of precisely that. The longs have asserted that most distributors are in fact discount customers.

Bluntly this is the crux of the argument. If the 25 percent "distributors" are in fact people who dream of receiving checks from the company then telling them they cannot will cause the scheme to collapse. If that huge swathe of people are just "discount customers" the formalising the arrangement will have almost no effect on business.

This is the first Rorschach Test: if you believed in advance that the discount customers were a myth you believe now the FTC conditions will collapse Herbalife. If you (like me) believe that the bulk of distributors were in fact discount customers then calling them such will have almost no effect.

What is great about this is that the existence or not of discount customers is easily determined. Go and visit half a dozen decent sized herbalife distributors and find their downline. (This will take you four days maximum - but you will need to use shoe-leather.) If you don't find many discount customers you can short the stock. (The shorts will be right.) If you find plenty you can go long the stock. (The longs will be right.)

And the beauty of this is that you can know. You do not need to take my word for it. Just do it yourself and make some money.

My assertion is the people I think are "discount customers" and Bill Ackman thinks are "failing distributors" are about a quarter of one percent of the US population. It should not be hard to find them if you look.

The second business change demanded by the FTC

Here again is the provision from the FTC website:
Multi-level compensation that business opportunity participants earn will be driven by retail sales. 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. No more than one-third of rewards can be based on other distributors’ limited personal consumption.

The shorts have continuously asserted that retail sales do not exist. (See the above discussion of whether discount customers do not exist.)

If you believe that retail sales do not exist then the requirement that two thirds of sales in the downline of a distributor be retail sales (rather than sales to another distributor) will be very hard to achieve.

If you believe like me that retail sales exist and are widespread the FTC requirement above becomes merely an auditing requirement.

Again you should not take my word for it. Get on the road. Go find some distributors. Talk to their customers.

But if the discount customers are in fact discount customers (see the discussion above) then this should be trivial.

But lets put some numbers around it. A distributor who is entitled to multi-level compensation is (with the trivial 42% distributor described above excepted) someone who is a "sales leader". Sales leaders are entitled to a share of sales up to three sales leaders below them.

To become a sales leader you need to have 4000 volume points annually. A meal replacement is roughly 1 volume point. So you need to be ordering roughly 4000 meal replacements per year.

The most anyone reasonably personally consumes is two meal replacements per day for them and their spouse. This is about 1400 volume points a year. Only in the extreme example of a couple who sell precisely the minimum number of volume points per year and personally consume the reasonable maximum is this provision even going to bind.

In other words the provision does nothing at all (once you have decided that retail volume truly exists). As a long I am utterly unconcerned about this provision. But the shorts (who think that retail volume does not exist) think this provision will be lethal too.

Again you can test it. Just get put on the shoes and allow yourself a few days to check it out.

The 80 percent rule company wide

Under the third condition the company is required to ensure that 80 percent of volume company wide is sold to must be legitimate sales and (as per the consent decree) specifically this means sales for reasonable personal consumption plus verified retail sales. This should not be hard even if you restricted it to retail sales.

In North America there are 76 thousand sales leaders doing 1.1 billion volume points. This is about 14,500 volume points per sales leader. The maximum amount of personal use (as estimated above) is about 1400 volume points per year.

This rule should be trivial to meet. Absolutely trivial.

Of course if the retail sales don't exist and the 25 percent distributors are really failed customers all bets are off. But again that debate is easily solved by using shoe leather.

Requiring at least a year as a distributor before opening a club

The final change demanded by the FTC will change business practices. It will require that a distributor be a distributor for at least a year and submit a business plan before they open a club.

Normally I would find it odd and patronising that the Government tells people (and in this case mostly Hispanic people) that they can't open a business. Notwithstanding that I am going to cheer the condition.

I have visited several viable clubs - and several non-viable clubs. But the viable clubs are barely viable. I blogged about that here. In that post I argued that clubs would be better if the number of clubs were restricted. I stand by that view. The FTC has done club owners and the company a favour.


The FTC settlement is a Rorschach Test. You will see in it what you want to see in it.

If you see a pyramid scheme in advance then the conditions that the FTC has imposed will cause that scheme to collapse.

If you see something that is not a pyramid scheme then lo - the FTC conditions will do almost nothing.

You can check this out yourself. Shoe leather. It's really an opportunity for you to make money on primary research.

I have for a long time asserted that Herbalife is not a pyramid scheme. I was worried however that some bureaucrat would (in direct contradiction of the facts on the ground) decide it was and try to shut it down. Indeed the extreme time that it took for the FTC to come to a settlement on Herbalife increased that risk dramatically. We had limited our position size (a little) to account for the insane-bureaucrat risk. That risk has gone now - and I upped the position (slightly) near the close on Friday.

But of course if this is a pyramid scheme then the conditions imposed by the FTC will cause the scheme to collapse. And so shorting it now is a low risk proposition.

Again - as stated - the FTC conditions are a Rorschach Test. You can see what you want to see.


One worthwhile detail is that more than a dozen top distributors signed non-disclosure agreements and okayed the settlement with the FTC. They did not think it will affect their business adversely. They did not bear the cost of litigation - so they only had an incentive to sign an agreement that did not hurt their business.

Take that detail as you wish.


Finally I remain resolute in my view that Herbalife is not only not a pyramid - it is a highly ethical organisation.

I think that the FTC might actually have trouble finding enough "victims" to distribute the $200 million in restitution. I intend on FOIA requests over time to monitor that.

The "restitution" makes me think of the FTC not as a competent and honest regulator but rather an extortion racket. I am a liberal and I always thought the argument that the US Government was an extortion racket was far-fetched. But I find myself agreeing with this article in The Economist.

The only saving grace is that the $200 million was "restitution" and not a "fine" and is therefore tax deductible.

I think by owning Herbalife you will make a lot of money.

But more - you will be standing up for an ethical company against lies and extortion. I am proud of the money we have made thus far, expect to make more and am proud of the position.

The FTC decision is now made and the arbitrary government decision risk is removed. If this is a pyramid scheme then the conditions imposed will cause it to collapse.

On that I think I am safe.


PS. There are a few other FTC provisions which should have very limited effect.

The company already gives distributors a refund for any unsold product including postage. The deal with the FTC forces Herbalife to offer that refund for a longer period.

Also the deal with the FTC prohibits auto-refilling orders at Herbalife. Herbalife has previously disclosed that about 0.5 percent were auto-shipped. This won't be a big change.

The company already requires distributors to order directly from the company if you wish the volume to count towards sales leader classification. There is already good granular data on these purchases. Refunds are readily available.


Mak said...

Regarding the retail rule, presumably sales to discount members at the 25% discount will now count as retail sales. In other words, re-categorization makes it possible to distinguish between consumers and distributors.

GlobalTrader said...

The difference between this settlement and the ones from the Economist article are
FTC can only go after civil penalties and they cant bring criminal charges (the bulk of the argument from the article)

Anonymous said...

It appears the FTC has taken away the ability to earn compensation on purchases of sales kits to new sales leaders until those leaders actually resell the product to retail customers. If a material amount of HLF product sales are kits to new leaders that don't find customers, then the business falls apart. I think John's analysis here is spot on. The changes to the model will ultimately prove which side is right.

Anonymous said...

Great points except for the Economist link. The author lost me immediately - calling the government an "extortion racket", and then citing completely justified corporate fines to support that idea. Wouldn't it make more sense to find some examples of fines that were unjustified? Or haven't there been a lot of large, unjustified fines?

Anonymous said...

If the company always had retail sales , why didn't it just show it had instead of spending millions of dollars defending itself? They have given different answers to this question in the past which obviously indicates either a) they have no clue what it is or b) they know and don't want to tell the actual number (which doesn't bode well). This company is screwed six ways to Sunday now

Skrambled80s said...

The short thesis be creepin.

Salty Droid said...

Assuming there are significant retail sales {and there most certainly are not} ... those sales are made by people whose livelihoods depend on closing big biz-op wholesale orders, and on infinity recruiting rewards. The part of Herbalife America's sales force whose expertise lies in recruiting rather than retailing ... will have to move on to other frauds if they want to avoid bankruptcy.

No more pics of cars, boats, or mansions ... that stipulation alone would have been sufficient to end Herbalife.

"You will see in it what you want to see in it."

Seriously, John?

Buy index funds people! Money managers are egomaniacal idiots who are no better at predicting the future than are drunken goldfish.

RogierFvV said...

What's to disagree about. Herbalife's spin is setting it up for trouble already, but anyone who reads the agreement would see it surgically removes the pyramid from the MLM and what you have left is a direct sales business with far too many distributors, so shrinkages is the operative word going forward. Clearly, in the 35 million shares traded, some smart people did get out...

Unknown said...

I respect the assertion that this is something you can test yourself by expending a bit of shoe-leather, but the problem is I've been approached in the past to 'join herbalife' and it was most definitely marketed as a pyramid scheme. Admittedly it was almost 20 years ago (and things have possibly changed) but I can still remember the sales person dramatically revealing his latest commission cheque/check from behind his briefcase, and telling us how much we could make just by recruiting more people. I have no recollection of the product or the product benefits, or any attempt to get me to use them, but I still remember the flourished cheque and the promise or riches.

So yes I could expend shoe-leather to find examples of people actually using Herbalife, or I could just recall the first-hand experiences I have had with Herbalife which were pyramidesque in everything but name.

Anonymous said...

I respect your research but I do not respect you John.

You know the world would be better off if HLF was not in business. As another mentioned - this is an old scheme. I can't believe it is still around. It's a dumb game. Checking on the downlines?????? Who cares!?!?!

If all MLMs were shut people would go to GNC, Amazon, wherever and buy the product for MUCH less. Your old posts make it seem like HLF is a good "ethical" company because these clubs promote weight loss----seriously??

What good does HLF do for the world? The void can easily be filled.

Subscript - I don't care if by definition the company is a pyramid scheme. It's a piece of sh*t that takes money from poor people.

Anonymous said...

"I have met many 25 percent discount customers and almost none are selling the product ever. By number these are - by far - the bulk of the 4 million Herbalife distributors globally."

You are absolutely INSANE if you believe that any rational person would purchase HLF products at 25% off of list price when they can buy the exact same thing (shake mix, aloe tea, etc) elsewhere much cheaper (ever heard of Insane, that is, UNLESS THAT PERSON WERE ENTICED TO PURCHASE BECAUSE OF THE "BUSINESS OPPORTUNITY" (either directly for themselves or b/c their family members and/or friends needed them to purchase the product so those people could benefit from the "business opportunity").

Also, I notice that you don't really say much of anything about the independent compliance monitor (ICM) that HLF will have to pay for during the next 7 years. If you want to see how much these folks "benefit" (used sarcastically) the companies they are monitoring, you should look at the saga of Ocwen (OCN) over the past 4 years. It was in the mid 30s when their ICM was appointed, now it's sub-2.

HLF's business is DEAD in the United States once the ICM comes onboard. Look out below.

John, you need to stop the denial - the FTC consent decree is a complete disaster for HLF, at least in the US. You yourself called HLF "scumbags" on national TV - yet now you carry on the ridiculous charade that they are somehow "good guys". THE FTC JUST STATED THAT THEY ARE INDEED SCUMBAGS, AS YOU PREVIOUSLY CLAIMED. What more needs to be said?

Anonymous said...

Funny situation. But the way I see it is
-people are enticed into becoming discounted customers/distributors with somewhat shady stories. They (I feel)are made to buy starter packs. And sell in clubs or homes to friends and neighbours. The scheme here is to convince the new discounted customers/distributors that once their volume increases and or they add on more people below them - then they will move up to the Sales Leader position thus making more commissions from upto 3 levels below them.
-the purchases of these discounted customers/distributors are credited to the Sales Leaders. And this goes 3 levels up. These sales leaders share the additional commissions.
-this scheme goes one step further innovatively in as much as to stimulate demand when one has doubts of buying a big tin of weight loss powder (paying $40 / $50 / whatever) they can rather buy a single dose / serving (paying $10 or something) at a time. This makes the Club Owner become the financer for new people wanting to try the product to see if it works.
-end of the day very few shops stock these products - they are more sold more from one person to the other
-my opinion this is a pyramid scheme with a lot of twist to it. Proving it is a pyramid scheme in the eyes of the law is going to be tough.

GlobalTrader said...

I'm no Statistician but how many distributors one would need talk to to satisfy the central limit theorem given that the sample is 4 million? The answer is probably, a lot. Thats why John's on the ground research is suspect

GlobalTrader said...

I'm curious John, did you spoke to at least 30 randomly picked distributors in the US? Then you 'examined their downline'? Because i believe that is the bare minimum one needs to make conclusions

John Hempton said...

Global trader - lets suppose we have a hypothesis that 30% of distributors are bad.

How many distributors do you need to talk to (and get all good results) before you can reject the hypothesis?

I think my stats is better than yours.


GlobalTrader said...

what do you mean by "distributors are bad"? bad in what sense?

Anonymous said...

User: Herbalifestudy
This constant talk about "it is available on amazon" shows to me the writer has no clue about the commercial idea of using direct sales/ MLM model.

The whole point using that, instead of a classical retail model, is that the sellers actively look to either sell or recruit preferred customers and push them a bit to take on the shake mix/protein powder, coupled with some social support.

Anonymous said...

I think an important question you have not adressed is:

If the 4 million non sales leaders are truly discount buyers, why do they have a churn rate of 2 millioner of those every year??

I can not think of any business that sells daily consumption products where half of its costumers change every year.

If this was really discount buyers, those discount costumers should bee seen as normal Starbucks custumers, Costco members etc. Buy if you look at their churn rate, they are non excitent ?

It could also just be that the products are really awful ? If you have 4 million customers and 2 million leaves you every year, what dose that say about the products you sell? And is it sustainable to get 2 million new customers each year just to keep flat revenue?

This is the one argument i have never find an answer on and that is why i am not long the stock anymore. I cant find an explanation of those really big churn rate
someone have argued that it is people that have completed a diet and therefore quit, that argument i dont buy.

John Hempton said...

Why the churn?

a. It is a diet product. Can you think of a diet where 50 percent of people stay dieting? I can - its called Herbalife.

b. They don't all churn. Some choose to stay customers and not pay the $70 distributor fee. They pay more.


Anonymous said...

"Ethical" company? Didn't you call the Dirtbags or some equivalent on national TV? Look at the way they're misrepresenting the settlement...just more of the same from these criminals. We're judged on the company we keep to an extent and as a cheerleading shareholder you're an accomplice to this fraud. And a thin skinned one at blocked me on Twitter just for disagreeing with you...weak.

Anonymous said...

There is no significant amount of "retail" in this company.

Anonymous said...

Thanks for the quick response. So the tuff question would really bee

of 4 million distributors: 2 million join and 2 million quit every year

Either the 2 million join and then quit because they finish their diet

or they join to become a distributor and not a discount buyer and quit because the business opportunity is not there at all.

I am not convinced enough to go long now. I will wait and see how it plays out.

If i look at other diet companies like weight watchers, their churn rate is SUBSTANTIALLY lower than Herbalife??

Also i think in the next 12-24 months we will se the traditional pop and drop in the china business where it will collapse 50 % before it stabilises like we saw with NuSkin.

With a stock trading at 17 times earnings with negative growth the last 2-3 year (some of it currency) and a business model that need to be completely changed i can not see where the upside in the stock is right now.

Anonymous said...

Churn also comes from a range of sales campaigns, rarely communicated outside the company, where sometimes it makes sense actually to re-register your preferred customer. Although it is the same people, statistically it looks like 1 churn and 1 new. Why do you think revenue could be so stable over the many years, in case the churn was really upwards 100% every year?

The whole industry is the same and sure, recruitment of preferred customers is absolutely necessary. Just like any company needs to attain new customers all the time.

Even before the short attack, HLF was displaying more data on this to the market than several competitors. Do you think Avon's sales force movement is different, just because they don't display it and only shows outgoing balance each quarter?

Unknown said...


Here's what you said in January 2013 on your blog:

"I agreed with Bill Ackman that Herbalife is mostly about ripping off distributors and people at the end of the chain. The product is more than twice as expensive as competitor shakes. I called Herbalife 'scumbags'... They are scumbags then - but they are scumbags working for stock market investors."

What have you learned that leads you to now conclude HLF is a "highly ethical organization"?

Thanks in advance for the interesting work you share on this blog.

Unknown said...

John Hempton,

Surely you don't seriously attribute the rate of HLF buyer churn to 50% of buyers successfully dieting and thus no longer needing the product?

Have you considered the success rate of people who begin a diet and actually lose weight? It is very low. And this is quite aside from the fact of whether dieting actually results in permanent weight loss.

Anonymous said...

John, a comment and related question to the requirement to be a distributor for one year before opening a club, and having a business plan. This sounds to me not dissimilar from what franchising companies do in some senses - they will impose all kinds of requirements upon franchisees, such as experience in that line of business, money of course, following a certain 'brand standard', etc. One difference is that with exclusive territories, franchisers often effectively provide the business model themselves - after all, the main variable in say a fastfood franchise is level of sales (and to a lesser degree staffing cost).
So as a line of inquiry, it may be worth considering what standards are applied to franchisers (either government regs or various voluntary or legal standards). As you said, this has some potential to improve the business - but may also limit what (real) distributors do, if they end up 'overspecifying' what a club should look like. Anyway, if there are real sales, having a filter before allowing a club to open should not kill the business.
I'd also be worried about two additional things: what happens to existing clubs, and whether this limitation applies only to 'fixed-place' clubs. (You certainly wouldn't want this to apply to groups that, say, meet in a community centre once a week, for example).

Anonymous said...

I think this issue of 'churn' is another Rorschach test. If the two million distributors who leave are truly distributors who expect to earn money, it's an issue. If they're effectively just retail consumers, probably not at all - or if you want to compare to Weight Watchers, you're already sort of admitting that these are retail customers (and you just don't like the data), and no longer claiming it's a pyramid.

But to anyone with a model to compare churn figures, please share. I've looked at churn data for industries that have clearly defined client acquisition costs, and regular term contracts - mostly cellular and internet service providers. But I'd be extremely wary of trying to compare between different industries or even within industries that didn't have common understandings of how to track and report, and without a fair bit of confidence in the data and markings. Could McDonald's or Starbucks provide meaningful figures?

Yes, HLF consumers should (in principle) be on regular, controlled diets. But without automatic re-ups/delivery, it may just be that this is normal consumer behaviour and we don't understand how they behave (and hence, back to the shoeleather).

Anonymous said...

Here is a hypothetical solution for HLF. I'm not close enough to the situation to know if this is a viable option. What do you think?

HLF converts the 3.6mm low-volume self-buying distributors into pure retail customers by removing the discount incentive at their volume level. HLF loses $252mm in fees from the $70 annual fee paid by these self-buying distributors. It would retain the volume sales by reducing list prices to some extent to make up for the 20% discount going away. Presumably these customers actually like using HLF products and would continue to purchase them at some discount lower than 20%. The number would need to be such that HLF can offset the lost annual fees with higher priced retail sales to the same customers. The high volume distributors do well because the pool of 3.6mm distributors is now a pure retail pool of customers. Perhaps HLF can capture a fee for allocating this "new" pool of customers to the existing high-volume distributors?

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.