Friday, January 11, 2013

More on Herbalife's Official Rebuttal to Ackman's Herbalife Slam

Bill Ackman in December made a long presentation claiming that Herbalife is a pyramid scheme.

On 10-JAN-2013 Herbalife made a formal press conference issuing rebuttals to Ackman's points. I am working off summary as published on Seeking Alpha so any misinterpretation would be mine, as I'm not working from the source material itself.

Ackman Assertion: There is no R&D spend and Herbalife's products are commodities that sell at high prices.
Herbalife Reply: Dietary supplements are classified as food, not drugs, and thus cannot be expensed as R&D. R&D expense is thus consistent with the peer group of GNC and NBTY. 

MY COMMENTARY: Why can't R&D be applied to dietary supplements? This sounds like rather specious reasoning. I need to get to the source material on this. GNC and NBTY manufacture stuff with existing ingredients. Does Herbalife claim any custom formulations with higher effectiveness? If so, then it cannot really be compared with GNC or NBTY, can it? 

Herbalife Reply (continued): Further, Herbalife spent $44 million in 2012 on product development, scientific affairs, quality sourcing ("seed to feed" program), product safety, etc. which was not classified as R&D so Ackman missed it.

MY COMMENTARY: Product development is NOT R&D? Quality sourcing and product safety is just QC, isn't it? Can those really be counted as R&D in the first place? 

Herbalife Reply (continued): Further, Ackman compared pricing per 200 calorie serving and found the price was almost double the nearest competitors, however pricing should be compared per serving at SRP, and Herbalife is priced right in the median. 

MY COMMENTARY: How often is the product actually SOLD at suggested retail price? 

Herbalife Reply (continued): The notion that Ebay is a proxy for the true retail price is also bunk, as 99.9% of product sales are away from Ebay.

MY COMMENTARY: this doesn't help establish a "true retail price" either. It just says "you can't do that!" without offering a more accurate definition. It's not SRP, it's not eBay price either. It's somewhere in between, but where? 

Ackman Assertion: Herbalife has a minimal outside customer base and only sells to their own network
Herbalife Reply: The company began working with Lieberman Research to do a comprehensive study on customer base in July of 2012 to independently verify customer numbers for the company. Lieberman found that over 90% of recent purchasers would likely purchase Herbalife again in the future and 92% of customers who purchased the product in the last 3 months were not distributors.

MY COMMENTARY: Until we see the methodology this doesn't mean anything. For all you know, these are nutritional club members who came in to try one shake and left. 

Ackman Assertion: The distributors are getting roped into this scheme and nobody ever makes money or is satisfied
Herbalife Reply: According to the Lieberman survey, only 27% of former distributors joined to make supplementary income. The remaining 73% joined for product discounts. Further, 44% of distributors expected to earn no money. An additional 28% of distributors only expected to earn between $1-$500 per month.

MY COMMENTARY: So Herbalife is claiming that their MAJORITY of customer base is a bunch of self-consumers with a FAKE title of distributor. So where is the churn rate coming from? 

Ackman Assertion: All former distributors are dissatisfied
Herbalife Reply: In the survey, 63% of former distributors would recommend becoming a Herbalife distributor and 87% would recommend Herbalife products.
Herbalife also has a very liberal return policy, where there is no restocking fee and customers have up to 12 months to return their orders. Only 0.5% of orders are returned. Bear in mind that the restocking fee was removed in May 2012, but I don't think this materially impacted the return number.

MY COMMENTARY: So why did they leave, if they would recommend the position and products to others?

Ackman Assertion: Products are only being shipped to distributors are not directly to customers
Herbalife Reply: 31% of orders are shipped directly to customers. 460,000 unique addresses on file.

MY COMMENTARY: So 69% of orders are shipped to distributors, and of those, 72% of them are for self consumption.  (see previous rebuttal about "joining for discounts"). 
0.69*0.72 is 0.4968, or 50% of all orders are shipped to self-consuming distributors. 
Add 31% of "customers", and you have 81% sold as "retail", if you count self-consumers. 
So that means 19% are sold to people for resale, hmmm... 
Is this really MLM, if only 19% of all sales are for resale? 

Ackman Assertion: Drops in mature markets are masked by pops in new markets. All growth is thus coming from new markets and will eventually run out. Affinity groups like Latinos are making up all the growth.
Herbalife Reply: 92% of 2012 YTD sales volume came from markets entered more than 10 years ago. Most is from markets opened 20-32 years ago. Non Spanish speaking customer volume point growth has outpaced Spanish speaking volume growth since 2010.

MY COMMENTARY: I'll admit that Herbalife has a point here, but I'll have to study the points in more detail before I can comment on it. 

Ackman Assertion: Herbalife's accounting techniques attempts to conceal the amount of commissions paid to distributors and increase the amount of retail profit.
Herbalife Reply: Policies in accordance with GAAP, passed KPMG audit. Further, the retail price paid for Herbalife's products does not change net sales. We treat wholesale commissions as a form of discount. The alternative is recording rebates in SG&A, which would still result in the same profit number and increase net sales.

MY COMMENTARY: I'll have to study the points in more detail before I can comment on it. 
The problem here is not really how corporate accounts for it though... unless you're Wall Street type. As an affiliate, are you expected to make money? According to Herbalife's own admission, VAST MAJORITY of affiliates do NOT expect to make money off Herbalife. They just like the products. 

FINAL THOUGHT: Clearly, you should not join Herbalife expecting to make money. So why join it? 

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  1. Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.

    Herbalife Dealers in Chennai

    1. So did you join Herbalife to make money? Or not?

      What are your thoughts then company claims most members did NOT choose to join to make money?

      Is that true near you?