The siege of Herbalife
J Thoendell stashed this in Business
Perhaps the best thumbnail précis of this saga was provided by hedge fund manager John Hempton, who runs Bronte Capital, in what was actually a prognostication. Just a week after the campaign launched, he wrote in his blog, “It will be the hedge fund equivalent of Stalingrad. Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow.”
Attempting to destroy Herbalife over being an MLM company actually made the company better.
Herbalife might seem like an odd target for such venom. Based in Los Angeles, it doesn’t make cigarettes, sell alcohol, manage casinos, or emit pollutants. It’s a 35-year-old, 8,000-employee nutrition company that sells 5,300 products in 91 countries, including weight-loss powders, vitamins, performance sports drinks, and a skin-care line.
It is remarkably successful. Its main product—composing 30% of its sales—is a meal-replacement shake powder, made from soy protein isolate, called Formula 1. Though many Fortune readers have likely never heard of it, its sales are more than double those of its three leading competitors—Ensure, Kellogg’s, and SlimFast—combined. Herbalife makes 25 flavors of shakes, including piña colada in the U.S., paçoca—a peanut candy—for the Brazilian market, and borscht for China, and markets non-GMO, gluten-free, and low-glycemic versions too.
But Ackman wasn’t going after Herbalife because it sold milk shakes. His issues stemmed from its being a multilevel marketing company, or MLM. MLMs distribute their products through independent contractors who are rewarded not just for selling the company’s products but also for recruiting other distributors to do so, and for persuading those recruits to recruit still more distributors, and so on, in a pyramidal structure.
The danger with any MLM is that recruiting, not product sales, may become the raison d’être of the enterprise, which then devolves into a thinly disguised money-transfer game indistinguishable from the chain-letter scams of the 1930s—the paradigmatic pyramid schemes. Early participants make out like bandits, but later recruits are mathematically guaranteed to fail.