Herbalife Clouded by Malpractices

From last May to now， the in- ternational healthy products manufacturer herbalife has never stayed away from the vortex of going short in the stock market. Hedge fund manager William Ackman accused this company of pyramid scheme. In his opinion， Herbalife’s profits mainly come from the expansion of memberships instead of selling products.

What’s worth attention is the report about Soros’ long position on Herbalife with a large amount of investment into Herbalife from the start of August. This is another billionaire joining in the battle of “long or short” of Herbalife. Such news also brought up the stock price of Herbalife by 10% or so.

When the battle in the stock market is getting more and more furious， Herbalife met another trouble in China its marketing control and product effect have been doubted in this country.

Herbalife is making fast increase in China， but its sales pattern also contains five questions： the collection of disguised“membership fees”， the boasted product effect， the unreasonable profits in products， the fast expanding club without any proper supervision， the too much depen-dence on salespersons.

A series of problems have made Herbalife’s direct-sale pattern become problematic and violate some rules in the Stipulations of Forbidding Pyramid Sales issued in 2005. This multinational giant is to be suspected of pyramid sales in China.

The Disguised “Membership Fees”

“If you can buy some more products， you can be promoted to the senior business representative so that you can develop your own customers and get the commissions，” said Li Ming， a senior business representative of Herbalife. He always told the salespersons working for him to buy more products of Herbalife so that they could “earn more money”.

According to Li Ming’s explanation， the business performance of salespersons of Herbalife is calculated into the PV value. One PV equals RMB 12. A salesperson that can have accumulated the PV value of RMB 1，200-48，000 （100-4，000 PVs） can get the sales commission of 15%-30%. He said that a salesperson must spend his/her own money buying products if he/she wants to earn money and the products are easy to be sold out after that. “However， if you do not sell Herbalife’s products， you cannot become the business representative and thus have no commission.”

The key to Herbalife’s success rests with the huge network of salesperson covering the whole country. However， the salesmanship of Herbalife is not easy to get. An important factor is that you must buy a certain amount of Herbalife’s products to become a member of Herbalife’s salesmen network. Such a disguised“membership fee” violates the laws and regulations of China.

According to Li Ming， a person could spend at least 12，000 buying Herbalife’s products to become a direct salesperson， which Li Ming refers to as business representative. A journalist from CBN impersonated a man who wants to become the salesman for Herbalife and contacted Li Ming. He frequently heard Li Ming try to talk him into buying more Herbalife’s products and assure him that “those products are easy to be sold”.

In November 2005， China’s State Council issued the Stipulations of Forbidding Pyramid Sales， whose 7th clause of 2nd chapter made it clear that any organization requiring people to pay for being recruited or gaining the permission to recruit others in cash or through buying things and earning profits from this pattern is considered to be involved in pyramid sales. Therefore， Herbalife’s direct salesperson requiring the candidate to get the salesmanship through buying its product is very close to the illegal behavior of pyramid sales.

In order to persuade the CBN journalist to buy more products， Li Ming kept talking about the benefits of the business representative. Another direct salesman of Herbalife said that he could earn RMB 20，000 thousand per month even though he only gained the salesmanship half a year ago. And Li Ming just shrugged and said “this is not too much”.

“Prescriptions” from Direct Salesman

When the direct salesperson kept trying to talk others into joining the network， the healthy products they promote seem to be too good to be true. For different symptoms， they almost gave the same prescription， making a kind of protein-hybrid drink a “panacea” for every disease.

“Does Herbalife have any products to solve the problem of insomnia？”When asked that question， a salesman in a healthy club of Herbalife in Yangpu District， Shanghai immediately took out a protein-hybrid drink， saying that this drink contains not only rich protein， but also dozens of vitamins， which are good for the health and subsequently bring about good sleep. When the journalist said that the main function of this product was said to be “weight reduction” as promoted in the previous campaigns， the salesman quibbled： “once a time means better health while twice a day means weight reduction.”

The same protein-hybrid drink was then given the function of curing stomach discomfort in another store of Herbalife. A manual of Herbalife’s products shows that the combination of Herbalife’s products in different ways can help to cure the obesity， insomnia， gynecological inflammation， chronicle cholecystitis， pancreatitis， hyperthyroidism， colitis， Coryza and so on， a score of diseases in total. Nearly all combinations have the aforementioned protein-hybrid drink a panacea from the mouth of Herbalife’s salespersons.

Is that true？ Several consumers of Herbalife confirmed that their health condition is better after having Herbalife’s products for a while but no obvious effect happened to the disease mentioned above if they have any. “Healthy products could have somewhat worked on improving men’s healthy conditions， but I am sure that they do not have healing effect for so many kinds of diseases since I have had Herbalife’s products for a while，” says one of the consumers.

Huge Benefits in Weight-Reduction Products

As Herbalife’s salespersons said， the weight-reduction products of Herbalife are the bestselling products with similar effect in the world. Then what secrets are these healthy products hiding？

The main ingredients of Herbalife’s bestselling weight-reduction product are the proteins， vitamins and minerals， as its direct salesman introduced. It mainly helps to reduce weight through letting people eat less than before while absorbing some nutrient elements. The effect is the same with the diet consisting of thin milk and fruits （once or twice every day）. However， a consumer needs to pay tens of thousands yuan for the products of Herbalife every year， much higher than the other products with the same function.

In comparison， such a high price is not based on the high R&D and marketing cost. Herbalife does not put more efforts into making its products distinguished from others in ingredients， effect and distribution.

In a conference of introducing Herbalife’s weight-reduction products inside the company， more than one hundred persons most are candidates for the direct salesmen of Herbalife were present， listening to the introduction of a protein-hybrid drink featuring good effect of reducing weight （actually， it is the hybrid drink with many “curing effects”）. Some consumers having tried this product said that they would feel hungry at first. Actually， this is the same with reducing the appetite. As Herbalife said， the protein-hybrid drink consists of soy protein， vitamins and minerals while the products are low in cholesterol， fat and calorie.

Wang Dahong， Secretary-general of the China Association of Healthy Products said that the protein hybrid drink of Herbalife works through reducing the amount of fat absorbed by people by replacing one meal with the products.

Wang Dahong also said that some of the salespersons in the healthy product market of China lacked the proper knowledge about healthcare. “Consumers should pay attention to the ingredients and effects of the healthy products and do not easily believe any words from the salespersons. It is better to consult with the nutrient experts.”

For this， some experts said that the choice of healthy products should depend on an individual’s personal conditions. The amount of vitamins and minerals a man needs to absorb is within a certain range while too small or too big is bad for health. Some people with spe-cial conditions should not be forbidden to have some healthy products. For example， people allergic to protein or have malfunctioning kidneys should not take protein-based products.

The panacea-like protein-hybrid drink of Herbalife and its peers in the family of weight-reduction products are said to take 90% of Herbalife’s sales amount in China. According to Li Ming， a consumer needs to spend RMB two or three thousand per month on Herbalife’s weight-reduction products if they want to see the effect， and they are always asked to keep using these products for years.

A comparison research found that Herbalife’s products are more expensive than the other brands with the same functions， but the proportion of its R&D spending in the operating revenue is lower than the other brands.

For example， the protein powder of Herbalife was sold at RMB 218 per jar or RMB 0.54 per gram. The same protein powder of Comba， a Zhejiang-based company， is sold at RMB 0.26 per gram， less than half of Herbalife’s products. Herbalife spends 1.1% of its income on R&D every year while Comba’s spending on R&D takes 2.63% of its annual income.

Chen Siting， an expert in food marketing， said that the price of products is not only determined by the cost. The brand value and scale effect are important factors too. “From the aspect of marketing， the recognition of consumers is more important than the cost， meaning that how willing the consumers are to pay for the value-added and function of the product.” But in his opinion， some enterprises might exaggerate the functions and effects of their products to make consumers willing to pay more money for their products.

The Less Organized Clubs

In the multi-level distribution network of Herbalife， the most typical one is its club-like distribution channels. The club is run like a social site， where salespersons can take friends and relatives to the club on a daily basis to know about the product information. In that way Herbalife promoted its products.

According to Herbalife’s stipulations， every club must report to the subsidiary companies of Herbalife and cannot be opened without the companies’ approval. However， many of these subsidiary companies are actually dealers of Herbalife and have independent legal representatives. Such a structure greatly affects the regulation and control of Herbalife over these clubs， where malpractices doubtlessly will happen at a high frequency. Recently， another international healthy product giant Amway was reported with a malpractice by its dealer， indirectly leading to the death of a consumer who eat too much of Amway’s products. Amway thought that it should not be responsible for this incident while the dealer causing this problem has an independent legal representative.

Herbalife thinks the same way when the problems arise. It always tries to separate itself from its dealers. According to the corporate rules， healthy clubs could neither use the words like “chain”， “franchising” and “subsidiary” in the promotion and operation nor the “Herbalife”in their names， fearing that they might be related to Herbalife once incidents happen.

Some experts said that Herbalife chooses this pattern to shun any legal responsibility caused by its dealers. However， the Stipulations about Direct Sales in China requires the company adopting direct sales pattern to be co-responsible for its salespersons， no matter they work for the enterprises or their dealers.

In addition to staying away from the responsibilities， Herbalife is known to mix consumers with investors， as it revealed in its internal training courses.

The presence in the internal training courses of Herbalife revealed a pattern that is very similar to the pyramid sales. At first you are told about the investment but later you subconsciously became consumers.

Then who are consumers of Herbalife？ People who only want to buy Herbalife’s products， its salespersons or the candidates？ Actually， many people take part in herbalife’s internal training course with the goal of earning money and some of them even bring their friends or relatives into this group， calling it a promising industry.

“I am going to introduce my nephew in. His current job is not promising at all，” Li Ming said. All of those salespersons or those who want the salesmanship claimed to buy or use Herbalife’s products， meaning the internal consumption is an important part of Herbalife’s sales volume.

According to Herbalife’s 2012 financial report， the company recruited 3.2 million salespersons in the world and 200 thousand of them were in China. Such a large team of salespersons will contribute the “membership fees” of RMB 2.4 billion in China if the “membership fee”is RMB 12，000 for one person.

Herbalife’s financial report did not clarify how much sales amount came from real consumers and how much came from its salespersons. But one thing is sure： these salespersons need to find more persons to buy the products so that they could earn more money and one way to recruit buyers is to promise them with great benefits of salespersonship and trying to get them to join in the ranks， another apparent feature of pyramid sales.