It Was The Black Earlier Christmas... Falsifying Nib Ackman's Herbalife Thesis
It was few days earlier Christmas in addition to Sahm Adrangi (from Kerrisdale Capital) pinged me (on Google Voice) call for if I had an sentiment on Herbalife.
I responded: "why bother? Crowded short."
I knew a fiddling virtually Herbalife. It was a multi-level-marketing scheme (MLM) selling to a greater extent than oftentimes than non weight loss products. This was a scheme where instead of buying weight loss products from a grocer or a specialist store I purchased them from a friend. And the friend could create coin ii ways - either yesteryear selling production to me or recruiting me to sell production to other people.
I receive got long held a distaste for MLMs seeing how Amway used to comport inwards Western Sydney. Amway sold overpriced crap to distributors who were a collection of no-hopers in addition to recovering drug dealers. (Contra: I also knew a real successful Avon lady... in addition to she convinced me that MLMs sometimes sold useful products well.)
That said, Sahm just told me to brain to the Bill Ackman presentation. Sahm is crazy-smart so if he tells me to brain to something I listen.
Anyway, I unfurled myself on the couch at run for 3 hours of (Bill's) self indulgence.
Bill Ackman's thesis virtually Herbalife is that it is a pyramid scheme, hence
(a) illegal,
(b) unsustainable, or
(c) both illegal in addition to unsustainable.
He has several substitution slides to back upwards this thesis...
First he makes out that people don't really know what Herbalife is. He uses comparable companies beingness Church & Dwight, Energizer in addition to Clorox.
I confess to knowing few Herbalife products - so this was modestly convincing.
He so - using that slice of rhetoric asserts that Formula 1 is the entirely $2 billion create that "nobody has always heard of".
So far, so good. He does non assert the sales are non existent though (because they are). Indeed he acknowledges the fellowship is existent in addition to that the gross margins are superior.
Through a procedure of elimination he shows that the gross margins are non a outcome of superior production (its a commodity), superior technology scientific discipline (they practise non receive got any), superior R&D (they don't practise any) or whatsoever of one-half a dozen other reasons you lot mightiness receive got superior margins.
After that he asserts (and so tries to prove) that the gross margin in addition to indeed the whole work concern comes virtually because it is a pyramid scheme.
He uses an one-time Federal Trade Commission (FTC) Definition of a pyramid scheme - in addition to it is the Definition which nosotros volition move alongside because this determines whether Herbalife is illegal (in the the U.S.A. anyway) in addition to the FTC Definition overlaps alongside what would unremarkably collapse every bit a pyramid anyway.
Here is the slide defining a pyramid scheme.
This legal Definition is the heart to the whole Herbalife story - so I volition write it out:
In summary: existent sales to consumers is kosher. Sales to distributors (and non to destination consumers) are non kosher. Influenza A virus subtype H5N1 fiddling of the latter is OK (the distributors practise demand to receive got some stock). Influenza A virus subtype H5N1 lot of the latter is not.
The critical enquiry is how much are sales to consumers.
And hither the enquiry arises: what is a sale to a consumer versus a sale to a distributor. After all if a distributor buys the production for their ain utilization they are considered a consumer. If the distributor buys it to sell it (and they are stuck alongside it) so they are a failed distributor. End consumption is what matters here.
Slide 119 asks this enquiry fairly directly:
To quote:
The side yesteryear side slide repeats the at nowadays infamous David Einhorn enquiry on a conference telephone outcry upwards (the 1 that caused the stock to drib xx percent). It is a enquiry that Herbalife answered very badly...
Again I volition quote because it is critical:
Bill Ackman does non province it - but the enquiry was asked on 2 May 2012.
Anyway this is a terrible respond in addition to left Herbalife opened upwards to the Ackman assault because a surprisingly large proportion of the sales are non to externals but to people who are signed upwards every bit distributors. Self consumption yesteryear distributors is a critical number in addition to the fellowship said they did non rails it.
Three weeks later on Herbalife was inwards harm repair fashion - trying to distance themselves from this answer. Ackman puts upwards several slides dealing alongside this - a typical 1 is repeated below...
Again - for completeness I volition lay upwards the Ackman highlighted sections...
And this is the critical question. If the unmarried grade distributors are distributors without destination sales so this is a pyramid. If the unmarried grade distributors are really consumers so this is non a pyramid, is legal in addition to in all likelihood sustainable.
The fellowship clearly has some explaining to do. What they are asserting is that millions of people sign a 48 grand give-and-take distribution agreement, pay a $55 fee to move a distributor in addition to purchase production so just eat it themselves anyway. Bill Ackman clearly thinks this is BS.
The fellowship asserts they practise this because if they sign upwards every bit a distributor they instruct a 25 percent discount. It makes their personal consumption cheaper.
Bill Ackman so asks the next (possibly rhetorical) question:
Again to quote:
Ackman answers this enquiry alongside the next slide:
Bluntly - in addition to this is the critical stride inwards his argument that "We Believe the Majority of Herbalife's So-Called "Discount Buyers" are, inwards Fact, Failed Distributors" [punctuation inwards Ackman original].
About this fourth dimension Sahm Adrangi pinged me again. It was 1 of those classic Sahm Adrangi observations - super-smart but I don't intend how smart he realized it was.
He said that Ackman's assertion is really funny. He was imagining billions of dollars worth of Formula 1 diet supplements sitting on people's shelves or inwards their garages unsold. They sell almost ii billion dollars worth of Formula 1 per twelvemonth - on my count roughly 120 grand metric tonnes per year. Most of that is sold to "distributors" who may or may non live "discount buyers". If they are - every bit Bill Ackman asserts - "failed distributors" so maybe 50 grand tonnes of this materials are edifice upwards on shelves in addition to inwards garages every year.
If that 50 grand tonne per annum create upwards is existent so Bill Ackman is right.
And if that 50 grand tonne per annum create upwards is non existent so Bill Ackman is wrong. He is falsified. The whole Bill Ackman thesis falls apart.
We at Bronte are really into our epistemology. We seek things that tin flame falsify our thesis - in addition to if our thesis does non suit to reality so it does non thing who nosotros are (Bill Ackman or Richard Feynman) in addition to it does non thing how smart nosotros are, nosotros are wrong. Indeed hither is Richard Feynman explaining process...
Indeed this video (and you lot really should scout it - visitors yesteryear e-mail should move to the blog) lays it out.
You create a guess. You calculate the implications of the guess. If those implications practise non foursquare alongside observation so the guess is wrong.
Ackman made a guess - the guess is that the "so called discount buyers are inwards fact failed distributors".
The guess implies that at that spot is a 50 grand tonne per annum create upwards of Formula 1 on shelves in addition to inwards garages of failed distributors.
If that calculation does non suit to reality so Bill Ackman is incorrect (and it does non thing who he is, how smart he is or how beautiful the thesis)...
Our attempts to discover the 50 grand tonnes per annum create up...
At Bronte our version of investing nirvana is when nosotros tin flame discover theses on which you lot tin flame create or lose a lot of money. And so especially nosotros tin flame blueprint unproblematic falsifiable tests. Sahm Adrangi (bless his bright soul) provided us our test...
Go discover (or neglect to find) that 50 grand tonnes per annum create up...
To start I asked some Herbalife distributors (found via the internet) what their stockpile was.
The answers were so little that they could non perhaps work concern human relationship for the necessary create up.
But I guess those are the successful distributors every bit they tin flame live works life via the internet.
So I tried to intend similar a failed distributor.
If I was a failed distributor I mightiness receive got $2000 worth of this getting one-time on my shelf. I mightiness (reasonably) desire to recover some money. So I would sell it.
Where? Craigs List or Ebay.
If I works life lots of desperate distributors - failed ones - selling it on Ebay so Bill Ackman is in all likelihood right. If at that spot are no such people so Bill Ackman is wrong. Simple test. And I tin flame practise it for any metropolis or solid set down inwards the basis from my desk at home. For illustration I could utilization a proxy server in addition to log into Ebay inwards French Republic in addition to exam there. Which is what I did.
Anyway hither is an illustration - Craigs List, Chicago, consummate Herbalife listing...
It is a grand total of half dozen people, v of whom acquaint every bit little fourth dimension failed customer/distributors in addition to 1 of whom is trolling for work concern every bit a continuing distributor. The small-time distributors receive got some opened production (as inwards I started this diet in addition to it was non for me).
I receive got done this exam for many cities - in addition to I but receive got non works life the grade of distress. However if you lot move to a metropolis alongside a large Hispanic population you lot discover a lot of adverts. Los Angeles has many but almost all of them are continuing distributors wanting to sell products. This is a typical advert:
This mortal has been advertising on Craigs List for some time.
There are also adverts pitching that if you lot "sign upwards alongside me" you lot tin flame receive got a permanent 25 percent off your Herbalife products...
In other words they are pitching exactly the offering that Bill Ackman (rhetorically) thinks is implausible.
So far I receive got works life cipher similar the grade of distress that would live implied if Bill Ackman's thesis is correct.
So I looked at Ebay. Linked is a typical seller... the seller has sold good over 2000 Herbalife items, all alongside a minimum toll (typically a 35 percent discount to retail) in addition to over a multi-year period. They oftentimes item their use-by dates - in addition to those use-by dates alter over fourth dimension (suggesting that the production was purchased at dates that also changed over time).
When you lot essay to communicate alongside 1 of these sellers you lot run out the truth. They are higher-level distributors. They purchase the materials effectively at a 50 percent discount (or 42 percent discount) in addition to sell it at a 35 percent discount in addition to thus create a profit. They are non failed distributors. Instead they are discounters gaming the scheme yesteryear trying to capture the mass of the profits of the chain.
I looked in addition to looked. Honestly I did. And I could discover no evidence of large sales at distress - the variety of sales that would guide identify if at that spot were 50 grand tonnes per twelvemonth create upwards of unsold inventory inwards the hands of "failed distributors".
And so nosotros receive got it. Bill Ackman had a thesis. I calculated the implications of that thesis (distress selling on Ebay in addition to Craigs List). This observation did non accord alongside reality.
Therefore Bill Ackman is wrong. And it does non thing how beautiful Bill Ackman is, how smart he is, how rich he is, or whatever. He is yet wrong. And at that spot isn't whatsoever room for declaration virtually it.
John
PS. Bill Ackman beingness incorrect does non create the stock a peachy buy. Indeed Bill Ackman beingness incorrect does non tell me the truth. I can't discover the truth alongside whatsoever certainty. I tin flame entirely falsify ... I receive got a serial of theses virtually the truth but they are dependent area of other posts...
There could live 1 of hundreds of other things incorrect alongside the fellowship (and hopefully those are testable things).
But nosotros tin flame live sure of 1 thing: Herbalife is non a pyramid scheme inwards the feel promoted yesteryear Bill Ackman. We tin flame receive got the 300 page Bill Ackman presentation in addition to throw it out. Falsified...
And whatsoever journalist (Michelle Celarier) who continues to receive got Bill Ackman seriously on this number has disconnected from reality.
J
Appendix - the total text of the Einhorn enquiry in addition to respond session
I responded: "why bother? Crowded short."
I knew a fiddling virtually Herbalife. It was a multi-level-marketing scheme (MLM) selling to a greater extent than oftentimes than non weight loss products. This was a scheme where instead of buying weight loss products from a grocer or a specialist store I purchased them from a friend. And the friend could create coin ii ways - either yesteryear selling production to me or recruiting me to sell production to other people.
I receive got long held a distaste for MLMs seeing how Amway used to comport inwards Western Sydney. Amway sold overpriced crap to distributors who were a collection of no-hopers in addition to recovering drug dealers. (Contra: I also knew a real successful Avon lady... in addition to she convinced me that MLMs sometimes sold useful products well.)
That said, Sahm just told me to brain to the Bill Ackman presentation. Sahm is crazy-smart so if he tells me to brain to something I listen.
Anyway, I unfurled myself on the couch at run for 3 hours of (Bill's) self indulgence.
Bill Ackman's thesis virtually Herbalife is that it is a pyramid scheme, hence
(a) illegal,
(b) unsustainable, or
(c) both illegal in addition to unsustainable.
He has several substitution slides to back upwards this thesis...
First he makes out that people don't really know what Herbalife is. He uses comparable companies beingness Church & Dwight, Energizer in addition to Clorox.
I confess to knowing few Herbalife products - so this was modestly convincing.
He so - using that slice of rhetoric asserts that Formula 1 is the entirely $2 billion create that "nobody has always heard of".
So far, so good. He does non assert the sales are non existent though (because they are). Indeed he acknowledges the fellowship is existent in addition to that the gross margins are superior.
Through a procedure of elimination he shows that the gross margins are non a outcome of superior production (its a commodity), superior technology scientific discipline (they practise non receive got any), superior R&D (they don't practise any) or whatsoever of one-half a dozen other reasons you lot mightiness receive got superior margins.
After that he asserts (and so tries to prove) that the gross margin in addition to indeed the whole work concern comes virtually because it is a pyramid scheme.
He uses an one-time Federal Trade Commission (FTC) Definition of a pyramid scheme - in addition to it is the Definition which nosotros volition move alongside because this determines whether Herbalife is illegal (in the the U.S.A. anyway) in addition to the FTC Definition overlaps alongside what would unremarkably collapse every bit a pyramid anyway.
Here is the slide defining a pyramid scheme.
This legal Definition is the heart to the whole Herbalife story - so I volition write it out:
If an organisation sells goods or services to Earth in addition to the participants inwards the organisation obtain monetary benefits from (1) recruiting novel members in addition to (2) selling the organization's goods in addition to services to consumers, the organisation is deemed a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods in addition to services to consumers. [Emphasis every bit per Bill Ackman...]
In summary: existent sales to consumers is kosher. Sales to distributors (and non to destination consumers) are non kosher. Influenza A virus subtype H5N1 fiddling of the latter is OK (the distributors practise demand to receive got some stock). Influenza A virus subtype H5N1 lot of the latter is not.
The critical enquiry is how much are sales to consumers.
And hither the enquiry arises: what is a sale to a consumer versus a sale to a distributor. After all if a distributor buys the production for their ain utilization they are considered a consumer. If the distributor buys it to sell it (and they are stuck alongside it) so they are a failed distributor. End consumption is what matters here.
Slide 119 asks this enquiry fairly directly:
To quote:
How much production purchased yesteryear Herbalife distributors is really resold to Retail Customers?
The side yesteryear side slide repeats the at nowadays infamous David Einhorn enquiry on a conference telephone outcry upwards (the 1 that caused the stock to drib xx percent). It is a enquiry that Herbalife answered very badly...
Again I volition quote because it is critical:
Question #1 from David Einhorn: "First how much of the sales that you'd create inwards terms of lastly sales are sold exterior the network in addition to how much are consumed inside the distributor base?"The total text of the Einhorn enquiry in addition to respond session is at the destination of this post...
Answer: We don't rails this number in addition to practise non believe it is relevant to the work concern or investors.
Bill Ackman does non province it - but the enquiry was asked on 2 May 2012.
Anyway this is a terrible respond in addition to left Herbalife opened upwards to the Ackman assault because a surprisingly large proportion of the sales are non to externals but to people who are signed upwards every bit distributors. Self consumption yesteryear distributors is a critical number in addition to the fellowship said they did non rails it.
Three weeks later on Herbalife was inwards harm repair fashion - trying to distance themselves from this answer. Ackman puts upwards several slides dealing alongside this - a typical 1 is repeated below...
Again - for completeness I volition lay upwards the Ackman highlighted sections...
"...the endeavor of Herbalife 101 was to interruption the distributors into unmarried in addition to multilevel. Why? Because A, it is genuinely single, in addition to B, nobody questions single-level, knowing that most people who are inwards single-level aren't inwards it to create a lot of money. They are inwards it for purpose fourth dimension or it self-consumption. If you lot move dorsum to the one-time Avon model, earlier they were multilevel, right, self consumption, non fifty-fifty an issue. It is non covered on the FTC's website. It is expected."Essentially the company eventually answered David Einhorn yesteryear asserting that the unmarried grade distributors are basically self-consumers - in addition to hence purpose of the consumption laid rather than purpose of the distributor set.
And later...
I intend it has been misrepresented every bit the production needs to live consumed exterior the network, which it does not. A, the FTC said it does not. But B, wehn you lot intend of the 82% of people at single-level, which is, again, that is all they are, it is non fifty-fifty a consideration every bit a challenge to the model.
And this is the critical question. If the unmarried grade distributors are distributors without destination sales so this is a pyramid. If the unmarried grade distributors are really consumers so this is non a pyramid, is legal in addition to in all likelihood sustainable.
The fellowship clearly has some explaining to do. What they are asserting is that millions of people sign a 48 grand give-and-take distribution agreement, pay a $55 fee to move a distributor in addition to purchase production so just eat it themselves anyway. Bill Ackman clearly thinks this is BS.
The fellowship asserts they practise this because if they sign upwards every bit a distributor they instruct a 25 percent discount. It makes their personal consumption cheaper.
Bill Ackman so asks the next (possibly rhetorical) question:
Again to quote:
Why would anyone pay $55 to instruct a 25% discount when Herbalife products are widely available online for discounts of to a greater extent than than 35%?
Ackman answers this enquiry alongside the next slide:
Bluntly - in addition to this is the critical stride inwards his argument that "We Believe the Majority of Herbalife's So-Called "Discount Buyers" are, inwards Fact, Failed Distributors" [punctuation inwards Ackman original].
About this fourth dimension Sahm Adrangi pinged me again. It was 1 of those classic Sahm Adrangi observations - super-smart but I don't intend how smart he realized it was.
He said that Ackman's assertion is really funny. He was imagining billions of dollars worth of Formula 1 diet supplements sitting on people's shelves or inwards their garages unsold. They sell almost ii billion dollars worth of Formula 1 per twelvemonth - on my count roughly 120 grand metric tonnes per year. Most of that is sold to "distributors" who may or may non live "discount buyers". If they are - every bit Bill Ackman asserts - "failed distributors" so maybe 50 grand tonnes of this materials are edifice upwards on shelves in addition to inwards garages every year.
If that 50 grand tonne per annum create upwards is existent so Bill Ackman is right.
And if that 50 grand tonne per annum create upwards is non existent so Bill Ackman is wrong. He is falsified. The whole Bill Ackman thesis falls apart.
We at Bronte are really into our epistemology. We seek things that tin flame falsify our thesis - in addition to if our thesis does non suit to reality so it does non thing who nosotros are (Bill Ackman or Richard Feynman) in addition to it does non thing how smart nosotros are, nosotros are wrong. Indeed hither is Richard Feynman explaining process...
Indeed this video (and you lot really should scout it - visitors yesteryear e-mail should move to the blog) lays it out.
You create a guess. You calculate the implications of the guess. If those implications practise non foursquare alongside observation so the guess is wrong.
Ackman made a guess - the guess is that the "so called discount buyers are inwards fact failed distributors".
The guess implies that at that spot is a 50 grand tonne per annum create upwards of Formula 1 on shelves in addition to inwards garages of failed distributors.
If that calculation does non suit to reality so Bill Ackman is incorrect (and it does non thing who he is, how smart he is or how beautiful the thesis)...
Our attempts to discover the 50 grand tonnes per annum create up...
At Bronte our version of investing nirvana is when nosotros tin flame discover theses on which you lot tin flame create or lose a lot of money. And so especially nosotros tin flame blueprint unproblematic falsifiable tests. Sahm Adrangi (bless his bright soul) provided us our test...
Go discover (or neglect to find) that 50 grand tonnes per annum create up...
To start I asked some Herbalife distributors (found via the internet) what their stockpile was.
The answers were so little that they could non perhaps work concern human relationship for the necessary create up.
But I guess those are the successful distributors every bit they tin flame live works life via the internet.
So I tried to intend similar a failed distributor.
If I was a failed distributor I mightiness receive got $2000 worth of this getting one-time on my shelf. I mightiness (reasonably) desire to recover some money. So I would sell it.
Where? Craigs List or Ebay.
If I works life lots of desperate distributors - failed ones - selling it on Ebay so Bill Ackman is in all likelihood right. If at that spot are no such people so Bill Ackman is wrong. Simple test. And I tin flame practise it for any metropolis or solid set down inwards the basis from my desk at home. For illustration I could utilization a proxy server in addition to log into Ebay inwards French Republic in addition to exam there. Which is what I did.
Anyway hither is an illustration - Craigs List, Chicago, consummate Herbalife listing...
It is a grand total of half dozen people, v of whom acquaint every bit little fourth dimension failed customer/distributors in addition to 1 of whom is trolling for work concern every bit a continuing distributor. The small-time distributors receive got some opened production (as inwards I started this diet in addition to it was non for me).
I receive got done this exam for many cities - in addition to I but receive got non works life the grade of distress. However if you lot move to a metropolis alongside a large Hispanic population you lot discover a lot of adverts. Los Angeles has many but almost all of them are continuing distributors wanting to sell products. This is a typical advert:
This mortal has been advertising on Craigs List for some time.
There are also adverts pitching that if you lot "sign upwards alongside me" you lot tin flame receive got a permanent 25 percent off your Herbalife products...
In other words they are pitching exactly the offering that Bill Ackman (rhetorically) thinks is implausible.
So far I receive got works life cipher similar the grade of distress that would live implied if Bill Ackman's thesis is correct.
So I looked at Ebay. Linked is a typical seller... the seller has sold good over 2000 Herbalife items, all alongside a minimum toll (typically a 35 percent discount to retail) in addition to over a multi-year period. They oftentimes item their use-by dates - in addition to those use-by dates alter over fourth dimension (suggesting that the production was purchased at dates that also changed over time).
When you lot essay to communicate alongside 1 of these sellers you lot run out the truth. They are higher-level distributors. They purchase the materials effectively at a 50 percent discount (or 42 percent discount) in addition to sell it at a 35 percent discount in addition to thus create a profit. They are non failed distributors. Instead they are discounters gaming the scheme yesteryear trying to capture the mass of the profits of the chain.
I looked in addition to looked. Honestly I did. And I could discover no evidence of large sales at distress - the variety of sales that would guide identify if at that spot were 50 grand tonnes per twelvemonth create upwards of unsold inventory inwards the hands of "failed distributors".
And so nosotros receive got it. Bill Ackman had a thesis. I calculated the implications of that thesis (distress selling on Ebay in addition to Craigs List). This observation did non accord alongside reality.
Therefore Bill Ackman is wrong. And it does non thing how beautiful Bill Ackman is, how smart he is, how rich he is, or whatever. He is yet wrong. And at that spot isn't whatsoever room for declaration virtually it.
John
PS. Bill Ackman beingness incorrect does non create the stock a peachy buy. Indeed Bill Ackman beingness incorrect does non tell me the truth. I can't discover the truth alongside whatsoever certainty. I tin flame entirely falsify ... I receive got a serial of theses virtually the truth but they are dependent area of other posts...
There could live 1 of hundreds of other things incorrect alongside the fellowship (and hopefully those are testable things).
But nosotros tin flame live sure of 1 thing: Herbalife is non a pyramid scheme inwards the feel promoted yesteryear Bill Ackman. We tin flame receive got the 300 page Bill Ackman presentation in addition to throw it out. Falsified...
And whatsoever journalist (Michelle Celarier) who continues to receive got Bill Ackman seriously on this number has disconnected from reality.
J
Appendix - the total text of the Einhorn enquiry in addition to respond session
David Einhorn
I've got a pair of questions for you. First is how much of the sales that you lot create inwards terms of lastly sales are sold exterior the network in addition to how much are consumed inside the distributor base?
Desmond Walsh
So, David, nosotros receive got a 70% client rule, which effectively says that 70% of all products is sold to consumers or really consumed yesteryear distributors for their ain personal use. So, obviously, what we've seen alongside Nutrition Clubs is that nosotros at nowadays receive got visibility for the outset fourth dimension to our customers. You know that nosotros reported on this telephone outcry upwards for the outset time, the number of commercial clubs approximately the world, which is inwards excess of 30,000. So that has given us visibility to the tremendous amount of products that are beingness sold direct to the consumers in addition to nosotros come across that every bit a growing tendency inwards our business.
David Einhorn
So what is the percent that is really sold to consumers that are non distributors?
Desmond Walsh
So nosotros don't receive got an exact percentage, David, because nosotros don't receive got visibility to that grade of detail.
David Einhorn
Do you lot receive got an approximation?
Desmond Walsh
So well, 1 time again going dorsum to our 70% rule, nosotros believe that it's at 70% or potentially inwards excess of that.
David Einhorn
Okay. What is the incentive for a supervisor to sign somebody upwards to move a distributor every bit opposed to -- if they're just going to eat it for themselves, every bit opposed to just selling them the production for the markup? How does the supervisor come upwards out better?
Desmond Walsh
Sure. So I intend there's 2 reasons for that. So nosotros know from our work concern today that many of our futurity supervisors in addition to work concern builders come upwards inwards every bit customers in addition to so they move distributors. So the practise goodness from a supervisor is the powerfulness for a greater memory of that customer/distributor because they are at nowadays earning a 25% discount. The instant number is that it preserves lineage. So obviously, if I sign you lot up, David, every bit a distributor, my promise in addition to expectation is that based on the tremendous production outcome that you're going to achieve, that you lot volition receive got friends in addition to families move to you lot in addition to say, gosh, David you lot aspect great, what are you lot on? You're going to respond in addition to say I'm Herbalife in addition to that volition encourage you lot to say, wow, maybe this is a work concern chance I could live interested in. So the practise goodness for me every bit your supervisor is one, the discount that would instruct in addition to therefore, my greater likelihood of retaining you lot every bit a permanent customer. And secondly, the promise that at some stage, you lot volition determine to practise the work concern in addition to therefore, that you lot are already inwards my lineage in addition to is purpose of my group.
David Einhorn
But just trying to sympathise this clearly. If I sell to a client -- I bought it, I'm a supervisor, I purchase at a 50% discount, I sell to a client in addition to create 50 points if he pays the total price. If he signs upwards every bit a distributor in addition to buys it himself, he gets a 25% discount in addition to I instruct vii points every bit a royalty, is that how it works?
Desmond Walsh
No. You volition instruct the other 25%.
David Einhorn
I'll instruct the 25% summation the 7.
Desmond Walsh
So unless you're earning royalties, you lot would but earn the difference. So you're inwards a 50% discount, you're selling at a 25% discount. And so the divergence betwixt the 2 is your turn a profit on that sale.
David Einhorn
Right. So if he signs upwards every bit a distributor in addition to buys it for himself from Herbalife, I yet instruct the 25%?
Desmond Walsh
That is correct.
David Einhorn
Okay, good. One lastly question. When you lot had your previous 10-K, you lot disclosed 3 groups of distributors at the depression end. You called 29% self consumers, 57% smaller retailers in addition to 14% potential Sales Leaders. And so that disclosure did non repeat inwards the subsequent 10-K. So I've got 2 questions. First of all, how practise you lot rails that in addition to how practise you lot characterize in addition to know which ones are which? And second, why did you lot halt disclosing that inwards the lastly 10-K? Is that something that you've stopped tracking or just stopped disclosing?
John G. DeSimone
This is John. The criteria for grouping distributors into dissimilar classes was based off of their book purchases. And nosotros create assumptions that people below are a sure book weren't doing the business, they were buying self consumption. And I don't call back the exact amounts but I tin flame instruct it to you lot after the call. It's how nosotros delineated betwixt the 3 classes. One of the reasons nosotros took it out of the 10-K is a alter inwards CFO for which to me, I didn't catch it every bit valuable data to the work concern or to the investors. However, nosotros tin flame easily supply the exact same breakout going forrad if you lot like. I could e-mail it to you lot in addition to to our investors. Again, I don't call back the exact delineation betwixt the 3 classes but I tin flame for certain instruct it to you. Our objective is to live completely transparent.
No comments