For Kicks: But How Big Is Herbalife? Together With A Uncomplicated Proof That This Is Non A Pyramid.

Herbalife has 3.7 meg distributors. There is very fast turnover alongside the lower-tiers of the distributor tree.

The nitty-gritty send instance for Herbalife is that these distributors are deceived - together with that at that topographic point are non huge numbers of existent sales - together with that the volume of the sales are to people who are buying it for the draw of piece of employment concern chance rather than to swallow the production inwards its ain right.

Indeed for this to hold upward a pyramid at constabulary the society needs to hold upward selling the bulk of its production to distributors who are non buying this for deliberate personal consumption but rather for the draw of piece of employment concern opportunity.

If the bulk of sales are to people who are non active distributors at that topographic point is exactly no agency that this is a pyramid. A reasonable summary of the pre-Burn Lounge constabulary from an anti-Herbalife slant is given by Dan McCrum at the FT.

Even he would concede that if a bulk of sales were to people who were non active distributors with a valid distribution contract thence Herbalife is non a pyramid scheme.

There are several steps to the argument.

Size of Herbalife sales

H5N1 large publish of people on Wall Street convey positions on Herbalife without having idea clearly virtually its size. It doesn't appear much inwards their social circles thence it must hold upward small.

Bill Ackman sneers at them when they say their competition is McDonalds.

So lets item it accurately.

Herbalife's principal production is Formula 1. It is a poly peptide milkshake pulverization used inwards repast replacement generally for weight loss. According to the annual filings weight loss products (which are generally Formula 1 together with meal-replacement poly peptide bars) are 63.5 per centum of all product. Some of this is diet-suppressing herbal teas - but repast replacements lonely are in all likelihood 58 per centum of all sales - completely led yesteryear Formula 1. 

Here is an picture of several 750 gram packets of Formula 1:

This is the production - higher upward all others - that is associated with Herbalife.

Here is the label which gives a suggested meal-replacement size of 50 grams:

This is a multi-level marketing company. You qualify for diverse tiers of the distributorship yesteryear selling a for certain publish of book points inwards a given time. [For instance 4000 or 5000 book points volition qualify y'all for "supervisor" condition depending on how fast y'all sell them.]

For all Herbalife production the cost changes yesteryear province - but the publish of book points does not. So whatever province y'all are inwards a parcel of Formula 1 counts as 23.95 book points.

During the final quarter Herbalife sold 1.4 billion book points of product. I convey used this slide earlier showing book points yesteryear region:

1.431 billion book points would hold upward the equivalent of 59.7 meg tins of Formula 1 powder.

Each parcel contains xv 50 gram repast replacements (see the label above). So if it were all repast replacement at that topographic point would hold upward 896.2 meg meals replaced per quarter.

That would hold upward 3584.7 meg meals annually.

Not all of this is repast replacement though. My approximate [explained above] is that alone 58 per centum of sales are repast replacement.

That would proffer 2079.1 meg actual meals annually.

Mr Ackman sneers when the society compares itself to McDonalds. But hello - I desire to. 

We desire to compare this to the size of McDonalds. McDonalds serves roughly seventy meg meals daily - or 25.5 billion annually.

Here is the comparison: based on publish of meals served Herbalife is virtually 8 per centum of the size of McDonalds. [For comparing Herbalife is virtually five per centum of the marketplace cap of McDonalds. It does non brand feel to compare revenue because McDonalds has a lot of franchise revenue - but it is - for completeness - roughly eighteen per centum of the revenue of McDonalds.]

These sales numbers are growing yesteryear five per centum annually although that growth charge per unit of measurement is slowing.

Herbalife sales per distributor

The publish of sales leaders inwards the society (again according to the higher upward table) is virtually 340 thousand. To brand the numbers run the average sales leader or their down-line is selling 6100 meals per sales leader per year.

If they tin teach their average client to swallow 200 meals per twelvemonth [that is supervene upon iv meals per week] thence they convey virtually thirty regular customers each - together with the total publish of Herbalife customers is virtually 10.4 million.

The total number of distributors of Herbalife is 3.7 million many of whom sign upward for their ain consumption. [The proportion who sign upward for their ain consumption rather than for the draw of piece of employment concern chance is a really large item of contention. Suffice to say that at that topographic point are a reasonable publish of both...]

This publish is increased considerably from when Mr Ackman did his master copy presentation. The 2011 annual report listed 2.7 meg independent distributors. 

Now hither is a large observation: My calculation - at that topographic point is plenty Herbalife sold thence that 10 meg people globally supervene upon 200 meals a twelvemonth with Herbalife product.

But at that topographic point are alone 3.7 meg people with an active distribution agreement.

We convey 3 choices here. Either:

(a). The sales/revenue numbers cited higher upward are completely fabricated, or

(b). The bulk of Herbalife production is consumed yesteryear people who are non distributors or 

(c). There are massive piles of inventory unopen to non consumed.

I recall nosotros tin spend upward hypothesis (a) really easily. The society generates huge amounts of cash together with was buying dorsum stock chop-chop earlier Bill Ackman came along without blowing the debt out unreasonably. [They convey bought fifty-fifty larger amounts to a greater extent than stock since Bill Ackman together with the internet debt has forthwith risen sharply.] They would non convey had the cash to purchase dorsum stock if the revenue numbers were falsified.

And I recall nosotros tin spend upward (c) higher upward pretty easily too. I convey spent considerable fourth dimension looking for the inventory together with I can't detect it. It is non on Ebay or Craigs listing (as per this post). Besides y'all tin forthwith provide it for a total refund - thence having unsold inventory sitting inwards the garage is stupid together with unlikely.

So nosotros are left with the middle alternative - the bulk of Herbalife production is consumed yesteryear people who are non distributors.

Bluntly: at that topographic point goes the send case.

The FTC volition - afterward examining all the documents - come upward to the same conclusion. And at that betoken I would non desire to hold upward curt this company.

John

Corrections together with amplifications:

There are ii amendments that postulate to hold upward made to this post. The get-go is that I got the book points wrong.

Here is a Herbalife label with book points:

http://www.herbalifeww.com/ca/pdf/News_More_Info_Items/FS_Inner_Nut_07_EN_112707-rev1.pdf

The 550 gram parcel is 23.95 book points. The 750 gram parcel is 32.75 book points. This would brand my comparing less extreme together with serves to undermine the declaration above.

However the labels (and considerable practice) advise that the agency that this is consumed is mixed with skim milk together with some fruit together with blended - with the dose beingness 25 grams non 50 grams.

Putting those things together the calculations are to a greater extent than extreme, non less extreme than inwards the article above. [My approximate - at that topographic point are to a greater extent than than xv meg consumers who swallow reasonable amounts of Herbalife production - important to a greater extent than than weekly.]

Bluntly at that topographic point is likewise much Herbalife sold for a bulk of sales to hold upward internal to the distributor base. The sales must hold upward external.

These numbers are utterly consistent with this press release (link) from Herbalife which suggests that lxxx per centum of sales are exterior the network. In which instance the FTC volition become away.


J