These are not the customers you are looking for, Herbalife edition

These are not the customers you are looking for, Herbalife edition

Dan McCrum

Oct 15 12:20 | 7 comments | Share

Part of the LIVING THE HERBALIFE SERIES

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There is something weird about the way that Herbalife has been responding to questions about its customer base. Faced with a barrage of scrutiny over the claims from Bill Ackman that it is a pyramid scheme, and as Herbalife has insisted that it is legitimate, it has turned to market research companies to show that it has plenty of real customers. That seems strange when you consider what each salesperson is required to do in terms of record keeping. Here is the 2011 version of the form that a distributor (direct selling jargon for a salesperson) has to fill in and sign every single month that he or she wants to receive commissions and sales bonuses from Herbalife (click to enlarge).Note the certification that a distributor will (our emphasis):

upon request (for verification purposes) furnish to Herbalife the following information concerning such customers: names, addresses, phone numbers, email addresses and copies of retail receipts (and or in the case of Nutrition club activities, a log of member visits inclusive of member names, dates of visits, contact information). I agree to maintain all such records for a period of two (2) years.

Now, the law surrounding pyramid schemes comes from prior court judgments, so recall a key appeal court ruling against Omnitrician:

On its face, Omnitrition’s program appears to be a pyramid scheme. Omnitrition cannot save itself simply by pointing to the fact that it makes some retail sales

The court found that a certification scheme is not on its face useful unless it is enforced. So why doesn’t Herbalife, which says it has a huge team of internal compliance people, use its own data to disprove its critics?

A two-for-one legitimacy slam, if you will.

Herbalife has said that it doesn’t want to use that data for privacy reasons. Even though it can ask for the identities of its ultimate customers, it doesn’t want those customers to think it is snooping on them.

We have a humble suggestion: hire a firm of accountants with broad terms of reference to conduct random audits of distributors. The data could then be anonymised and aggregated, to provide a snapshot of the Herbalife customer base.

The company has instead preferred to use market research. Work by Lieberman Research was used to respond to claims by Mr Ackman that Herbalife does not have a prominent brand or true retail customers.

A survey of 2000 US adults found 5 per cent had made Herbalife purchases in the past three months, which equates to 5.7m of the 114m US households, the company said.

Another market research firm, Nielsen, was also used to show that Herbalife has lots of customers.

According to the research, 3.3% of the general population reported that they had purchased Herbalife products within the past three months, indicating that Herbalife currently has approximately 7.9 million customers when projected to the total U.S. adult population. Herbalife customers would include their distributor network, which totaled approximately 550,000 in the U.S. as of the end of the first quarter 2013.

(The margin of error on the survey is +/- 0.96 per cent, so somewhere between 2.4 per cent and 4.2 per cent of the adult US population. Or 5.8m to 9.6m.)

Again, that is interesting, but it doesn’t quite answer the question asked in our previous post, who are Herbalife’s customers?

All this matters because, as we have said before, determining whether or not a company is part of a pyramid scheme or not depends upon the specific facts of the case, and at Herbalife we don’t think that there is enough published data to go by.

LIVING THE HERBALIFE SERIES

Our deep dive into the Herbalife dispute

Spot the difference, Herbalife edition

When Latinas attack: perhaps the strongest anti-Herbalife letter yet

A herbal(-ife) high

Herbalife and the FTC

The lessons aren’t in the laundry, Herbalife edition

That’s my answer and if you don’t like it… well, I have others, Herbalife edition

These are not the customers you are looking for, Herbalife edition

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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