Herbalife has been around for more than four decades and, somehow, it's managed to remain both successful and controversial. It also has bragging rights as the U.S. Justice Department, the Food and Drug Administration and the Federal Trade Commission have all investigated it. As a result, it has had to pay hundreds of millions of dollars in settlements.
Plus, Wall Street loves betting against the famous nutritional company, trying to answer: is Herbalife a pyramid scheme? The result is that all these haters fail to bring it down. Herbalife is still alive and kicking. In fact, according to its new CEO, the company is even doing pretty well these days. So, how did this controversial company get so far? Let's find out, but before we dive into Herbalife's history, it's important to answer one question.
To answer this question, we must understand how it works. For starters, Herbalife is a nutrition and lifestyle company. It sells meal-replacing shakes, proteins, and other supplements for weight-management or sports enhancement. It’s a direct selling company; the products are only sold through distributors and not in stores. It allegedly promotes healthy lifestyles and self-improvement. The company also relies on big names in the sport world, such as Cristiano Ronaldo and David Beckham back in the day.
The adventure doesn't end there. On top of taking the shakes, the company gives buyers a possible business opportunity. Here's where it gets complicated. Herbalife's promise has always been that you can reach your financial independence as a distributor. In short, with Herbalife, you make good money and become a healthy, successful person.
The premise is simple. You master the product and then introduce others into your network. This way, you become a supervisor and can continue climbing up the organization, as you have more distributors in your network. That's the theory and, if you do it right, you can allegedly earn a lot of money. So, from an outside perspective, it seems that Herbalife is a multi-level marketing business or MLM. That is a business model where you recruit sales-people to join you in distributing a product or service, and you take commissions out of their sales. Plus, in Herbalife, you also take commissions from your distributors' recruits. It's in your best interest that those who buy the product from you continue to find other distributors to get all those commissions.
Up to this point, everything is legal, though it's awkwardly similar to an illegal pyramid scheme. So, what's the difference?A pyramid is an unlawful business that makes money out of recruiting people, charging them buy-in fees. The difference between MLM and a pyramid scheme is that, in theory, you can make money in MLM while the latter won't generate income. It's a scam and only managers get to see some dough, illegally that is. A pyramid scheme manager will take the money from newcomers and pay themselves and some of the first distributors, to keep the facade going. So, in both cases, recruiting is vital.
The main difference between a legitimate MLM and an illegal pyramid can be how they make most of their money and you can pick up the scent from their selling tactics. If the company focuses more on recruiting tactics than sales, it may be a pyramid scheme. It’s illegal because it usually sells a promising business opportunity with high returns in a short time when, in reality, most of those who participate lose money. On the other hand, if the business focuses on selling goods or services, and makes most of the revenue out of those sales, then it probably is a good MLM.
As you can see, in this explanation alone, the line can be thin. So, it's hard to discern, even for authorities.
Herbalife was founded in 1980 by Mark R. Hughes, a businessman from California. His childhood was troublesome and he struggled with his mother’s emotional problems, obesity, and prescription drug abuse. From such a young age, these issues marked him so, in time, he vowed to provide solutions for others to face these challenges.
In 1985, Herbalife was among the fastest-growing private US companies. It went public in 1986 when its stock started trading on the NASDAQ exchange. Hughes owned around 60% of the company, and by 1999 he was already trying to make it private again. Still, the problems of his past refused to leave him. Though the company had flourished, he struggled. Hughes unexpectedly passed away in 2000, at age 44, of an apparent accidental overdose of alcohol with a toxic level of antidepressants.
The company has remained public since. His attempts failed and one can only wonder why he wanted to return Herbalife to a private status. The world has also questioned Herbalife and, in the early 2000's, the FDA filed a formal complaint about some pills and shakes containing potentially harmful products. In response, Herbalife had to reformulate the products.
The FDA isn't the only entity questioning Herbalife, as accusations of it being a pyramid scheme also emerged as soon as 1985. Three Californian agencies, including the Attorney General’s office, filed a lawsuit charging Herbalife to make false claims about its products and be an illegal multi-level sales structure. The real money was getting others involved in the business opportunity, and not so much in selling the products. To accomplish this involved selling them the product to distribute and charge fees for training or attending extravaganza events with company gurus.
Distributors used to be ruthless about recruiting. They would sell the dream business opportunity, the promise of quitting your job, becoming your own boss, and why not? Become rich in a short time. A piece of cake. Or more like a piece of shake. They would even lie about the medicinal properties of the products. Anything to get people to sign up for the business opportunity and sell some of the Herbalife stock. There are legends of distributors hoarding products in their garages, then sell it to others, and have them do the same.
The problem was that entry-level distributors rarely got to the level of distribution needed to make a decent income. This hasn't changed in years. The majority loses money, and recruits are replaced in an endless churning cycle. Meanwhile, those at the top collect commissions for everything that happens below them. So, the recruiting required to sustain such a scheme is a massive and elaborate exercise. Herbalife has been accused of targeting vulnerable consumers, like the Latino immigrants in the US, who may be prone to buy the business opportunity to pursue the American dream. The company does excellent in places like Asia-Pacific developing economies, a region where net sales were $1.24 billion in 2019. Other profitable destinations include Latin America and some African countries.
US authorities have already been tasked with determining if Herbalife is a pyramid scheme or not. Not long ago, in 2016, the Federal Trade Commission decided that it was not a pyramid. Still, they made the company entirely restructure its US business operations, as a part of a settlement. The legal process included a $200 million payment from Herbalife to compensate consumers that were deceived into believing they could earn substantial money selling the products between 2009 and 2015.
The FTC also recognized that distributors made no profits out of actual product sales. Again, it laid out a warning, and requested Herbalife to, literally, “start operating legitimately” after thirty-six years. The company took the settlement as a victory back then, and it has managed to stay afloat. But legal battles don’t seem to be over for Herbalife.
Recently in August this year, the company agreed to pay more than $122 million, this time to resolve an investigation by the US Securities and Exchange Commission about the company bribing Chinese government officials to obtain permits and increase Herbalife’s business in China. The US Justice Department stated that: “By engaging in a decade-long scheme to falsify its books and records to conceal corrupt and other improper payments to Chinese officials (...), Herbalife misrepresented important information made available to investors."
There are recent reports of a federal court in Miami just reopening a class action that seeks more than $140 million in damages against 44 top distributors. Stories like that keep raising questions about the multi-level business of companies like Herbalife, Amway, or Avon. Meanwhile, John Agwunobi, the current Herbalife CEO, states that over five million shakes are consumed globally daily and that it is the number one meal-replacement company.
So, Herbalife seems to have lived at the edge of legality since the beginning. They can say they have paid close to half a billion dollars settling the legal accusations made against them so far and keeping their head up.