Herbalife overview

Running head: Herbalife International 1

Herbalife International

Jake Freeman

ORG530-1: Business Ethics and Sustainability

Colorado State University – Global Camus

Victoria Figiel, Ph.D.

March 3, 2013

Herbalife International 2

Herbalife International

Herbalife International LLC was founded in 1980 by Mark Hughes as a direct to

consumer nutritional supplementation company. Herbalife started as a simple idea of Hughes’ to

“change the nutritional habits of the world” (iChange, 2012). Hughes’ mother died due to an

overdose brought on by a cocktail of diet pills prescribed by doctors to assist with weight

problems which were in turn brought on by a poor nutrition plan. After the death of his mother,

Hughes determined to find or found a simple and effective nutritionally complete healthy meal

replacement program. Within one year it grew into a multi-million dollar company and within 13

years it grew into a billion dollar company (Beach, 2013). For Fiscal Year 2012 the company

enjoyed strong corporate financial performance, netting a profit of $4,100,000,000 (Investor

Relations, 2013).

The company is organized into two parts: corporate and sales. Corporate Herbalife

focuses on research, development, marketing, sponsorships, ethical and legal considerations of

the company as a whole. As such, it is answerable to outside agencies and organizations such as

the FDA and FTC. The sales portion feeds off of the product development, brand recognition,

and marketing drives created by corporate. Each sales distributorship is an independent entity

who has gained permission to use Herbalife logos, products, and support (Distributor Policies-

Code of Honor, 2013). In the following paragraphs, these two main entities which make up

Herbalife will be discussed. Due to the complexity of sustainability practices within a dynamic

two part company, some sustainability issues will be discussed throughout, including the

Corporate Sustainability Model as well as structure and accountability.


Corporate

The corporate wing of the company is broken up into separate entities. Germane to this

paper are the ethics, research and development, and community outreach departments. Each

department is staffed with full time employees. Corporate employees may not also be

independent distributors of Herbalife products due to conflict of interest issues. The ethics

department has significant authority within the company and is known by the mantra “Protecting

the Golden Goose” (Herbalife Today Magazine, 2011). Their task is to enforce stringent ethical

guidelines corporate has in place to protect consumers and distributors from unethical behaviors

on the part of errant distributorships. As a personal experience, recently there was a Millionaire

Team member who posted photos of his income pay checks as part of a power point presentation

to a large seminar. This is considered as unethical baiting by Herbalife rules and guidelines.

After investigation, Herbalife ethics shut down the member’s distributorship and nutrition clubs

and banned him from the organization for two years, costing him millions. Ethics are constantly

discussed at Herbalife meetings and events and distributors will frequently observe each other

and give guidance on ethical questions.

Herbalife has a robust team of recognized scientists working within research and

development, to include Dr. Louis Ignarro, Nobel Laureate, and Dr. David Heber, named “Best

Doctor in America” at least once (Herbalife Science, 2013). Lead by this team, product

development is relatively slowly. The deliberate pace is for sustainability purposes, often taking

a year or more per product. Each product goes through a conceptualization stage, feasibility stage

where distributor stakeholders are asked for input, and formulization stage where refinement and

exploration on the long term ingredient availability and quality are determined. Through this

method, Herbalife releases at least one key market product per year (Product Development,


2013). The inclusion of distributors allows the company to avoid marketing disasters where a

product is generated with excitement in the lab, but met with complacency in the marketplace.

Products under development will often be hinted at or even sampled in larger gatherings called

Success Training Seminars, Leadership Development Weekends, or the annual keynote event,

the Herbalife Extravaganza.

In view of philanthropy and like external outputs, the community outreach department

has several initiatives through which distributors can volunteer time and money. The three most

popular are the Herbalife Family Foundation, Casa Herbalife, and the African American

Initiative. (Social Responsibility, 2013). Herbalife Family Foundation and its subsidiary, Casa

Herbalife, focus on humanitarian services around the world and provide “$2 million in funding

and volunteer assistance each year to more than 90 organizations worldwide. These funds bring

nutrition to more than 8,165 children in over 50 countries on a daily basis” (Herbalife, 2009;

Herbalife Family Foundation, 2013). The African American Initiative is the result of Herbalife

leadership recognizing that as a demographic, the African American community is hard hit by

nutritional and economic issues (African American Initiative, 2013). Herbalife recruits rising

African American sales and corporate representatives within its sales and corporate wings to act

as emissaries to African American communities about proper nutrition as well as the possible

financial benefits that can be derived from Herbalife Wellness Coaching.

Sales

Distributors are the only mechanism through which the company markets its products.

Through its well-developed recognition programs, easily accessible training and distributor

service programs, thorough research into new and existing products, and corporate focus on

environmental and community synergy, Corporate Herbalife protects its lifeline of distributors.


The following paragraphs outline how Corporate Herbalife supports its human resources and

gleans financial resources from them, Perhaps this is why not only has the new distributor corps

grown but experienced distributors have stayed within the organization and a rate of 50%, above

industry average (Press Release 2012).

High quality products, if not married with an effective marketing system, may not be

able to last. In view of this, corporate has established an inexpensive and robust online platform

so that distributors can sell products online. Distributors can order (wholesale) a customer’s

product (retail) which is sent from central warehouses “just in time” without ever seeing those

specific products themselves. As such, there is no need to keep an inventory on hand, which

minimized overhead costs. Using this model, fledgling distributors with limited financial options

can create on online business for under $130, including an partnered outside merchant account

services such as ProPay, which benefits the company by opening their doors to individuals with

desire and sufficient skills or willingness to learn who do not have the capital available to launch

a traditional business. It assists communities by opening up the doors for entrepreneurship to

community members who desire self-employment. Distributors can purchase wholesale products

in large quantity and keep a stock on hand for instant sales, but this is typically not recommended

for reasons discussed later. In short, massive quantities are purchased for operation of so called

“nutrition clubs” rather than using the “just in time approach” Regardless of the method of

transacting business, there is no fault or fee associated with not creating a certain sales volume.

The online sales nomenclature allows people up several levels in the organization to monitor

volume point production and identify inappropriate activity.

In regards to labor practices and employee benefits, the sales portion is organized after

the multiple-income stream model, commonly called multi-level marketing. It encompasses


some 2.7 million independent distributors (Annual Report, 2012), called “Wellness Coaches”,

and their subsidiary distributors. In a business context this model is easily corruptible and often

results in poor returns for entering members (Greene, 2012). However, it is important to

differentiate between a legitimate MLM and a pyramid or Ponzi scheme. In essence, in a Ponzi

scheme there is not a legitimate end product available, and the method by which participants

make money is by bringing new members into the actual organization. In Herbalife,

distributorships derive no benefit from simply recruiting new distributors. To keep rosters clean,

every year on the date of original purchase of membership, each distributorship is charged a $14

processing fee. If a distributor does not pay it, they are scrubbed from the Herbalife distributor

account and unable to become distributors again for two years.

For those who wish to remain active either as wholesale purchasers for personal use or

actual Wellness Coaches for others, independent distributors are able to purchase product at a

25% wholesale and then sell retail, essentially keeping $25 of each $100 sold. The intent is to

produce enough “volume points” (approximately $1 per volume point) to attain 35%, 42%, and

finally 50% wholesale savings, which increases their retail profit margins. The 50% level is

referred to as the “Supervisor” level. Once a Supervisor, a person can bring interested individuals

into the business and train them how to successfully act as a Wellness Coach to clients using

practicable and duplicable business methods. Recognizing the effort it takes to train a new

person, corporate Herbalife will match 25% of each new distributor’s sales revenues as an

override to their trainer, payable no later than the 15th of each month.

Beyond attaining “Supervisor” status, a distributorship can, completely alone and with no

distributor organization built under them, build enough consecutive volume point production to

attain World Team. This means that for four months in a row a distributor has achieved 4000


volume points. In theory, these volume points can be from personal consumption or personal

sales. Although a subsidiary organization of distributors can be built by a distributor prior to this

point, no more real growth can occur after this point unless an organization is created.

Regardless of personal sales or revenue after World Team, no more advancement can come

unless a distributor can show leadership enough to teach others top do what they have done.

After World Team, a distributor can achieve Tabulator Team status which entails each

subsequent level above it. Established by strict business and ethical guidelines as set forth by

corporate these levels include Global Expansion Team, Millionaire Team, President’s Team, and

Founder’s Circle. It must be noted that these additional levels are not based on the raw amount of

distributors a supervisor brings into the organization. Subsidiary distributorship is irrelevant. As

a sustainability check, a distributorship gains nothing if a new distributor joins their organization,

unless that new distributor experiences some modicum of success themselves. This aids in

eliminating the risk of the organization becoming a “pyramid scheme”, as product must be

purchased and consumed. The various levels are simply a measuring stick to success. The real

benefit comes from additional training and networking with those who have discovered

practicable methods for success. A simple way to view the levels is this: Global Expansion Team

(GET) requires any number of subordinate supervisors attaining a net of 20,000 volume points

(approximately 5 fully active supervisors creating 4000 volume points per month each, of which

the GET member will receive royalty overrides of 5% from the three levels of distributors below

them); Millionaire team requires 4000 royalty points for three consecutive months; President’s

Team requires 10,000 royalty points for three consecutive months. The royalties override

percentage earned are typically the same per level, but the larger organizations make the higher

levels more lucrative. There are reports from time to time that some distributorships try and


influence their team members to purchase massive quantities of product themselves in order to

inflate their own numbers. Unless purchases are made to operate a nutrition club, large purchases

run counter to corporate ethics guidelines and are looked at as unsound business practice

(Distributor Policies- Expenditures, 2013). Common sense rules of business apply.

The company responds well to external requirements of sustainability. An example of

this is the companies’ use of ephedra, the popular but now banned organically derived weight

loss ingredient. The US Food and Drug Administration banned the substance in 2004, which sent

many manufacturers scrambling to find a quick alternative to avoid catastrophic market share

loss. Herbalife, however, faced no such issue. Although used in products during the 1990s,

Herbalife discontinued its’ use in 2002 due to emerging research on the dangers of the ingredient

prior to any dictate from the government. Internal correction is a truly sustainable practice

(Epstein, 2008).

An oft heard challenge on both the corporate and sales venues is to “change the

nutritional habits of the world” (iChange, 2012). Based on that internal drive and even after the

death of Hughes in 2000, the company researches and develops new products at a slow and

highly vetted rate. As a safeguard against falling for short term marketability pressures at a

possible risk of long term sustainability, Herbalife CEO, Michael O. Johnson hired Vasilios

Frankos M.S., Ph.D., former head of the Food and Drug Administration’s Supplementation

Division to oversee Herbalife’s consumer safety and quality control (Press Release, 2010).

Frankos and his team have the autonomy and responsibility to audit and, if necessary, shut down

any manufacturing or processing cycle at any point based on professional assessment of

sustainability violation. Often, this leads to shortages in key products. However, the Herbalife

Distributor Relations Center responds to complaints by stating that product integrity takes


precedents over available supply. Certainly, distributors will likely not be happy nor successful if

key products are constantly out. As such, Herbalife maintains high standards for product

development, to include ingredients and manufacturing (Holistic Therapies- Belfast, 2013).

Herbalife manages inputs into the organization rather well and the processes by which

they do it are interesting. For instance, leadership in Herbalife is a results based enterprise. On

the sales side of Herbalife, only high and consistent producers are invited to speak and mentor at

main events. Outside speakers are not hired. Typically in national or regional events, Millionaire

team, President’s team, and Founder’s Circle lead the training. Rising leaders within the

organization are able to mentor within their own organizations or organizations to which they are

invited. However, promising Supervisors and World Team members are sometimes invited to

speak and convey their strategies for success. Enabling fairly new coaches to be recognized is an

invigorating practice for other new distributors. Many may regard such recognition as evidence

that they too could be recognized for achievements.

As a specific example of the type of leadership Herbalife attempts to instill, the case

study could be Michael O. Johnson, former CEO of Walt Disney International, who Herbalife

hired as their new CEO. Upon the untimely death of Mark Hughes, Herbalife was leaderless and

faced a crisis. Johnson filled the void and took company into its new future. With his tenure as

president, Herbalife has shown renewed and deepened dedication to sustainability. He currently

leads Herbalife Corporate and communicates the organizations values and development of a

corporate sustainability strategy (Epstein, 2008). Johnson has led the organization toward greater

sustainability practices and active sustainability audits, making results and metrics reports

available to the public (Audit Committee Charter, 2013). His tenure has led to awards and

recognition for Herbalife’s sustainability practices. (Awards and Recognition, 2013). This entails


building design (Press Release, 2009) to product development. From explanations gathered

from current Herbalife distributors who were distributors prior to Hughes’ death, while Hughes’

initial vision and charisma led the company to the success it had, the direction Johnson has taken

has been an increasingly sustainable and lucrative one. When Johnson took over, the company’s

popular Formula 1 meal replacement shakes was its primary marketing success (Beach, 2013).

Desiring to develop greater market diversity, Johnson led the company’s expansion into high

grade athletic meal replacements, pre-workout, post-workout mixes, and 12:1 carb-to-protein

during workout mixes, the Lift-Off® energy drink supplement, and so forth.

On product development, the story of Herbalife’s new athlete’s line of supplements is

useful. Johnson happened upon Dr. John Heiss, a recent UCLA PhD graduate, while on a hill

climb cycling exercise in the hills above Los Angeles. Dr. Heiss was marketing from the trunk of

his car a new nitric oxide pre-workout blend he had developed. After speaking with the scientist

and having a good first impression, he took samples back to the Herbalife lab for testing. Once

the composition and quality of the sample was proven to be legitimate, Johnson and Herbalife

hired Heiss, the company gained proprietary rights for the supplement, and provided funding and

labs for Heiss’ further research and development of what became the popular line of products

called “24”. According to Heiss’ vision, the line is so termed as it is designed for “the 24 hour

athlete” (Calbay, 2011). That expanded the market for Herbalife and took pressure off of the

foundational meal replacement program, which in turn made the company more sustainable

economically. It also showed Johnson’s willingness to support local scientists and entrepreneurs,

bringing them into the framework of Herbalife. With the previously mentioned team of scientists

and researchers on staff, an argument could be made to keep idea generation inside the company.

That Johnson would entertain the research and product development of a new Ph.D. vending his


work from the back of a car shows a local attitude underneath the power and prestige of an

international multibillion dollar publicly traded firm.

Seemingly, the company’s reputation amongst stakeholders and their reaction to the

company’s sustainability performance has been mostly positive. Revenues are increasing which

means more products are being purchased, which means positive brand recognition. Enough

capital has been created to purchase and build a new botanical refinement plant in Changsha,

Hunan Province, China, and stocks are on the rise. The Changsha refinement plant is an

interesting evolution for Herbalife. Herbalife is striving towards a sustainability lifecycle concept

first spoken by Mark Hughes prior to his death called “Seed to Feed”. According to the concept,

Herbalife would own the entire process of their production from the fields ingredients are grown

in to the manufacturing plants where the products are created (Holistic Therapies- Belfast, 2013).

While this has not happened in every Herbalife department, the Changsha botanical plant is a

major step. This is evidence of Herbalife’s capital budgeting and sustainability strategy: the

company wishes to own its resources for greater sustainability in the future. Since Herbalife’s

focus is on balanced nutrition and wellness, it seems logical that the company would attempt to

manage the risk of unreliable third party supplier stakeholders by owning their own farms,

processing plants, and refinement centers. That way, the company can ensure that unwanted

chemicals or cross contamination are kept to a minimum.

One recent negative point was raised by stock specialist William Ackman when he made

a 3 hour presentation on what he saw as the unsustainability of the Herbalife model and

likelihood of the FTC suddenly declaring Herbalife’s business model an illegal pyramid scheme.

(Herbalife, 2012; Hotaling, 2013). Essentially, his argument was that Herbalife relies on new

distributors to enter the company for established distributors to make revenue and as such should


be closed by the FTC. When this happened, he predicted, Herbalife stock would fall to zero. He

shorted the company 20 million shares. Conversely, Carl Icahn, John Hempton (Taub, 2013) and

Daniel Loeb (Greenberg, 2013) derided his conclusions, pointed out that distributors do not

make revenue from simply recruiting, and that even if the FTC closed Herbalife’s US market,

80% of Herbalife’s revenue is international and thus a zero dollar stock is highly unlikely. The

two brokers purchased large amounts of stock in the company.

Herbalife could strengthen its position as a world leader in wellness products, education,

and sustainability by creating more available information on plant certification, metrics utilized

for audits, and as Ackman stated in his critique, tighter accounting of which distributors actually

distribute and which simply purchase for personal use (Hotaling, 2013) . The building of a new

plant in China and recently unveiled plans to open a new 500 employee factory in Winston-

Salem, NC (Associated Press, 2012) seems to indicate that the company expects growth. Growth

will likely not be unnoticed, which likely means additional scrutiny. As the previous pages may

have indicated, Herbalife is not slow or reluctant to adapt. Both outsiders and insiders would

benefit from more clear documentation and records of fiscal and sustainability activity within the

company (Schaefer, 2013). This will not only make it less of a target for the Ackmans of the

world, but likely give distributors greater confidence in dealing with those who have questions.

Herbalife, the 33 year-old multi-billion dollar international wellness, weight-loss, and

physical performance company, has strong sustainability characteristics. With a professional and

dedicated corporate staff, a strong focus on ethics, and a talented team of scientists and market

analysts behind it, the sales side of Herbalife is set up for success in marketing Herbalife

products. This would not be so without the code of honor and attitude toward sustainable thought

and action by corporate leadership, which percolates throughout the organization. Community


outreach and volunteer programs give back to the areas where Herbalife distributors operate, and

certain demographics can benefit from programs such as the African American Initiative. As

with any large, successful organization, Herbalife has its critics. Yet, if certain corrections are

made and the organizations remains as sustainable and flexible as it has in the past, perhaps

Hughes goal of changing the nutritional habits of the world can be realized, at least in part.


References

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Supporters.html

Education

Herbalife overview