LOS ANGELES — More than 12,000 Latino independent distributors for Herbalife gathered at the Los Angeles Convention Center Oct. 17 for the nutritional supplement company’s annual «Extravaganza,” a four-day event that included seminars, business development training, a “Fiesta Gen H” dance and a fundraising workout for charity.
The “Extravaganza” pays homage to a Latino community that has become the mainstay of Herbalife’s $4 billion business — about 64 percent of its U.S. distributors, a quarter of a million people, are Latinos. The event’s website now displays a gallery of photos of beaming distributors doing everything from gyrating at “Fiesta Gen H” to posing in front of a blow-up photo of Herbalife CEO Michael Johnson.
What the gallery does not show is the spectacle that unfolded outside the convention center on Oct. 18, as dozens of protesters brandished signs saying “Stop Exploiting Us” and handed out a letter to distributors alleging Herbalife has targeted the “family-oriented and trusting Latino community” with false hopes of making easy money selling its products.
According to Herbalife’s own data, 88 percent of Herbalife’s distributors earned no payments from the company in 2012, and only 3.67 percent received more than $1,000 for the entire year.
The protest was organized by the Coalition to Stop Herbalife, which includes Latino organizations, lawyers and former Herbalife distributors.
“No one community should have to bear the brunt of a company’s predatory business model,” the letter said.
Herbalife has made a significant investment in outreach to the Latino community, in large part through informal “nutrition clubs” operated out of distributors’ homes and strip mall shops. Outside the L.A. Convention Center, according to eyewitnesses, some distributors spat at activists, and CEO Johnson angrily told them, “You don’t know the facts. We don’t want to hear your lies. This is all lies.”
However, there are signs that the concerns over Herbalife’s relationship with the Latino community are gaining traction. On Jan. 24, California Attorney General Kamala Harris met with activists, who say she is empowered under a 1986 court order to investigate whether Herbalife is operating an illegal pyramid scheme.
The anti-Herbalife coalition asked Harris for “a thorough and swift investigation to try to find out if this company is doing business practices that are a detriment to the Latino community,” said Joseph Villela, director of policy and advocacy at the Coalition for Humane Immigrant Rights of Los Angeles.
In Washington, D.C., Sen. Edward Markey, D-Mass., has called on the Securities and Exchange Commission and the Federal Trade Commission to investigate Herbalife’s business practices, citing the case of a Norton, Mass., family who lost the $130,000 they put into Herbalife.
“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” Markey said in a statement.
Record sales
According to the FTC, participants in a pyramid scheme pay money to a company and in return they receive the right to sell a product and “receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.”
Herbalife, which was founded by the late Mark Hughes in 1980 and is based in Los Angeles, has always vehemently denied it is such a scheme, saying it operates as a perfectly legal “multi-level marketer.”
The Herbalife hierarchy consists of 11 levels of sales reps, starting with the distributor rank and going all the way up to founder’s circle. How far a distributor moves up the hierarchy depends on how much “volume” they accumulate in a specified time period.
At the lowest rung of the ladder, distributors earn a 25-percent discount from the retail price of Herbalife products. Those on the fifth, or supervisor rung, get 50-percent off and become eligible for commissions, or “royalty overrides,” for developing, retaining and managing other distributors. Production bonuses are also available to reps for purchases by people in their “downline” organizations.
The company has weathered past storms over its practices. In 1985, for example, the California attorney general and the state Department of Health Services charged Herbalife with making “untrue or misleading” product claims and operating an “endless chain marketing scheme.” Herbalife settled that case for $850,000 and agreed to the court order requiring it to carefully track distributors’ sales and barring it from exaggerating the health benefits of its products.
Herbalife’s 2012 net sales of $4.1 billion were a record for the company and an 18-percent increase over the previous year. Formula 1, a high-protein shake mix, is its top-selling product.
In the Latino community, it has experienced rapid growth since U.S. distributors imported the nutrition club concept from Mexico, which is second to the U.S. in Herbalife sales. At the clubs, consumers can buy single servings of Herbalife products — a much cheaper alternative to having to purchase them in bulk to use at home.
Herbalife also sponsors the L.A. Galaxy professional soccer team, which has huge Latino fan support and has hired Antonio Villaraigosa, L.A.’s first Hispanic mayor, as an adviser since he left office last year.
But the company has come under renewed fire since late 2012, when hedge fund manager Bill Ackman said it was a pyramid scheme in which most of the independent distributors end up with garages filled with Herbalife products they cannot sell, and only the few distributors who build large networks get rich.
According to one of Herbalife’s own regulatory filings, most of its distributors “have not sponsored another distributor and do not earn compensation relating to products [sic] sales made by or to other distributors.”
Ackman also displayed photos of purported Herbalife nutrition clubs, including one in which trash cans and a discarded mattress were lined up outside the entrance. Herbalife, he suggested, is operating unlicensed restaurants by calling them “clubs” and lures neighbors into becoming reps by offering “complimentary beverages.”
“Herbalife’s nutrition clubs are required to follow a bizarre set of rules that … appear to be designed to bolster Herbalife’s contention that nutrition clubs are not retail stores, restaurants or food establishments when in fact that is exactly what they are because they are selling food at fixed retail locations,” the Oct. 18 letter to distributors said.
Herbalife’s headaches
At CHIRLA, officials decided to support the Coalition to Stop Herbalife after hearing complaints about the company from Latino distributors.
“The majority of distributors are not even making minimum wage trying to sell the products,” Villela told MintPress in an interview. Some of them “feel that the scheme is very similar to a pyramid scheme. For us that’s a big red flag.”
Villela noted that Latino immigrants are particularly vulnerable to schemes that promise an easy path to wealth because they have come to the U.S. “in hopes of getting a better life,” are reluctant to seek redress from consumer protection agencies, and face a language barrier.
“There’s a question whether or not Herbalife’s business practices are actually allowing people to make a profit,” he said.
Other Latino organizations have been asking similar questions.
“A particular concern to us about Herbalife is whether distributors make money selling products or recruiting others to sell products,” Jose Calderon, president of the Hispanic Federation, wrote the FTC in May. “The latter is an indicator of a pyramid scheme.”
In his Jan. 23 letters to the SEC and FTC, Markey asked regulators to look into, among other things, how Herbalife’s compensation system works, how much profit the average distributor can make from retailing to non-distributors and distributors and from purchases of their products by their downline sales network, and why Herbalife has provided “inconsistent” estimates of sales to non-distributors.
“Typically, the more sales occur within a distributor network in which the products are not purchased by those who would be expected to ultimately consume them, the more likely a company is to be a pyramid scheme,” Markey noted.
Adding to Herbalife’s headaches, a Los Angeles judge ruled in October that former Herbalife distributor Dana Bostick could proceed with a class action lawsuit alleging he could not make a profit because those distributors getting a 25-percent discount on products must compete with those getting a 50-percent discount.
Bostick’s allegations had met the FTC’s test for a pyramid scheme, U.S. District Judge Beverly Reid O’Connell said, citing the “considerable discounts and advantages offered to supervisors” who recruit downline distributors.
But some in the Latino community have risen to Herbalife’s defense.
“[T]he critics of Herbalife and multi-level marketing companies are confusing business ventures with a welfare program,” Rafael A. Fantauzzi, CEO of the National Puerto Rican Coalition, wrote in a column for Fox News Latino. “They assume that everyone must have equal outcomes, not just equal opportunity.”
But Villela believes Fantauzzi is missing the point.
“We’re not saying everyone should make the same sales,” he said. “We’re talking about whether you can generate sales or not.
“These are questions we don’t have answers to yet,” Villela added. “At this point, we ought to be investigating the company.”