The Problem With Herbalife's Business Model

Mar 12 2014, 8:31pm CDT | by

Herbalife has attracted a great deal of interest in Wall Street in the last year on the long and the short side of the market. Now, the company is the target of a Civil Investigative Demand (CID) from the Federal Trade Commission (FTC), according to a statement issued by the company:

“Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC.  We are confident that Herbalife is in compliance with all applicable laws and regulations.  Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years. ”

Investors on the short side of the market have every reason to celebrate, as the stock dropped following the company statement. Investors on the long side of the market have every reason to be concerned, though the company has warned about possible risks, including “the outcome of inquiries from regulatory authorities.”

At stake is Herbalife’s business model—a multilevel marketing organization whereby individual customer-distributors enlist other customer-distributors to work for them, in a pyramid style organization.

One of the things that some critics find at fault with this model is that very few people make it to the top of the pyramid reaping off a huge pay-off, while the vast majority is losing money. But isn’t the case with most business ventures?

The problem, I believe, isn’t with the very nature of a multi-level marketing network, but as to whether those who join it understand that nature: The difference between participating in the network as customers, end up buying products at inflated price (to pay for the commissions of the people who join the network earlier); and as entrepreneurs, developing a business that markets the network products, both directly and indirectly.

Hopefully the FTC investigation will come up with a ruling to clarify this confusion.

Source: Forbes Business

 
 

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