Thursday, December 18, 2014

Herbalife Dying - Part 2

This post continues from Part 1.

So what's so bad about Herbalife? Obviously not every Nutrition Club is gonna make money and not everyone would benefit from nutrition drinks. Isn't it a case of buyers beware? I guess every argument can always be framed on a spectrum. On one hand, Herbalife gives everyone an opportunity to become financially free, and while they are at it, drink lots of overpriced nutritional shakes and sells that to a dozen friends and help them lose weight as well. That's win-win-win for everyone, and that's Herbalife's value proposition.

On the other hand, it's scam that does more harm than good overall as it improvishes a lot more poor people to help a handful of rich people get richer. Yeah, meaning rob the poor and help the rich. But which argument is true?

Every argument always boils down to percentages and probabilities. Type A personalities will have great difficulties understanding this hence they are always arguing over why they are 100% right and others are wrong. We must understand that this world is not digital and the truth always lies in between black and white.

Here's the stats, 99% of all Herbalife members will earn less than the minimum wage (like $3 an hour) Less than 1% will make decent income and about 0.1% of all Herbalife members makes six figure income annually. So what Herbalife promised is technically not impossible. Just seriously difficult. The financial freedom, save your friends, save the world, nutrition for better life blah blah, is a mere 0.1% chance that one could actually make it happen. One in a thousand. It's harder than getting into Harvard University. So to get rich via this scheme? Why not try applying for Harvard instead?

What's more, Herbalife does more damage than just promising an empty dream, it is selling overpriced useless shakes to lots and lots of people. It is estimated that over the next 10 years, consumers will lose $2-4 billion dollars through Herbalife.

These no.s are from

Needless to say, Herbalife argues that the stats are wrong, they have more members and distributors earning more money. The arguments really get into percentages, probabilities and convoluted counter-arguments. But what stood out was that Herbalife does not like to disclose how much their promoters actually earned. Not the average amount earned, nor median salary, nor any statistics that would show mathematically the probability of making good money. What's also interesting, Herbalife goes out of the way to state their "facts" against misrepresentations:  

Herbalife's version of misrepresentations and facts

Now, the way I understood the word fact was that it should be something quite indisputable, like IBM generated more than 10 billion dollars of free cashflow or IBM's CEO is a lady called Ginni Rometty or IBM has been in existence for more than a hundred years. So let's take a quick look at the 5 facts that Herbalife stated. Well, none of them really stood up to this indisputability test, do they? Is high quality product a fact? Maybe #2 on millions of consumers in and out of network could pass off as one fact. But then again, what's in and out of network?

So here's a firm that couldn't differentiate between what's fact and what's not claiming that it is saving the world by lifting people out of poverty, empowering them to sell great nutritional products and solving the world's obesity issue all at once. That's some firm! Go fly kite IBM.

Alas, we know that's too good to be true. Rather than making nutrition for a better world, there were evidence that Herbalife did real harm. The firm was sued in the past for misrepresentation and also some of products contained hazardous ingredients that have caused people to experience liver failure after consumption. Of course, Herbalife always managed to settle these issues out of court, never admitting to any wrongdoings.

Some might ask, if Herbalife was really such a scam, how did it earn over a few billion dollars in revenue annually with significant net profit over all these years. Its products are also sold globally and a lot of people have heard about it, or even consumed some of these products and found them beneficial. Well, I would say that scam could go on for a long, long time before it gets unravelled. Madoff was at it for 30 years, Enron also cooked its books for decades. Sometimes, some of these would never be uncovered. Sadly only in Disney movies would the bad guys ever get punished and the hero and his princess live happily ever after.

Having said all that, nothing is ever 100%, it is always between 1-99%. We cannot know for sure that Herbalife is 100% fraud and another Enron in the making. Everything lies on a spectrum and we can only say that maybe Herbalife is closer to the dark side ie it subtracted rather than add value to our world. One of the real time vindication would also be the stock price. The chart below showed how it roller-coastered over the past 2 years, rising up and down from $20 to $80 and now crashing its way to its multi-year lows.

Herbalife's 2 year stock price

Sad to say, the crash was actually brought about by slowdown in its emerging market sales leading to profit warnings and not because its scams were uncovered in a big way despite the SEC investigating it. In many parts of the world, it's business as usual. Herbalife stuffing its inventories into poor families and gullible people. They in turn living an empty dream that they would be financially free selling nutritional products to others.

Ironically, Herbalife dying and disappearing from existence would save some of these families. In other words, it would be Herbalife's death that is really nutrition for a better world. ;)

Part 1