Leveling Off Multilevel Marketing

0

The time has come for Herbalife Ltd. to abandon its multilevel marketing business model.

Yes, I know that would be radical. It may spawn lawsuits and likely would result in Herbalife being a smaller and less profitable company. But it can’t go on this way.

In case you missed it – and it would’ve been hard to do so – Herbalife has been targeted by a hedge fund, Pershing Square Capital headed by William Ackman, that’s shorting its stock. The Wall Street gunslinger reportedly has bet $1 billion against the L.A. nutrition supplement company. He made a big presentation last month outlining why he believes Herbalife’s multilevel marketing arrangement is a grubby Ponzi scheme with a corporate sheen.

That was followed by heated denials and tepid explanations by Herbalife. For all I know, Herbalife might be 100 percent right. But you know the old adage: If you’re explaining, you’re losing.

Last week, the soap opera continued. A nine-month “investigation” by Herb Greenberg, a CNBC senior stocks reporter, was unveiled. And there were reports that the Securities and Exchange Commission might have opened an inquiry into the multilevel marketing practices of Herbalife. (The SEC’s enforcement chief wouldn’t commit when asked specifically, but he referred to Herbalife’s business model as

a “scheme.”)

For a moment, fate seemed to turn Herbalife’s way. A different hedge fund, Third Point Capital headed by Daniel Loeb, came to Herbalife’s defense. Loeb made a huge bet of his own, buying up 8.2 percent of Herbalife’s stock. He said Ackman had made “preposterous” claims.

This clash of the hedge fund titans led to a front-page article in the Wall Street Journal last Thursday – again, this was all hard to miss – and breathless coverage by CNBC. Commentators said they’ve never seen anything like it – hedge funds betting hundreds of millions on the question of whether Herbalife was a big sham.

On Thursday morning, Herbalife defended itself in a long presentation in New York. Its stock see-sawed during the day as investors parsed words, news and reaction. Herbalife’s chief, Michael Johnson, didn’t help his case by being evasive under questioning.

Look, Johnson might be absolutely right and his company might have a perfectly sound

marketing arrangement. But the more he claims Herbalife is not a Ponzi scheme, the more he comes off sounding Nixonesque. (“I am not

a crook!”)

Herbalife is losing this war. It can’t go on this way. These attacks are killing the company. And they’re tiresome: Remember, this Ponzi scheme allegation has dogged Herbalife for years.

It’s time for Herbalife to take command of its increasingly dire and embarrassing situation. Its multilevel marketing arrangement might have turbocharged the company for a long time, but now managers must acknowledge that the party’s over.

I don’t presume to have a magic prescription to cure the company. But it seems the company has a good foundation with the so-called nutrition clubs – places where customers can buy products individually, a shake at a time (for about a 100 percent markup). Maybe Herbalife can focus on those, perhaps franchising such shops. Its supplements could be sold retail there.

Yes, it would be difficult and expensive to change the marketing arrangement, and its aggrieved distributors, among others, could sue. Even in the best outcome, Herbalife likely would become a less potent corporate entity.

But it’s a much better choice than continuing on as it has been, fighting and explaining. Denying and explaining some more. And losing.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].

No posts to display