With about 4,000 employees, nutritional supplement maker Herbalife Ltd. would seem to be a decent sized company. Yet that number pales in comparison with its network of independent distributors, who number nearly 2 million.
By keeping payroll small while revenue rolls in from millions of sales reps, the downtown L.A. company has kept costs down and profits high – so high that it recorded an astounding 81.1 percent return on equity over the past few years.
“We kept a very lean infrastructure,” said Chief Operating Officer Richard Goudis.
In fact, Herbalife easily topped the Business Journal’s annual ranking of most profitable companies in Los Angeles County based on three-year average return on equity as of June 30. (See list on page 22.)
Herbalife did have a few things in common with other companies reporting strong return on equity. Many of those also were lean and mean – and raking in the green.
In fact, this year, fully half of L.A.’s 10 most profitable companies have fewer than 200 employees, well below the government’s 500-employee threshold to be considered a small business. The highest-ranking companies come from a variety of industries, but many have business models that simply require few employees.
Cherokee Inc., an apparel licensing company in Van Nuys, was the second most profitable local company despite having just 20 employees running all of its operations. Another, even starker, example is Peerless Systems Corp., which has just five employees handling its software licensing business. With a 36.6 percent average return on equity, the company ranked No. 7.
Some other companies showing good profits benefited from market trends. High-end retailers, such as True Religion Apparel Inc. (No. 8) and Guess Inc. (No. 10), rode a modest recovery in their industry.
Herbalife directly benefited from its multilevel marketing business model, which in the past has been plagued by lawsuits alleging that it’s nothing more than a pyramid scheme. In response, the company tightened up control over its selling networks, requiring the majority of its products ultimately to be sold to end users.
It also juiced up its marketing and entered growth mode. The company sponsors more than 100 athletes, teams and sporting events, including the Los Angeles Galaxy soccer team and the Tour of California bike race. The point is to associate the brand with healthy and active lifestyles.
“We’re getting behind the brand more, we’re spending more on advertising and promoting the brand more than ever before,” Goudis said.
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