It has become something of a ritual for many of them, arriving by 8 a.m. each day at a nondescript building at Nordhoff Street and Sepulveda Boulevard in North Hills.

Dozens of women and men, most of them Latino and residents of this working-class neighborhood, gather at an Herbalife-sponsored “nutrition club” on the second floor, above a smoke shop and a beauty salon.

They are there for their daily cup of tea and a weight-loss shake. Though there are no signs outside, the club is thriving along with thousands like it. And that has been providing an energy boost of sorts for downtown L.A. supplement maker Herbalife Ltd.

The clubs have become popular with dieters who don’t want to shell out $35 or more for a month’s supply of shakes but are more than willing to drop a few bucks a day – and have a chance to chat with friends. Some even have regular seats.

“People like to come here to socialize,” said Gustavo Zepeda, the 54-year-old owner of the North Hills club and about 200 other locations across Southern California.

Nutrition clubs, which have proved particularly popular in Latino communities, are reinvigorating Herbalife’s global sales and providing a platform for the company to penetrate new markets. The adoption of the model also marks a dramatic strategic shift for the multilevel marketing company, which for decades had relied on independent distributors to peddle weight-loss products and nutritional supplements in bulk to friends and neighbors.

Herbalife is now encouraging distributors to open clubs, which accounted for about one-third of the company’s $2.7 billion annual revenue last year and, executives hope, as much as two-thirds in coming years.

“They changed the way distributors go to market,” said Scott Van Winkle, an analyst at Canaccord Genuity Inc. in Boston who follows Herbalife’s stock. “You have more customers and lower price points, (so) you do get a more consistent model. That’s where you’re seeing as much growth as anywhere else.”

Herbalife recently reported record first quarter earnings and raised its profit forecast for the year. This month, share value hit $60.99, the highest level since the company went public in 2004, when adjusted for a recent stock split. Shares closed July 14 at $57.97.

Management shakeup

It’s not as if the company hasn’t been growing.

Herbalife has flourished since Walt Disney Co. executive Michael Johnson was hired in 2003 to shake things up at the company, which was founded in 1980 by the late Mark Hughes, who sold weight-loss shakes out of his car’s trunk.

Johnson, now chief executive, has sought to put the company’s unflattering past behind it, including lawsuits that alleged Herbalife’s multilevel marketing model was little more than a pyramid scheme.

Under Johnson, the company settled a class-action lawsuit, tightened marketing practices and expanded its lines to include fitness and skin-care products. This month, it introduced a performance nutrition line called Herbalife24. (See sidebar page 42.)

Johnson, who had run international operations for the Burbank entertainment behemoth, also spearheaded a major global expansion, and raised Herbalife’s visibility by signing sponsorship deals with the Los Angeles Galaxy soccer club and other teams. While the strategies proved beneficial, arguably the company’s most significant shift came about almost by accident.

In 2003, hoping to boost sales, one of Herbalife’s independent distributors in Mexico set aside space in his home where prospective customers could come, buy a single serving of shake and consume it in a social setting. Thus, the nutrition center model was born. The company initially resisted changing a distribution model that had been successful. As a result, the clubs took a while to catch on.

“It wasn’t significant enough to even start talking about until … three or four years ago,” said John San Marco, an analyst with Philadelphia’s Janney Montgomery Scott LLC.

Indeed, when Zepeda, who started as a distributor for Herbalife in 1992, went to Guadalajara when the clubs were first being launched to see them for himself, he was initially unimpressed.

“One tea, one shake for a couple dollars? I thought this is not big, serious business,” he said.

By comparison, a month’s supply of the company’s most popular product, Formula 1 Nutritional Shake Mix, can cost $35 or more depending on the distributor.

But after a few years, Zepeda was invited back by a friend to see the growing popularity of the clubs, which often had 30 or more daily customers.

“I got excited,” he said.

Born in Mexico, Zepeda opened his first nutrition club in Compton in 2008. After a little more than a year, business had more than doubled.

According to Herbalife, there are 70,000 nutrition clubs in at least 60 markets worldwide, about half of which are in Mexico. The United States counts some 11,000 clubs.

Herbalife now provides training and support for distributors who are interested in setting up clubs in their homes or renting space in strip malls. The distributors are given wide latitude in how they operate, but they are responsible for startup costs and any storefront leases.

However, the clubs are not open to the general public and barred from advertising or having storefront signage – even though Herbalife executives have compared the daily consumption model to Starbucks shops.

“It’s very important to us that our nutrition clubs are not perceived as retail stores,” said President Des Walsh. “It’s a private club. The essence of our business is the one-to-one relationship with the customer.”

Indeed, Herbalife is trying to incorporate the clubs into its traditional marketing model, which involves turning buyers and users of its product into future distributors.

“The context of daily consumption really focuses on the idea that our future distributors come from current customers,” Walsh said.

Global growth

In China, a potentially lucrative market, tight restrictions prevented Herbalife from using its traditional distribution model, so the company opened a handful of company-owned stores.

Nutrition clubs have become the leading distribution model in that country, resulting in 41 percent revenue growth there in the first quarter. Executives said the clubs have been popular in China in part because people there are not as comfortable inviting strangers into their homes and would rather meet at a retail location.

The clubs are boosting sales elsewhere across the globe where obesity is a growing problem. In the first quarter, revenue in Mexico was up 45 percent, Brazil jumped 52 percent and South Korea rose 74 percent.

“They are growing really in every region of the world in double digits, particularly in the Far East,” said Timothy Ramey, an analyst with D.A. Davidson & Co. in Lake Oswego, Ore.

Net sales in India, meanwhile, surged 165 percent from last year. That market is becoming more important for the company, which analysts said had previously been unable to penetrate with higher-cost bulk sales.

Shareholders are benefitting from the growth. In the first quarter, the company reported a profit of $88 million – a 69 percent year-over-year increase – on revenue of $795 million. The company, among the most profitable in Los Angeles County due to its lean distribution structure, said it will use its free cash to boost the dividend and buy back shares.

Despite shares having nearly doubled in price over the past six months, when adjusted for a two-for-one split in May, analysts believe there is a lot of life left in the stock.

Ramey, who rates Herbalife’s stock a “buy,” said the recent stellar performance does not appear to be a mere bump.

“They’re headed in a direction that is very aligned with what consumers are looking for,” he said. “There’s a lot of runway ahead of them.”