Herbalife's Sneaky Business Activities in China Raised Suspicion: Disguised Form of Recruitment Fees Gives away Its Pyramid Scheme
August 12, 2013 15:08 Source: First Financial Daily
Herbalife (NYSE: HLF), a global nutrition product magnate, has continued to be drawn into the whirlpool of the bull-bear battle since last May. Hedge fund manager William Ackman accused Herbalife of practicing a pyramid scheme and thought that Herbalife makes money by recruiting members rather than selling products. It is worth noting that, since August this year, financial guru Soros, as reported by overseas media, has taken a sizeable long position in the stock of Herbalife. He was another billionaire investor who joined the alliance of Herbalife's backers since the Herbalife bull-bear battle. Herbalife share soared over 10% on the day when this news was released. As the bull-bear battle unfolds at full scale, apart from its performance in the capital market, Herbalife's management and control over its distribution and the effects of its products have caught the attention of the industry. Recently, First Financial Daily discovered through private investigation that, while Herbalife is fast growing in the China market, its sales model is suspicious in five respects: collection of "recruitment fees" in disguised form, suspected exaggeration of product effects, possible windfall profit derived from products, fast growing clubs absent of strict supervision and control, and product purchase overly dependent on sales representatives or potential sales representatives…… A series of issues have deviated the direct selling model of this company, and have contradicted with certain provisions in the "Regulations on the Prohibition of Pyramid Selling" promulgated and implemented by the State Council in 2005. As a result, suspicion has been brought up that Herbalife's sales model is a pyramid scheme.
"Recruitment Fees" in Disguised Form
"Xiao Zhong, you'd better order products worthy of 1000PV these two days, so that we can get you promoted to senior business representative and you can then develop your own client base and get commissions." Business representative of Herbalife, Li Ming (pseudonym), who had introduced one of our reporters to become a premier customer of Herbalife, kept urging our reporter to purchase Herbalife products, although our report kept telling Li Ming that he has no intention to do so. Li Ming explained that Herbalife evaluates performance on the basis of the PV value. 1PV equals to RMB12. A monthly sales turnover of RMB1200 to 48000 (i.e.100PV to 4000PV) would generate a 15% to 30% sales commission. Li told our reporter that he has to invest by purchasing the products before making money and it would be pretty easy to sell the products afterwards. However, if our reporter fails to sell