According to an analysis by Barron's, a US financial magazine, only by digging into the footnotes of reports, and checking other regulatory filings, can one estimate that their earning tables leave out 90% of Herbalife's distributors and almost 95% of Nu Skin's. More importantly, it documents how MLMs are getting their money from micro-credit institutions—an issue that is of serious relevance to India, where tens of thousands MLMs are luring the poorest people

Moneylife Digital Team

US-based Barron's financial magazine, which provides in-depth analysis and commentary on the markets and companies, has said that a careful analysis of Herbalife and Nu Skin numbers suggests that over 90% of their US distributors make no money.
 
"International markets offer fresh prospects for the companies, but even so, Herbalife's filings show it has to replace more than half of its distributor ranks every year. The world is large, but it is finite and increasingly well-informed. Herbalife's chief executive Michael O Johnson has said that his company is the "intersection of health and wealth," but the numbers show that distributors are capable of figuring out that it's a dangerous intersection," Barron's said in a report (Where Beauty Is Skin Deep).

The report said, Nu Skin's and Herbalife's annual reports disclose the commissions earned by their US distributors. But the disclosures by both firms tabulate commissions for only a top fraction of their networks-giving a distorted picture of what a distributor could expect to earn. Only by digging into the footnotes of those reports, and checking other filings at the Securities and Exchange Commission (SEC), can you estimate that the tables leave out 90% of Herbalife's distributors and almost 95% of Nu Skin's. Even in the small slice shown by Nu Skin, most are in a segment that averages under $600 in commissions per year. Only 451, or about 0.2% of US distributors, are in the sliver that averaged more than $15,000 in commissions last year, according to Nu Skin's compensation summary. The numbers are better at Herbalife, but still daunting: About 1,200 made it into the 0.2% sliver that got more than $100,000 in commissions, it added.



Herbalife's SEC filings do a good job of documenting the churn within its ranks. Last year, it lost 51% of its 'active' distributors worldwide-an improvement from the 60% churn in 2009. Nu Skin, for its part, refused Barron's request to quantify its turnover rate, which SEC filings simply describe as 'high'. "It is easy to start a Nu Skin business," says the company. "It [is] easy for them to drop out."

Importantly, the Barron's report highlights the use of credit (mostly obtained through microfinance companies) for subscribing to MLM schemes. Quoting present and former employees of Grameen America (the brainchild of Nobel Peace Prize winner Muhammad Yunus, is present in the US as well), the report says that in Omaha and New York, many who took Grameen microloans, joined Herbalife and other such multi-level sales organisations as self-employed distributors.
 
The earnest manager of Omaha's Grameen America branch, Habib Chowdhury, told Barron's that he now discourages women from borrowing to join Herbalife.

For Herbalife and its health-products rival Nu Skin, however, business has never been better, says the report. Over the past five years, Los Angeles-based Herbalife more than doubled its earnings to $3.30 a share and saw its stock quadruple. Nu Skin tripled profits, to $2.38 a share, over the same stretch; the Provo, Utah outfit's stock likewise tripled. Both NYSE-listed companies have shared their swelling cash flows with stockholders, through dividends and huge share repurchases. Herbalife chief executive Michael O Johnson was the highest paid boss of a public company last year, earning $89 million.
 
Robert Fitzpatrick, president of Pyramid Scheme Alert and author of "False Profits" and also a crusader against multi-level marketing (MLM) companies says, this is the first time that "a prominent business magazine is questioning the validity of two of the nation's largest MLM companies-Herbalife and Nu Skin".
 
"The most significant issue of this article, however, is that Herbalife and other MLMs are reportedly now getting revenue from 'micro-credit' loans granted by non-profit banks to help the poorest of the poor. MLMs are now disguising themselves as anti-poverty programs!" says Mr Fitzpatrick. This is of extreme importance to India.
 
At Moneylife, which is arguably the only publication that has been single-handedly campaigning against MLMs and pyramid schemes, we believe that Indian regulators and state governments need to watch this development carefully, especially when the discredited microfinance sector is looking for ways to revive its fortunes.
 
As Mr Fitzpatrick says, "Verified data show that 'success' in MLM schemes is less than 1% per year for consumer investors. The micro-loan repayments would be based on the ability of poor borrowers to recruit other poor people into the MLM business, rather than from sustainable, profitable sales to retail customers. In that system, each unit of the 'business', on its own loses money. Profit comes only from the investments from other poor investors, nearly all of whom are destined to lose. If this is the case, and it is occurring on a significant scale, it means that MLM may be corrupting the micro-credit lending field, which is operating in many of the world's poorest countries.
 
Micro-credit lending was originally aimed at creating self-sufficiency and building community infrastructure. It is the exact opposite of a predatory investment scheme".