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Herbalife

 
Hoover's Profile: Herbalife Ltd.
(NYSE:HLF)
Company Financials
Income Statement
Balance Sheet
Cash Flow Statement

Contact Information
Herbalife Ltd.
1800 Century Park East
Los Angeles, CA 90067
CA Tel. 310-410-9600
Fax 310-258-7019

Type: Public
On the web: http://www.herbalifeww.com
Employees: 4,000
Employee growth: 11.1%

Is it a weight-loss supplement or a way of life? Only Herbalife Ltd. knows for sure. Formerly known as WH Holdings (Cayman Islands) this holding company operates through Herbalife International, which manufactures and distributes weight control products including meal replacements, snacks and "enhancers." It also offers nutritional supplements, energy drinks, and skin care products. The company has international subsidiaries in 70 countries. Herbalife's multilevel marketing program involves more than 1.9 million independent distributors throughout the world.

Key numbers for fiscal year ending December, 2008:
Sales: $2,359.2M
One year growth: 9.9%
Net income: $221.2M
Income growth: 15.5%

Officers:
Chairman and CEO: Michael O. Johnson
CFO: Richard (Rich) Goudis
CIO: Charles A. (Chuck) Sperazza

Competitors:
Avon
Nu Skin
USANA Health Sciences

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Company News: Herbalife
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Company History: Herbalife Ltd.
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Incorporated: 1979
NAIC: 454390 Other Direct Selling Establishments; 325412 Pharmaceutical Preparation Manufacturing
SIC: 5963 Direct Selling Establishments; 2834 Pharmaceutical Preparations

Herbalife Ltd. is a holding company that operates through Herbalife International, Inc. This global multilevel marketing company produces and distributes a broad spectrum of more than 120 herb- and botanicals-based weight management and dieting products, cosmetics, and general health and nutrition products. Its goods are sold through a worldwide network of over one million independent distributors in 63 countries. Herbalife products, sold under a variety of brand names, include ShapeWorks meal replacement program, Niteworks nutritional supplement, Liftoff energy drink, and Radiant C and Skin Activator cosmetic products. Herbalife has thrived despite negative claims against its marketing schemes, product ingredients, and distribution methods.

American Success Story Beginning in 1980

Master salesman Mark Hughes began Herbalife in a Beverly Hills warehouse in 1980, selling the new company's dieting aids from his car. Hughes, whose parents were divorced soon after his birth in 1956, was raised in Lynwood, California, outside of Hollywood. By ninth grade, Hughes had dropped out of high school. He became involved in drug use and by the age of 16 was sent to the Cedu School, a private residential home for emotionally disturbed and troubled teenagers. It was there that Hughes developed a knack for salesmanship, rehabilitating himself by selling door-to-door raffle tickets in support of the school. By the end of his tenure, Hughes had joined the school's staff.

Another turning point for Hughes came at the age of 18, when his mother died due to an overdose of diet pills. As Hughes would tell it, according to Inc. magazine: "My mom was always going out and trying some kind of funny fad diet as I was growing up. Eventually, she went to a doctor to get some help, and he prescribed ... a form of speed, or amphetamine. ... After several years of using it, she ended up having to eat sleeping pills for her to sleep at night. After several years of doing that, her body basically began to deteriorate." The death of his mother stimulated Hughes' interest in herbs and botanicals, the use of which had become popular during the 1960s. Hughes set out to develop a dieting program based on herbal and botanical products that would enable people to lose weight safely.

Before founding Herbalife, Hughes the salesman received another kind of training when, in 1976, he began selling the Slender Now diet plan from multilevel marketer Seyforth Laboratories. Hughes quickly rose to become one of the pyramid's top earners. When that operation collapsed, Hughes joined another multilevel marketer, selling Golden Youth diet products and exercise equipment. By 1979, however, Hughes, then 23 years old, decided to form his own company.

Together with Richard Marconi, former manufacturer of the Slender Now products, Hughes developed the first Herbalife line of diet aids. Marconi, who claimed to hold a Ph.D. in nutrition, would later admit that his doctorate was a mail-order certificate from a correspondence school. Nevertheless, Marconi would remain an officer at D&F Industries, Inc., which would continue to manufacture much of the Herbalife line throughout the company's history. Also joining Hughes in the new venture was Lawrence Thompson, formerly of Golden Youth, and earlier, Bestline Products, which in 1973 was fined $1.5 million for violating California's pyramid scheme laws. At both Bestline and Golden Youth, Thompson worked with Larry Stephen Huff, later to become a Herbalife distributor, who was involved in what Forbes labeled the "father of all pyramid schemes," Holiday Magic, Inc., a multilevel marketer charged by the Securities and Exchange Commission (SEC) in 1973 with defrauding its distributors of $250 million.

The Herbalife plan involved limiting meals to one per day and supplementing the diet with protein powders and a regimen of as many as 20 pills per day. According to the company, Herbalife was an instant success, selling $23,000 in its first month and $2 million by the end of its first year. Hughes, described by Inc. as "a honey-tongued spellbinder" and "a tanned and blow-dried California swashbuckler," and by Forbes as a "firebrand preacher," brought multilevel marketing to a new height, by taking the Herbalife message to television. Booking two- to three-hour slots on cable television, including the USA Cable Network, Herbalife was an early purveyor of the so-called infomercial. The Herbalife television programs, led by Hughes himself, were, as described by Forbes, "full of inspiring testimonials from common people and resemble[d] old-style revival meetings in their fervor." At the same time, Herbalife published its own magazine, Herbalife Journal, equally filled with testimonials, for which the company reportedly paid $200 each, from distributor success stories to weight-loss victories of Herbalife customers. Within a short time, the Herbalife slogan, "Lose Weight Now--Ask Me How," began appearing on buttons and bumper stickers everywhere.

Legal Challenges: 1984-86

Herbalife grew rapidly. By 1985, the company appeared on Inc. magazine's list of fastest-growing private companies. That magazine labeled Herbalife's five-year growth "from $386,000 to $423 million, an increase of more than 100,000 percent, [as] by far the highest growth rate in the history of Inc. 500 listings." In that year, the company claimed more than 700,000 distributors in the United States, Canada, the United Kingdom, and Australia, bringing annual (gross) revenues of nearly $500 million. Yet, as early as January 1981, the U.S. Food and Drug Administration (FDA) began receiving complaints of nausea, diarrhea, headaches, and constipation, which were attributed to the use of Herbalife products. Herbalife distributors reportedly were instructed to assure customers that these side effects were the result of the body purging itself of toxins. By 1982, when the company published that year's edition of the Herbalife Official Career Book--a guide given to distributors that contained a full product list and descriptions of the uses and benefits for each product, as well as advice on building their Herbalife sales--the FDA took action against the company.

Among the complaints leveled against the company were a number directed toward the claims Herbalife made for its products in the Career Book. The Herbal-Aloe drink, for example, was said to help treat kidney, stomach, and bowel "ulcerations"; and Herbalife Formula #2 was said to be a treatment for 75 conditions ranging from age spots to bursitis to cancer, herpes, and impotence. In the summer of 1982, the FDA sent Herbalife a "Notice of Adverse Findings" requiring the company to remove the mandrake and poke root ingredients--both considered unsafe for food use--of Slim and Trim Formula #2, while also finding questionable the existence of "food-grade" linseed oil in the products. In response, Herbalife removed the mandrake and poke root and promised to modify the product claims found in the 1982 Career Book.

Herbalife was well into its surging growth--and Hughes was riding high himself, purchasing for $7 million the former Bel-Air mansion of singer Kenny Rogers, and marrying Angela Mack, a former Swedish beauty queen--when the FDA released a "Talk Paper" on its complaints against Herbalife to the press and public in August 1984. The company's troubles increased several months later when Canada's Department of Justice filed 24 criminal charges for false medical claims and misleading advertising practices against Herbalife. In December of that year, Hughes went on the attack, filing a suit against both the FDA and the U.S. Secretary of Health and Human Services, accusing them of "grossly exceeding their authority by issuing false and defamatory statements and by engaging in a corrupt trial-by-publicity campaign against the company." In a press release, Hughes said: "[We're] not about to stand around and let this agency or anyone else issue blatant lies about us or our products, or to lie down and roll over while they take pot shots at us. In the five years we've been in business, literally billions of portions of Herbalife products have been consumed by millions of people. And we have never been sued or subjected to any formal proceedings by the FDA." In the same press release, Hughes also suggested that the FDA "attack" on Herbalife was inspired by legislation pending in Congress that sought to regulate the rapidly expanding dietary supplement market.

Although Hughes would withdraw the lawsuit the following year, Herbalife began to suffer from the negative publicity surrounding not only its products, but also its marketing tactics. After a still-strong first quarter, the company ended 1985 with only $250 million in retail sales. In March 1985, Herbalife itself was charged in a civil suit brought against it by the California attorney general, the California Department of Health, and the FDA. That suit, which included Hughes as a defendant, charged Herbalife with making false product claims, misleading consumers, and with operating an illegal endless-chain scheme. At the same time, both the U.S. Senate and U.S. House began investigations into the company, during which the investigating subcommittees pursued allegations that Herbalife products had been responsible for as many as five deaths. While the civil suit was based in California, the Washington investigations brought the negative publicity surrounding the company nationwide.

With sales stalling, the company cut its workforce--which had reached approximately 2,000 people--laying off 270 in April 1985, and nearly 600 more the following month. Herbalife distributors were also hard hit, leaving many with unsalable inventories of Herbalife products and many others seeing their income drop to nothing overnight. Sales dropped even more precipitously the following year. Despite repeated vows to fight the charges against his company, Hughes reached an out-of-court settlement with the California attorney general's office. Under terms of the settlement, Herbalife paid $850,000 in civil penalties, investigation costs, and attorneys' fees. Herbalife also agreed to discontinue two of its products, Tang Quei Plus and K-8, at FDA insistence that, although the products posed no safety risks, the claims made for them by the company would require them to be considered as drugs under the Food, Drug and Cosmetic Act. In addition, the company agreed to make further changes to its Career Book, including dropping claims for its Cell-U-Loss product as a natural eliminator of cellulite. By the end of 1986, Herbalife posted a $3 million loss.

Overseas and Back Again: 1986-95

Herbalife's domestic sales were at a standstill, so Hughes took the company overseas to expand its international markets. To finance the expansion, the company went public in December 1986, merging with a public Utah-based shell company, which allowed the company to go public much faster than if it had been required to file an initial public offering. Hughes became chairman of the new company, called Herbalife International, taking 14.8 million of 16.8 million shares of outstanding common stock. The remaining two million shares went to newly named director and executive vice-president, Lawrence Thompson.

By 1988, Herbalife had moved into Japan, Spain, New Zealand, and Israel, and soon added Mexico as well. The company's aggressive expansion forced it to take a loss of nearly $7 million that year, but international sales built quickly, raising worldwide sales to $191 million in 1991. Meanwhile, domestic sales continued their slide, reaching a low of $42 million that year. At the same time, critics of the company pointed to an emerging pattern: that in many of the countries Herbalife entered, sales would surge initially, then plunge, often in the face of government scrutiny.

Nonetheless, Herbalife continued to grow strongly through the first half of the 1990s. Retail sales doubled to $405 million in 1992 and jumped again to nearly $700 million in 1993. Although 80 percent of sales still came from international markets, Herbalife's U.S. sales began to climb, reaching $85 million. Buoyed by this growth, Herbalife filed for a secondary offering of five million shares in 1993.

The company came under attack again, however. An Herbalife program introduced in 1992 called Wealth Building--in which newly recruited distributors could achieve supervisor status, with an immediate discount of 50 percent, if they made a first purchase of $500--was seen as skirting the edge of an illegal endless-chain scheme. The company's newly introduced Thermojetics Program of products also was criticized by the FDA and others for containing the Chinese herb ma huang, which contains ephedrine. In response to a Canadian threat to ban Thermojetics, the company agreed to reformulate the product. Despite this publicity, sales of Thermojetics were credited with raising Herbalife's retail sales still higher, to $884 million in 1994 and to $923 million in 1995, for net earnings of $46 million and $19.7 million, respectively.

The company's international operations also were faced with problems. In France, claims that a group of Herbalife's distributors were part of an unpopular religious group led to falling sales in that region. In 1995, the firm suspended the sale of Thermojetics Instant Herbal Beverage in Germany after receiving complaints from government agencies about the product. The suspension led to a sharp increase in product returns and distributor resignations as well as a decline in sales of related products.

The firm continued to thrive, however, despite the conflicts in which it was involved. In 1994, the company began developing a new line titled Personal Care, which focused on health awareness. The products were launched in 1995 and included the Skin Survival Kit, Parfum Vitessence fragrances, and Nature's Mirror, a line of facial products. Herbalife also entered the catalog sales market in 1994 and developed "The Art of Promotion" catalog that was used by distributors and complemented existing product lines.

Growth and Continued Problems: 1996-2000

The company entered the mid-1990s focused on international expansion as well as continuing its growth in existing markets. By 1996, Herbalife was operating in 32 countries and international sales accounted for more than 70 percent of total sales; sales in the United States, however, declined by 16.2 percent to $279.6 million. The firm also began restructuring its European distribution system. It closed four warehouse facilities, leaving five in operation, and established new sales centers for distributor meetings. The company also opened a main sales office in the United Kingdom that could process telephone orders from European distributors.

The firm came under fire once again in 1997 when Clint Fallow, a former distributor, filed suit against Herbalife claiming that the firm withheld earned income. The suit, which Fallow detailed on a public web site, garnered negative attention and was the first of many filed against the company by disgruntled distributors.

Nevertheless, the company forged ahead, securing $54.7 million in net income in 1997, a 22.2 percent increase over the previous year. By 1998, the firm had expanded into Turkey, Botswana, Lesotho, Namibia, Swaziland, and Indonesia. The next year, Hughes set plans in motion to take the company private in a $17 per share buyout plan after claiming that Wall Street was undervaluing his firm. Although the Herbalife board approved the offer, many shareholders claimed that the offer was not fair and filed suit against the firm.

Herbalife continued to battle problems into the new century. The use of ephedrine in its products raised issues as the FDA linked heart attacks and strokes and even death to its use. Herbalife was one of the first companies to eliminate ephedra from its products. Then in April, Hughes abandoned his buyout efforts when he was unable to raise enough capital to fund the deal. The firm settled the suit with shareholders and its stock price faltered, trading around $10 per share after the announcement; in spring 1998 the stock had traded at $27 per share.

The company was again faced with hardship when in May 2000, Hughes died accidentally of a legal combination of alcohol and the antidepressant Doxepin. For the first time in five years, sales declined and the firm recorded a 35.1 percent decrease in net income over the previous year.

After Mark Hughes: 2000-03

The company moved forward as it had done in the past when faced with adversity. It entered new markets, including Morocco, and recruited more distributors. However, it was involved in pending litigation regarding ephedra-related lawsuits, and Hughes' ex-wife was demanding diversification of the $244 million family trust. The trust held 57 percent of Herbalife's voting stock; Hughes' young son was the sole beneficiary. Shortly after Hughes' death, the trustees rejected an unsolicited purchase offer of $172 million for the trust's shares.

In 2002, the company accepted an offer of $695 million from an investor group that included two equity firms, Whitney & Company and Golden Gate Capital, Inc. Sales for that year were $1.1 billion, with net income of $23 million. Within a year, the now-private company had a new parent, Cayman Islands-based WH Holdings Ltd., and a new management team in place, headed by CEO Michael O. Johnson, a former Walt Disney executive.

The company was carrying a lot of debt from the buyout. To get back to its earlier sales and profit numbers, Johnson implemented cost-cutting measures and introduced Niteworks, a heart-healthy product, and ShapeWorks, an enhancement of Herbalife's longtime diet program, Formula #1. He also began buying TV and radio time in selected markets for traditional commercials for ShapeWorks.

"Scientific-based" had become a critical and more common characteristic of weight-loss products, and nutrition supplements such as Herbalife and its competitors sought to reassure those customers who, after the ephedra findings, were still leery about ingredients or had questions as to whether the products would actually do what the ads said. Herbalife helped to establish the Mark Hughes Cellular and Molecular Nutrition Lab at the University of California-Los Angeles, and initiated a scientific advisory board to review product development efforts.

Growth and Public Ownership (Again): 2004-06

In 2004, WH Holdings Ltd. changed its name to Herbalife Ltd., and took Herbalife public. The company raised $203 million at its initial public offering in December. According to articles in the Daily Deal, the money was used to pay down debt and to pay a cash dividend to the investor group of at least $109.3 million. The investors had already received $221 million in a stock buyback earlier in the year, and the price of $14 a share put a valuation of $734 million on their 52.4 million shares of stock. With the dividend and stock buyback, the value of the initial $176 million investment by Whitney and Golden Gate Capital had grown to $1.06 billion. Revenue for 2004 came in at $1.3 billion, with net income of $24 million.

By this time, Herbalife was operating in over 60 markets, with 35,000 distributors. China lifted a ban on door-to-door marketing that had been in effect since 1988, and in March 2005, Herbalife received a license there to operate direct sales businesses in selected cities. In August, the company's stock price was $28 and revenues were up. Sales were particularly strong in Mexico, with triple-digit growth, and in Brazil. Part of the reason for that growth may have come from Herbalife's strategy of building what the company called "customer clubs" in emerging markets. These clubs met daily and products were tailored to lower-income customers. Sales were also improving in the United States, likely in response to the country's obesity problem. New products that year included Liftoff, an energy drink, and the skin care line NouriFusion.

2007 and Beyond

Herbalife had a shaky start in 2007, as sales growth was slower in Mexico than expected and stock prices fell in January. In February, Whitney & Company, the largest shareholder, made a $2.7 billion cash takeover bid at $38 per share, which the board rejected as too low, although it remained open to a higher offer. The following month, the company announced it had signed a $25 million jersey sponsorship deal with the Los Angeles Galaxy soccer team. China expanded Herbalife's license to cover one whole province. In November, the stock price was around $39 per share.

Herbalife successfully recovered from the death of Mark Hughes. It was poised to capitalize in the coming years on the growing concern in the United States about obesity as well as continued interest in healthy living. With 82 percent of revenues coming from overseas, the company remained very dependent on its international distributors network and on eliminating any issues that might harm recruitment.

Principal Competitors

Alticor, Inc.; GNC, Inc.; Nature's Sunshine Products; Nu Skin Enterprises, Inc.; WeightWatchers International, Inc.

Further Reading

Barker, Robert, "Suppress Your Appetite for Herbalife," Business Week, December 20, 2004, p. 109.

Barrett, Amy, "A Wonder Offer from Herbalife," Business Week, September 13, 1993, p. 34.

Bartiromo, Maria, "Herbalife--CEO Interview," CNBC/Dow Jones Business Video, August 4, 2005.

Belgum, Deborah, "Herbalife Stock Ailing After Unsuccessful Buyout Effort," Los Angeles Business Journal, April 24, 2000, p. 42.

Carey, David, "PE Firms Feast on Herbalife," Daily Deal, November 17, 2004.

Cole, Benjamin Mark, "Herbalife Plans Share Offering of $101 Million," Los Angeles Business Journal, August 23, 1993, p. 1.

Darmiento, Laurence, "New Herbalife CEO Seeks Return to Glory Days," San Diego Business Journal, November 24, 2003, p. 9.

Day, Kathleen, "Herbalife Lays off 573, Blames Slowing Sales," Los Angeles Times, May 29, 1985, p. D1.

DeSanto, Lauren, "Herbalife, Ltd.," Analyst Report, Morningstar, Inc., August 13, 2007.

Evans, David, "Herbalife Faced Struggle After Death of Founder Mark Hughes," MLM Watch, August 11, 2000.

Evans, Heidi, "Agencies Sue Herbalife, Alleging False Claims," Los Angeles Times, March 7, 1985, p. D1.

Farrell, Andrew, "Herbalife Halts Sale Talks," Forbes.com, April 9, 2007.

Gorham, John, "Till Death Do Us Part?" Forbes, August 20, 2001, p. 44.

Hartman, Curtis, "Unbridled Growth," Inc., December 1985, p. 100.

"Herbalife: Down Mexico Way," Business Week Online, January 8, 2007, p. 1.

"Herbalife Founder Dies," Los Angeles Business Journal, May 29, 2000, p. 49.

"Herbalife Ltd.," China Business Review, July/August 2007, p. 40.

"Herbalife Nixes $172MM Offer from Rbid.com," Chemical Market Reporter, October 2, 2000, p. 14.

Hiestand, Jesse, "There Is Herbalife After Disney," Hollywood Reporter, April 4, 2003, p. 5.

"It's a Wonderful Herbalife," Business Week, November 1, 1999, p. 166.

Kravetz, Stacy, "Bitter Herb Distributor Hopes," Wall Street Journal, November 12, 1997.

Lambert, Phineas, "IPO Roundup," Daily Deal, December 17, 2004.

Linden, Dana Wechsler, and William Stern, "Betcherlife Herbalife," Forbes, March 15, 1993, p. 46.

Lubove, Seth, "But Where Are the Directors' Yachts?" Forbes, October 20, 1997, p. 43.

Paris, Ellen, "Herbalife, Anyone?" Forbes, February 25, 1985, p. 46.

Pomerantz, Dorothy, "Supplemental Income," Forbes, October 4, 2004, p. 116.

"Private Equity Firms to Buy Herbalife for $685 Million," New York Times, April 11, 2002, p. C4.

"Self-Healing," Forbes, November 17, 1986, p. 14.

Shiver, Jube, Jr., "Herbalife Says All Queries into Tactics Now Resolved," Los Angeles Times, October 17, 1996, p. D4.

Svetich, Kim, "Herbalife Seeking to Rebuild Its Domestic Market," California Business, February 1990, p. 18.

"Today in Business a Bid for Herbalife," New York Times, February 3, 2007, p. C2.

Whitaker, Barbara, "Charismatic Leader Left an Image Problem and Other Issues," New York Times, June 23, 2000, p. C1.

Yoshihashi, Pauline, "The Questions on Herbalife," New York Times, April 5, 1985, p. D1.

— M. L. Cohen; Updated by Christina M. Stansell, Ellen Wernick


Diet Information: Herbalife
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Created by: Mark Hughes

The Herbalife diet plan consists of a variety of weight-loss programs that typically include a protein drink which is substituted for two meals each day, along with multivitamins and herbal tablets. One balanced meal is recommended each day, with a total intake of at least 1,000 calories per day.


Wikipedia: Herbalife
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Herbalife, Ltd.
Type Public (NYSEHLF)
Founded Los Angeles, CA (1980)
Headquarters Los Angeles, CA
Key people Michael O. Johnson, Chief Executive Officer

Brett R. Chapman, General Counsel and Corporate Secretary
Richard P. Goudis, Chief Financial Officer

Y. Steve Henig, Ph.D., Chief Scientific Officer
Industry Nutrition & Skin Care products
Products Weight management, nutritional supplements, personal care
Revenue USD$2.4billion (2008)[1]
Website www.herbalife.com [1]

Herbalife International pyramide scheme (NYSEHLF), is a global nutrition, weight-loss and skin-care company. The company was founded in 1980 and it employs around 3500 people worldwide. Herbalife reported global sales of USD 2.4 billion in 2008 and its corporate headquarters are in Los Angeles, USA.[2]

The company distributes its products in 72 countries through a network of 1.9 million independent distributors, who earn profit on product sales and additional commission from a multi-level marketing (MLM) compensation structure.[3]

As one of the largest nutrition companies in the world Herbalife faces occasional legal challenges over the safety of its products. As of 2009, none of these have been upheld.[citation needed]

Contents

History

In February 1980, Mark Hughes began selling the original Herbalife weight loss product from the trunk of his car. Hughes often stated that the genesis of his product and program stemmed from the weight loss concerns of his mother, whose death he attributed to an eating disorder and an unhealthy approach to weight loss. Adopting the multi-level marketing system for distribution and growth, the company attracted thousands of distributors who sold its products door-to-door or through word-of-mouth, shunning commercial distribution in retail stores.

The company's slogan, "Lose Weight Now, Ask Me How", became a marketing theme for distributors, featuring heavily on badges, flyers and posters. Early methods to recruit distributors included seminars, which would feature distributors giving health and weight loss testimonials on the Herbalife products and a keynote address by Hughes. By 1982 Herbalife had reached USD 2 million in sales and had expanded into Canada.

In 1985, the California Attorney General sued the company for making inflated claims about the efficacy of its products. The company settled the suit for USD 850,000 without admitting wrongdoing.[4] In 1986 Herbalife became a publicly traded company on the NASDAQ, and in 1996 Herbalife reached USD 1 billion in annual sales.

Mark Hughes died at age 44.[5] The Los Angeles County Coroner autopsy results ruled that the entrepreneur had died of an accidental overdose of large quantities of alcohol and the prescription anti-depressant Doxepin. The company continued to grow after his death and in 2002 was acquired by Whitney and Co LLC and Golden Gate Capital for USD 685 million, who took the company private again.[6]

In April 2003, Michael O. Johnson joined Herbalife as CEO following a 17-year career with The Walt Disney Company, most recently as president of Walt Disney International.[4] On December 16, 2004, the company had an initial public offering on the NYSE of 14,500,000 common shares at $14/share. 2004 net sales were reported as USD 1.3 billion. In April 2005, the company celebrated its 25th anniversary with a four-day event attended by 35,000 Herbalife Independent Distributors from around the world. In August 2005, Dr. Steve Henig joined the company as Chief Scientific Officer, responsible for product research and development. In 2008, President and COO Greg Probert resigned after it was reported that he had not completed the degree requirements for the MBA he claimed on his resume.[7]

Business

Herbalife is a multi-level marketing (sometimes called MLM or network marketing) company. In addition to profits from product sales, Herbalife distributors can earn additional commissions from sales by their 'downline' distributors. Supporters of MLM contend this is a fair compensation system, whilst critics of MLM contend that it is similar to a pyramid scheme[8]. Critics also argue that the company does not make enough effort to curb abuses by individual distributors, though Herbalife has consistently denied such allegations.[9] Herbalife is a member of the Direct Selling Association in most countries in which it operates.

In its filings with the U.S. Securities and Exchange Commission (SEC), company management note problems with inappropriate business practices in the past, their subsequent long-lasting effects and the need to avoid any repetition. Herbalife's September 2006 quarterly report to the SEC describes a distributor network that is relatively easy to enter and exit by comparison to many other network marketing companies. Company management considers the number and retention of distributors a key parameter and tracks it closely in financial reports. Most recent figures show 41.5% of distributors were still active after twelve months, up from 39.7% a year before. As of December 2008, Herbalife has 1.9 million independent distributors in 70 countries. It refers to supervisors who qualified in 69 countries under its traditional marketing plan plus China sales employees collectively as ‘Sales Leaders’. The company had 456,858 Supervisors worldwide and 48,236 sales employees in China, for a total of 505,094 sales leaders.[3] In both global sales and number of distributors, it is one of the world's largest network marketing companies. According to the non-profit Consumer Awareness Institute Herbalife is the most successful multi-level marketing business from a distributor's perspective with 99.42% of distributors losing money, compared with Amway's 99.99%[10]

Herbalife Family Foundation

In 1994 company founder Mark Hughes started the Herbalife Family Foundation, a children's charity. The foundation receives donations from Herbalife itself as well as distributors and customers. The Herbalife Family Foundation has donated more than USD 6.5 million to children's causes worldwide, and it also supports disaster relief efforts.[11]

The foundation's main focus is its Casa Herbalife program, in which it partners with existing children's charities. There are currently over 43 such Casa Herbalife programs around the world.[12]

Sports sponsorships

Herbalife sponsors a number of athletes, sports teams and sporting events around the world, including:

A complete list can be found at the Herbalife Sports Sponsorships website.

Product range

Herbalife's product range includes protein shakes, protein snacks, nutrition, energy and fitness supplements and personal care products.[18] The Formula 1 protein shake, a soy-based meal-replacement shake, is the company's number one product and was one of the first products sold by the company. The range also includes targeted products for heart health, digestive health and skin care. Some products are vegetarian, kosher or halal, and Herbalife provides testimonials and advice from health professionals as part of their product marketing.

In its annual report (SEC Form 10-K) Herbalife declares that most of its products are manufactured by outside companies, except for a small amount of products manufactured in its own manufacturing facility in China. Major suppliers include NBTY (Nature’s Bounty), Fine Foods (Italy), PharmaChem Labs and JB Labs, which together account for more than 40% of its product purchases in 2006. [19] In 2007 the company launched a new product development process to "accelerate the introduction of new products", which involves company employees, outside consultants and testing products with distributors and customers.[3] In 2009 the company acquired a manufacturing facility in Lake Forest, California to "enhance its global product development and supply chain to better serve its independent distributors".[20]

Clinical studies

Three clinical studies have been completed on different formulations of Herbalife's Formula 1 protein shake product. All three studies showed that using Formula 1 meal replacements twice a day led to effective weight loss.[21][22]

The studies in Germany and Korea were conducted by members of Herbalife's Nutrition Advisory Board, Drs. Marion Flechtner-Mors and Belong Cho, respectively. The results of the UCLA study were published in Nutrition Journal (August 2008),[21] Dr. Flechtner-Mors presented in October 2008 at the annual meeting of The Obesity Society in Phoenix, Arizona and at the European Congress of Obesity in Geneva, Switzerland, and the Korean results appeared in The International Journal of Clinical Practice (February 2009).[22]

Scientific advisory board

Herbalife's Scientific Advisory Board is chaired by David Heber, M.D. Ph.D, F.A.C.P., F.A.C.N., who is professor of medicine and public health and the founding director of the Center for Human Nutrition in the Department of Medicine at UCLA. According to a 2004 Forbes article, Dr. Heber joined the board at roughly the same time Herbalife made a $3 million donation to establish the Mark Hughes Cellular & Molecular Nutrition Laboratory at his Center for Human Nutrition, leading to criticism of Heber's actions as an inappropriate conflict of interest.

Louis J. Ignarro, Ph.D., a Nobel Laureate in Medicine and Distinguished Professor of Pharmacology at the UCLA School of Medicine, is also a member of Herbalife's Scientific Advisory Board. Ignarro worked with Herbalife to develop Niteworks, a dietary supplement designed to boost the body's own production of nitric oxide, and later became a member of the company's Scientific Advisory Board. Ignarro endorsed this product in exchange for a royalty agreement reported to have earned his consulting firm over $1 million in the first 12 months. Ignarro also promoted Niteworks' ingredients in the prestigious Proceedings of the National Academy of Sciences, without disclosing his financial interest to the publication. After Ignarro's ties to Herbalife were revealed, the journal issued a correction to the article, citing Ignarro's undisclosed "conflict of interest". UCLA conducted its own investigation and determined that Ignarro did not act improperly as all the research was done in Italy and no research funds came from UCLA.[citation needed] Therefore, it was not legally necessary for him to disclose anything. Ignarro presents a one-hour Herbalife promotional video for Niteworks.

Nutrition Advisory Board

Herbalife states that its Nutrition Advisory Board consists of "leading experts in the fields of nutrition and health who help educate and train our independent Distributors on the principles of nutrition, physical activity and healthy lifestyle."[23]

  • David Heber, M.D., Ph.D., F.A.C.P., F.A.C.N., Director of the Center for Human Nutrition at UCLA.[24]
  • Louis Ignarro, Ph.D.
  • Luigi Gratton, M.D., M.P.H., Vice President of Nutrition Education at Herbalife
  • Alexey Borisov, M.D.
  • Joaquim Caetano, M.D.
  • Marco DeAngelis, M.D.
  • Jorge Dominguez, M.D.
  • Marion Flechtner-Mors, Ph.D.
  • Julian Alvarez Garcia, M.D.
  • Shih-Yi Huang, Ph.D.
  • Linong Ji, M.D.
  • Patricio Kenny, M.D.
  • Rocio Medina, M.D.
  • Anoop Misra, M.D.
  • Alla Pogozheva, M.D.
  • Ralph Rogers, M.D.
  • Nikolaos Sitaras, M.D.
  • Jean de la Tullaye, M.D.
  • Nataniel Viuniski, M.D.
  • Yoshio Yoshimoto, M.D.

Controversies

Multi-level marketing

  • A 2004 settlement resolved a class action suit on behalf of 8700 former and current distributors that accused the company and distributors of "essentially running a pyramid scheme." A total of $6 million was to be paid out, with defendants not admitting guilt.
  • In a California class action suit, Minton v. Herbalife International, et al., the plaintiff is "challenging the marketing practices of certain Herbalife International independent distributors and Herbalife International under various state laws prohibiting "endless chain schemes", insufficient disclosure in assisted marketing plans, unfair and deceptive business practices, and fraud and deceit". [25]

Marketing practices

In a West Virginia class action suit, Mey v. Herbalife International, Inc., et al., the plaintiffs allege that some "telemarketing practices of certain Herbalife International distributors violate the Telephone Consumer Protection Act, or TCPA, and seeks to hold Herbalife International vicariously liable for the practices of these distributors. More specifically, the plaintiffs' complaint alleges that several of Herbalife International's distributors used pre-recorded telephone messages and autodialers to contact prospective customers in violation of the TCPA's prohibition of such practices". Herbalife managements insisted they have meritorious defences in both cases and that in the West Virginia case, any such distributor actions also went against Herbalife's own policies. Management also contends that any adverse legal outcomes Herbalife might suffer would not significantly affect their financial condition, particularly since they have already set aside an amount that they "believe represents the likely outcome of the resolution of these disputes".[25] The case was resolved with Herbalife and its distributors paying $7 million into a fund for class members part of the suit.[26] Herbalife International did not acknowledge wrongdoing, or admit culpability for the actions of its distributors.

Product controversies

Some of the original Herbalife weight loss products contained the active ingredient Ma Huang or Sida cordifolia, two herbs containing ephedrine alkaloids. Herbalife stopped using ephedrine in its products in 2002 after several U.S. states banned supplements containing botanical sources of ephedrine alkaloids.[27][28] The U.S. Food and Drug Administration banned supplements containing ephedra in 2004.[29]

Scientific studies in 2007 by doctors at the University Hospital of Bern in Switzerland and the Liver Unit of the Hadassah-Hebrew University Medical Center in Israel found an association between consumption of Herbalife products and hepatitis.[30][31] In response, the Spanish Ministry of Health issued an alert asking for caution in consuming Herbalife products.[32] Herbalife has stated they are cooperating fully with Spanish authorities.[33]

In May 2008 the Fraud Discovery Institute, which claims to be a consumer watchdog organisation, reported that laboratory test results of Herbalife products showed lead levels in excess of limits established by law in California under Proposition 65.[34][35] The Fraud Discovery Institute was founded by fraudulent entrepreneur Barry Minkow, who served seven years in jail for stock fraud, [36] and since disclosed that his company was profiting from the allegations by shorting Herbalife stock.[37] Herbalife responded stating its products met federal FDA requirements[38][39] and released independent lab tests proving the products did not exceed Proposition 65 limits.[37][40]

On 10 May 2008 a suit was filed on behalf of a woman who developed lead-related liver complaints that she claimed were a reaction to a combination of Herbalife products.[36][41] The suit was filed by lawyer Christopher Grell, cofounder of the Dietary Supplement Safety Committee and an associate of Barry Minkow.[36] On 17 June 2008, the suit was expanded to add distributors who had supplied the woman with the Herbalife products, with Grell launching a website to offer persons who believe they were harmed by Herbalife products the chance of redress.[42] In August 2008, Minkow retracted all accusations against Herbalife and removed any mention of the company from his web site.[43]

Crazy Fox commercials

As of April 2008, a series of commercials featuring a large red animated fox advertising home-based business opportunities have been running on US television. The advertisements typically feature a series of testimonials from actors playing individuals who have made sums of money between $5,000 USD and $15,000 USD per month as a result of participating in an undescribed business program. The adverts direct viewers to a website that allows them to purchase a "success kit". The kit also provides no information about how the business opportunity works.

These adverts have been found to be run by independent Herbalife distributors, as a method of recruiting new 'downline' distributors.[44] While it is not illegal, critics of this type of advertising prefer advertisers to be up front about their company associations.

In popular culture

Ugly Betty parody

Herbalife is parodied in comedy Ugly Betty from the first episode. In the Pilot, informally known as "I Am Not Going To Sell Herbalux", Betty's sister Hilda is seen to be a distributor for a company called Herbalux with a logo similar to Herbalife's. Herbalux is the name of a real-life Polish company that specializes in alternative medicine, and has no connection to Herbalife.[45]

In Trust, Lust, and Must when Betty opts to sell Herbalux products due to financial pressure, she wears a tag saying "10 pounds in 10 days", similar to the "Lose Weight Now, Ask Me How" badges often used as a marketing tool by Herbalife distributors.

In La Fea Más Bella, a Spanish-language program with a similar storyline to Ugly Betty, the lead character Lety used actual Herbalife products as she underwent an onscreen "physical transformation" in six episodes of the show.[46] It is believed this product placement in the Spanish show is in response to the Herbalux parody in Ugly Betty.

See also

References

  1. ^ Herbalife 2008 Annual Report
  2. ^ Herbalife calls buyout bids too low
  3. ^ a b c Herbalife Annual Report 2008
  4. ^ a b "Nobel Prize Winner Didn't Disclose Herbalife Contract" Bloomberg News report
  5. ^ Copage EV. Mark R. Hughes, 44; Founded Nutrition Supplement Concern New York Times, 23 May 2000. Section B, Page 11, Column 5.
  6. ^ Herbalife acquisition completed. (Industry News).(Whitney and Co. and Golden Gate Capital acquire Herbalife International)(Brief Article) | Nutraceuticals World | Find Article...
  7. ^ Ethical flap forces exit of president: Herbalife executive Probert credited with company's growth.(HEALTH CARE)(Gregory Probert) | Article from Los Angeles Business Journal | ...
  8. ^ "Herbalife Sets More Layoffs". The New York Times. 1985-05-30. http://query.nytimes.com/gst/fullpage.html?res=9405E2D91739F933A05756C0A963948260. 
  9. ^ Statement from Nordic Herbalife Director denying toxicity of Herbalife products, pyramid marketing scheme
  10. ^ Skeptoid.com
  11. ^ Herbalife Family Foundation website
  12. ^ Herbalife Family Foundation Establishes Casa Herbalife Program in St. Petersburg, Russia
  13. ^ LA Triathlon website
  14. ^ AYSO website
  15. ^ LA Galaxy
  16. ^ Indystar.com
  17. ^ Superdeporte.es (Spanish)
  18. ^ Herbalife Corporate Profile
  19. ^ SEC Filing Form 10-K, annual report 2006 Herbalife
  20. ^ Herbalife Acquires U.S. Manufacturing Facility
  21. ^ a b A controlled trial of protein enrichment of meal replacements for weight reduction with retention of lean body mass; Leo Treyzon, Steve Chen, Kurt Hong, Eric Yan, Catherine L Carpenter, Gail Thames, Susan Bowerman, He-Jing Wang, Robert Elashoff and Zhaoping Li; UCLA Center for Human Nutrition, Department of Medicine, David Geffen School of Medicine at UCLA, Los Angeles, USA
  22. ^ a b Efficacy of low-calorie, partial meal replacement diet plans on weight and abdominal fat in obese subjects with metabolic syndrome: a double-blind, randomised controlled trial of two diet plans – one high in protein and one nutritionally balanced; Belong Cho; The International Journal of Clinical Practice, February 2009
  23. ^ Advisory Boards - Science: Herbalife
  24. ^ University of California Los Angeles
  25. ^ a b Herbalife Quarterly Report to SEC, June 2006
  26. ^ Herbalife Ltd. - HLF Annual Report (10-K) Item 3. Legal Proceedings
  27. ^ Herbalife Ltd. (2005-03-14), "Form 10-K", United States Securities and Exchange Commission: page 15, http://www.sec.gov/Archives/edgar/data/1180262/000104746905006359/a2153305z10-k.htm#05WLA1071_1 
  28. ^ Evans, D. (2002-04-11). "Herbalife, Other Ephedra Marketers Face Soaring Insurance Rates". Bloomberg L.P.. 
  29. ^ "Sales of Supplements Containing Ephedrine Alkaloids (Ephedra) Prohibited". U.S. Food and Drug Administration. http://www.fda.gov/oc/initiatives/ephedra/february2004/. 
  30. ^ Association between consumption of Herbalife nutritional supplements and acute hepatotoxicity.
  31. ^ Herbal does not mean innocuous: ten cases of severe hepatotoxicity associated with dietary supplements from Herbalife products.
  32. ^ Spanish Ministry of Health issues precaution on Herbalife brand
  33. ^ Herbalife Responds to Spain's Ministry of Health Alert
  34. ^ Herbalife lead levels draw attention - Regulation - NutraIngredientsUSA - Food, Beverage & Nutrition - Publications - Decision News Media
  35. ^ Second, FDA Registered, Independent Lab affirms Higher Lead Levels in Herbalife Product, reports Fraud Discovery Institute, Children's Herbalife Products contain Materially Excessive Lead Levels affirmed in New Lab Results, Expert reports to Fraud Discovery Institute, New Tests reveal 904 Percent More Lead in Herbalife, NuSkin Nutritional Shakes than Competitors, reports Fraud Discovery Institute
  36. ^ a b c Los Angeles Business Journal Online - business news and information for Los Angeles California
  37. ^ a b Herbalife rebuffs lead allegations
  38. ^ FOXNews.com - Group Says 6 Dietary Supplements Contain Dangerous Levels of Lead - Health News | Current Health News | Medical News
  39. ^ Herbalife Tangles with Prop 65, Testing Company
  40. ^ More lead testing confirms product safety, says Herbalife - Industry - NutraIngredientsUSA - Food, Beverage & Nutrition - Publications - Decision News Media
  41. ^ Herbalife Sued for Negligence and Fraud by Victim
  42. ^ CNN.com
  43. ^ Reuters.com
  44. ^ Work At Home: The Real Deal - NewsChannel 9 WSYR
  45. ^ Herbalux
  46. ^ Herbalife Transforms Lead Character in ‘La Fea mas Bella,’ Mexico's Ugly Betty
Notes

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