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
