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Herbalife is a pyramid scheme worth zero dollars: Bill Ackman

Herbalife, a global MLM scheme also prevalent in India, is believed to be worthless according to hedge fund manager Bill Ackman, who made a detailed presentation on why consumers should avoid buying the company’s products and stay away from the MLM. This is first part of a three-part series

On a warm Sunday afternoon, you may encounter a group of young and old people coddled together in, say, Café Coffee Day, listening to a very animated team leader, motivating and making a very passionate speech. Move closer, you will hear the team leader motivating all the members of the group to generate leads to create more ‘business’ and at  the same time ‘educate’ them about various (dubious) products to sell. What is this ‘business’ that they talk about? You approach and enquire. They will tout a nutrition powder, which you have not seen anywhere else and supposed to make you buff and strong. But there’s more to this than the nutrition supplement. This is Herbalife, a multi-level marketing (MLM) scheme prevalent not just in India but all over the world. Along with QNet and SpeakAsia, Herbalife has been cast in the spotlight recently. Herbalife only sells its dubious products here. In the US it is a listed stock. If you believe the well-known hedge fund manager Bill Ackman,  the company runs  one of the largest pyramid schemes. Herbalife is just one of the hundreds of pyramid or MLM schemes. All of them will impoverish you. Pay attention to what the billionaire activist-hedge fund manager and his outstanding team of researchers have discovered.
 

After a whole year of research, Bill Ackman and his team at Pershing Square Capital Management have come to the conclusion that Herbalife is worthless as a company and one big “pyramid scheme” and “caused and continues to cause enormous harm to the most vulnerable communities in the US and around the world”. He gave a lengthy presentation (a whopping 342 slides were shown), at a conference in Manhattan recently, listing out reasons why Herbalife is worthless a company and warned investors and consumers alike to stay away from the company.  He has shorted the company and believes the company is worth $0. He has even put up a website warning consumers about Herbalife.
 

Regular readers may recall Moneylife is the only publication that has been single-handedly campaigning against MLMs and pyramid schemes for the past three years. Moneylife Foundation has hosted several financial literacy seminars (click here for one such seminar in which we warned discerning public last year itself) which has pointed out the dangers of such MLM and pyramid schemes, including Herbalife. We the first to blow the whistle on Speak Asia and also on stockguruIndia.com, apart from many other dubious schemes.
 

To read what Moneylife has written about Herbalife in the past, click here.
 

Herbalife is an MLM scheme, which ‘sells’ nutritional and weight-management products, in as many as 84 countries and has been doing this since 1980. It makes money not by selling product directly to you and me but by recruiting sales people, which recruits more sales people, which in turn recruits more sales people. The moment you buy its product, you become the sales person. In order to qualify for rewards or bonus, consumers (who become distributors automatically) must recruit (or ‘sell’ Herbalife’s products) so that they meet a stipulated target every month. Not many consumers or distributors get back their money’s worth. It is estimated that failed sales people, those at the bottom of the pyramid scheme, lost as much as $3.8 billion since 1980!
 

According to  Ackman, Herbalife, at a total enterprise value of $8.1 billion is reportedly more valued than other well known brands such as Energizer ($6.7 billion) and ChurCh and Dwight ($7.2 billion) . Its flagship product Formula1, sells more than Palmolive, Betty Crocker, Clorox, with nearly $2 billion in sales, bringing in 29% of the revenues.




Herbalife sells six times more nutrition powder that Abbott Labs, Unilever and GNC combined. What is the reaosn? Is it cheaper than other products, or is it too good to resist?
 

Neither. Indeed, Herbalife’s Formula1 is the costliest nutritional powder among six other brands. Formula1 power comes at $2.87 per 200 calorie serving, while all other powders are available between 88 cents to $1.74 per 200 calorie serving. This is just an example. All other products from Herbalife are overpriced compared with similar products.
 

So, how can Herbalife justify the premium pricing of its products, asks Ackman. How is it that Formula1, a $2 billion brand company that no one has heard of? This is because its lifestyle and nutritional products bypasses retail channels and instead sold through “distributors” and consumers in the pyramid. No one outside of the pyramid has heard of Formula1. Herbalife puts itself at par with Nike and Disneyland in brand recognition that too when its advertising expenses are miniscule compared with the other two giants.



In addition, Herbalife spends its budget on promoting itself and not the brands it is so proud of!
 

Yet despite the “big brand name and high sales, strangely it spends little on R&D too. Both are minute compared to total sales. Herbalife, claims to have the “highest standards in R&D” (another way of saying “lots of money spent on R&D”), but Ackman found out that it does not spend much “materially” on R&D.&nbs. Herbalife spent just 0.2% of its net sales on R&D.




Moreover, it claimed to be a ‘product innovator’ when it actually pays royalty to the patent owner—Unither Pharma—for its nitric oxide products. Herbalife owns just one patent in the healthcare/nutrition area!


 

How come it is able to sell a commoditised product that is rarely marketed at three times the price of its competitors. Why would consumers buy it when there are cheaper products out there? The answer lies in its ‘distributors’ and the way it sells a dream. It recruits ‘distributors’ in over 80 countries to buy its products and bundles it with a "business" proposition. More of this is explained in the second part of our story.



To lure distributors to buy its products and “business”, Herbalife needed a savior—a famous person. Typically, companies like Amway, Gold Quest, etc use film stars and have political connections, and they tie up with NGOs to gain popularity and legitimacy. In Herbalife's case, endorsements were made by a Nobel laureate. Louis Ignarro, the 1998 Nobel Laurete in medicine is used to create an invincible aura around  Herbalife and thus legitimize it. Louis Ignarro, PhD, is a member of the editorial board of the Herbalife Nutrition Institute and a member of Herbalife Nutrition Advisory Board. He and his consulting companies have been paid more than $15 million to promote Herbalife’s products.
 


So, Herbalife’s commodity products priced at three times its competitors is merely a guise for recruiting more sales people, a hallmark of a pyramid orMLM scheme. In our second part, we will discuss the ‘business’ part of the Herbalife MLM/pyramid scheme and how it make people lose their life savings in pursuit of a dream.

User

COMMENTS

Vikas Gupta

4 years ago

SEBI is requested to look into another Ponzy scheme INSTANT FOREX.

IIFCL, Hudco and IRFC tax-free bonds: Know what’s coming

IIFCL, Hudco and IRFC have lined up tax-free bond offerings even as PFC extended its deadline by a week as it could garner only Rs596 crore till the scheduled closing date of 21 December. Find out the offered rates and where you may want to invest

India Infrastructure Finance Company (IIFCL), Housing, Urban Development Corporation (HUDCO) and Indian Railway Finance Corporation (IRFC) will offer their public issue of secured, redeemable non-convertible tax-free bonds over the next one month. Power Finance Corporation (PFC) has extended its deadline by a week (27 December) as it could mop-up only Rs596 crore till 21 December closing date. Even though the PFC bonds are AAA rated by Crisil and ICRA, it has been finding few takers. It may have suffered as its issue came after REC (Rural Electrification Corporation); both companies are mainly into financing power related projects across India.

 

Last year, many bond offerings closed early due to over-subscription, but this year the trend seems to be reversed. Extension of the closing date is due to lack of investor participation. Find out what is going wrong with tax-free bonds this year –

 

 

10 year bond

15 year bond

IIFCL coupon for retail investors

7.69%

7.86%; 7.90% for 20 year bond

IIFCL coupon for others

7.19%

7.36%; 7.40% for 20 year bond

IIFCL credit rating

AAA by ICRA, CARE and Brickworks

AAA by ICRA, CARE and Brickworks.

Hudco coupon for retail investors

7.84%

8.01%

Hudco coupon for others

7.34%

7.51%

Hudco credit rating

AA+ by CARE and India Ratings and Research Private Limited

AA+ by CARE and India Ratings and Research Private Limited

IRFC  coupon for retail investors

7.68%

7.84%

IRFC  coupon for others

7.18%

7.34%

IRFC  credit rating

AAA

AAA

Individual investment up to Rs10 lakh will be considered as retail application

 

IIFCL will launch its public issue of tax-free bonds at an interest rate of 7.69%, 7.86% and 7.90% per annum (p.a.) for 10, 15 and 20 year terms for retail investors. Non-retail investors will get 0.5% p.a. less. The bond issue will remain open from 26th December 2012 to 11th January 2013. IIFCL is planning to raise Rs1,500 crore with green-shoe option up to the shelf limit of Rs9,215 crore.

 

It is proclaiming to offer rare opportunity to invest for up to 20 years, as it is the only company approved for it.  The bonds have been rated AAA by ICRA, CARE and Brickworks. Considering the IIFCL’s diversified infrastructure portfolio into financing infrastructure projects in the sectors like power, roads & highways, ports, airports, renewable energy, and urban infrastructure, it is an option for including in your debt portfolio.
 

Hudco will offer tax free bonds from 9 January to 22 January 2013. The company proposes to raise Rs750 crore through the issue with an option to retain over-subscription up to the shelf limit of Rs5,000 crore. The retail coupon for 10 year and 15 year bond will be 7.84% and 8.01% respectively. The non-retail investor coupon rates will be 7.34% and 7.51% for 10 and 15 year bond respectively.
 

Hudco’s coupon rates are higher than other bond offerings today, but that’s because its rating is below AAA. CARE and India Ratings and Research Private Limited have assigned a rating of AA+ to the bonds. Hudco’s task involves building affordable housing and carrying out urban development. It provides long term finance for construction of houses for residential purposes or finance or undertake housing and urban development programs in the country.

 

IRFC will offer tax-free bonds from 21 January to 29 January 2013 for raising up to Rs8,981.40 crore. It has already raised Rs1,018.60 crore through the private placements of bonds. The coupon rates will be 7.68% (7.18% for non-retail) for the 10-year bond and 7.84% (7.34% for non-retail) for 15 year bond.


IRFC is a dedicated financing arm of the ministry of railways. Its sole objective is to raise money from the market to part finance the plan outlay of Indian Railways. The money so made available is used for acquisition of rolling stock assets and for meeting other developmental needs of the Indian Railways. Even though it is an AAA rated bond, there have been recent reports of rampant time overruns and resultant cost escalations in railway projects.

 

Name of Company

Bond Issue Size in Rs crore

NHAI (National Highways Authority of India)

10,000

IRFC (Indian Railway Finance Corporation)

10,000

IIFCL (India Infrastructure Finance Company)

10,000

HUDCO (Housing and Urban Development Corporation)

5,000

NHB (National Housing Bank)

5,000

PFC (Power Finance Corporation)

5,000

REC (Rural Electrification Corporation)

5,000

Jawaharlal Nehru Port Trust

2,000

Ennore Port

1,000

Dredging Corporation of India

500

Ten companies authorised to issue tax-free bonds this fiscal.

 

The interest from these bonds is tax-free to investors. Today, it is difficult to get more than 9%p.a for long-term fixed deposits (FDs) from banks. Those earning more than Rs10 lakh annually are in the highest tax bracket (30%). This means that effective post-tax return from long-term FDs is only 6.3%. AAA rated tax-free bonds giving 7.86% are much better option. Yet, the interest is subdued as compared to last year. It could be that investors have not warmed up to the series of tax-free bonds issues or they don’t find it as much attractive as last year. This is especially true for non-retail investors.

User

COMMENTS

srinivasan M

4 years ago

Sir,

You've not mentioned whether (i)bonds will be listed in stock exchanges or not. So investors can move out if needed.
(ii)Users with or without Demat a/c can invest
(iii)How you rate them in decreasing priority for investment purpose(you've selected only IIFCL bonds)
(iv)Allotment is First come basis or not etc. It would be hugely beneficial if you could indicate these as well. Thanks.

REPLY

raj

In Reply to srinivasan M 4 years ago

yes, it will be listed and can be sold without any lock-in period. yes, physical application (no demat) is allowed. Hudco is AA+ and IRFC will be AAA with 0.17% difference in coupon rates. It is up to investor to decide. Allotment will be first come basis.

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