The market judged the Herbalife (HLF, Financial) FTC settlement as an extremely favorable one and the stock surged. Over the weekend many market participants will find the time to actually dig into the 31-page agreement. They won’t like what they will find.
I’ve never seen a settlement that puts so many restrictions on a company’s business model, and I can’t imagine Herbalife will be able to compete effectively in the U.S. under the rules stipulated by the agreement. Herbalife sellers compensation is now much closer tied to sales they make to real end using customers. In addition the agreement doesn’t make it easy for Herbalife to shift customers between classifications of business participant and preferred customer (a real end user).
It’s now also a no-no for anyone at Herbalife or associated with Herbalife (and the company has to provide mandatory training to people participating in its business opportunity that point this out) to claim Herbalife sellers can quit their job, are set for life, will earn millions of dollars, make more money than they ever imagined or realize unlimited income.
Nor can the company or those taking part in the business opportunity rely on descriptions or images of opulent mansions, private helicopters, private jets, yachts or exotic automobiles. So no more statements that participants can “quit your job,” “be set for life,” “earn millions of dollars,” “make more money than they ever have imagined or thought possible,” “realize unlimited income,” or any substantially similar representations; and images like the one below:
Source: Herbalforhealth
Or this one:
Source: Keyannabarnett
These are no longer allowed to be used for promotional purposes. That’s not where the restrictions end, though. Take for example the paragraph below, quoted directly from the FTC-Herbalife agreement:
Agents, and employees, and all other persons in active concert or participation with any of them, who receive actual notice of this Order, whether acting directly or indirectly, in connection with the advertising, marketing, promoting, or offering of any Business Venture, are permanently restrained and enjoined from misrepresenting or assisting others in misrepresenting, including by providing others with the means and instrumentalities with which to misrepresent, expressly or by implication:
A. That participants will or are likely to earn substantial income;
B. The amount of revenue, income, or profit a participant actually earned or can likely earn;
C. The reasons participants do not earn significant income, including but not limited to representations that participants fail to devote substantial or sufficient effort; and
D. Any other fact material to participants concerning the Business Venture, such as: the total costs to participate, including trainings, brochures, and sales aids; any material restrictions, limitations, or conditions on operating the Business Venture; or any material aspect of its performance, efficacy, nature, or central characteristics.
The agreement is so restrictive, images like the one below are encompassed by it:
Source: 2paragraphs
It is a mystery to me why the stock is up substantially in response. The only positive takeaway is the fact Herbalife has not been brandished a pyramid scheme. But how can the company compete effectively under such an agreement? Competitors do not operate under such severe restrictions. It is extremely common for advertisers to “suggest” benefits of a product and Herbalife and those taking in the business opportunity are severely hamstrung from now on. Why would they stay and not try their luck at a MLM where they can operate a little bit more freely?
Some consolation can be derived from the fact the U.S. represents only 20% of the company’s revenue. But an immediate concern is how many countries will follow Herbalife’s home regulator? Perhaps none? Perhaps it will set off a chain reaction of global regulatory consequences?
The $200 million fine isn’t the problem here. Herbalife can handle it easily enough. What would be bothering me here as a Herbalife shareholder is its business model going forward. It just doesn’t appear to be very sustainable anymore with significant risk to the top and bottom line. Will Herbalife still exist in five years? I’m not all that sure.
