Herbalife (NYSE: HLF) sells weight management, nutritional supplements, energy and fitness, and personal care products through a network of 2 million independent distributors in 72 countries. In 2007, the company marketed and sold a portfolio of 127 products. The company earned $2.3 billion in revenue and $203 million in net income in 2009.
Herbalife is one of the largest network marketing companies in the world, and as such markets its products through relationship referral and direct selling. That is, independent distributors buy Herbalife products at wholesale prices and then sell them at retail prices. Distributors are motivated through royalties, a performance-based compensation plan, bonuses, and other incentives from the company. Additionally, Herbalife provides its distributors with educational training materials to help them increase their sales and to recruit additional distributors. The company also holds international Company sponsored sales events.
Herbalife stands to benefit from the obesity epidemic -- studies estimate that the number of overweight and obese people is around 1.6 billion -- with its Formula 1 product, which accounts for 32% of the company's sales. However the company also faces foreign currency risks because it does a substantial portion of its business abroad. In 2009, the company suffered a $155 million loss in revenue to do foreign currency exchange.
Out of Herbalife's 2 million distributors, 481,000 are considered sales leaders and account for almost the entirely of the company's sales. Of the remaining distributors, 47% are considered discount buyers, meaning that they buy Herbalife products at a wholesale price but do not market it to others. 36% are considered small retailers and 17% are considered potential supervisors.
The company is divided into five segments: Weight Management, Targeted Nutrition, Energy and Fitness, Outer Nutrition, and Literature & Promotional Products.
The top six countries worldwide account for nearly 60% of the company's net sales. Herbalife divides its geographic sales into six different segments:
The obesity trend in the United States and the world at large has greatly expanded the weight loss industry as a whole. Worldwide, it is estimated that the number of overweight and obese people is around 1.6 billion. According to the Marketdata Enterprises, 68% of Americans over the age of 19 are considered overweight of which half are considered obese. As a result, the weight management industry generates $59 billion in revenue annually in the US alone. Since Herbalife's best-selling product, Formula 1, is intended to help consumers lose weight, the company stands to benefit from the worldwide obesity epidemic and if consumers become more aware of the negative health-related aspects of obesity. Formula 1 accounts for 32% of the company's sales.
Since 80% of Herbalife's revenue is generated from its sales in foreign countries, the company is exposed to the ups and downs of the foreign currency market. When the US dollar is weak, each sale in foreign currency (like the Euro or Yen) can be converted into more dollars, thus boosting Herbalife's revenue total. However, the opposite is also true -- when the dollar is strong, Euros and Yen are traded in for fewer dollars, thus negatively impacting the company's sales figure. In 2009, Herbalife suffered from a $155.6 million loss due to foreign currency exchange.
Because Herbalife's distributors are contractors rather than employees, Herbalife believes that they are more liable to act in a manner that is inconsistent with the company's own policies. A court could hold Herbalife liable for violations of its distributors. Additionally, many countries have regulations regarding "Pyramid" or "Chain Sale" schemes. Though Herbalife is a network marketing company, the boundary between network marketing and these illegal schemes is often unclear. No action has yet been taken by the Chinese government.
Because China heavily regulates direct selling and forbids pyramidal promotional scheme, Herbalife operates retail stores and sells its product through employed sales management personnel, a business model different from that which it uses in the rest of the world. Herbalife has stated that applying for direct selling licenses is expensive and cumbersome. Sales in China account for 6.5% of the company's net sales.
Because the company's Formula 1 accounts for 32% of its net sales, Herbalife faces competition in the weight-loss industry. Thus, almost any company that a customer could turn to to help him or her lose weight is a potential substitute for Herbalife.