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WIKI ANALYSIS
Herbalife International is a company that sells weight management, nutritional supplements, energy and fitness, and personal care products through a network of 1.7 million independent distributors [1]. In 2007, the company marketed and sold a portfolio of 131 products[2].
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[3]. Additionally, Herbalife provides its distributors with educational training materials to help them increase their sales and to recruit additional distributors[4]. The company also holds international Company sponsored sales events[5].
Much of the company's growth over the last five years has been driven by geographic expansion in South America and Asia [6]. Since 2003, the company has expanded to an additional ten countries, bringing the total number of countries where it conducts business to 65 [7]. Over the coming years, Herbalife also stands to benefit from the obesity epidemic and, since the company does a substantial portion of its business abroad, a weakening dollar.
Company Overview
Business Financials
The company's Net Income and Revenues have risen steadily from 2002-2007. Net sales for fiscal year 2007 increased 13.8% to $2,145.8, up from $1,885.5 million in fiscal year 2006 [8]. The increase was primarily driven by growth in net sales in the US (23.9% increase), China (136.9% increase), Venezuela (317.3% increase), and Taiwan (27.7% increase) [9]. Out of Herbalife's 1.7 million distributors, 473,000 are considered sales leaders and account for almost the entirely of the company's sales [10]. Of the remaining distributors, 52% are considered discount buyers, meaning that they buy Herbalife products at a wholesale price but do not market it to others. 26% are considered small retailers and 22% are considered potential supervisors [11]. Average annual gross compensation to leaders was $2,300.
Business Segments
The company is divided into five segments: Weight Management, Targeted Nutrition, Energy and Fitness, Outer Nutrition, and Literature & Promotional Products. Respectively, these account for 63.4%, 20.2%, 4.2%, 6.7%, and 5.5% of the company's net sales [12].
- Weight Management--The Weight Management segment, which accounted for almost two-thirds of the company's 2007 sales, sells meal replacement shakes, weight loss enhancers, appetite suppressors, and snacks. Its products include Formula 1 Healthy Meal, Personalized Protein Powder, Total Control, and High Protein Bars [13]. Formula 1 is Herbalife's best-selling product and accounts for 30% of its sales [14].
- Targeted Nutrition--Targeted Nutrition sells dietary supplements, which contain herbs, minerals, vitamins, and natural ingredients. Products include Niteworks, Garden 7, and Best Defense [15].
- Energy & Fitness--The Energy & Fitness segments markets energy and isotonic drinks such as Liftoff Energy Drink and H3OTM Hydration Drink [16].
- Outer Nutrition--Outer Nutrition markets skin cleansers, moisturizers, shampoos and conditioners, and lotions with antioxidants and other products that help users maintain and improve the appearance of their body and hair [17].
- Literature & Promotional Products--The company sells CD's, audiotapes, DVD's, and other materials to help its distributors market products. Start-up kits called "International Business Packs" are available for new distributors [18].
Geographic Regions
As of 2007, six countries have represented 56.1% of sales [19].
- North America--North American sales rose 22.7% in fiscal year 2007 to $438.7 million [20].
- Mexico & Central America--Sales rose 2.0% to $384.6 million. The small rate of growth was driven by a decline of .6% in Mexico's sales. Herbalife has stated that 2007 was a rebuilding year for Mexico [21].
- South America--sales increased 33.9% to $300.1 million, driven primarily by 27.5% growth in Argentina and 246% growth in Venezuela [22].
- Europe, Middle East, Africa (EMEA)--In European markets, the company faces increasing competition from Wellness Coach DMO (10k, p55). Sales increased by 3.6% to $567.7 million, primarily driven by favorable currency fluctuation [23].
- Asia--Sales increased by 20.0% to $454.7 million, driven by 27.7% growth in Taiwan, Herbalife's largest market in the region, and 136.9% increase in China. To comply with Chinese regulations, Herbalife employs a sales-force and sells its products through retail stores in China. Herbalife has been aiming to expand aggressively in China [24].
Trends and Force
The Obesity Epidemic Will Increases Demand for Herbalife's Products
Since 1980, US obesity rates in adults have more than doubled [25]. In China, from 1991 to 2004, the obesity rate amongst adults increased from 12.9% to 27.3% [26]. Since Herbalife's best-selling product, Formula 1, is intended to help consumers lose weight, the company will see increased demand if the worldwide obesity epidemic grows worse and if consumers become more aware of the negative health-related aspects of obesity.
Fluctuations in Foreign Currency Exchange Rates Increase Revenues from Foreign Countries
Since 80% of Herbalife's revenue is generated from its sales in foreign countries, Herbalife stands to benefit from a weakening of The Dollar. As the dollar weakens, each sale in Euro or Yen can be converted into more dollars; hence, revenue increases. According to Herbalife, from 2006 to 2007 appreciation of foreign currencies had a 73 million dollar favorable impact on sales in, accounting for about 3.9% of total sales increase [27].
Litigation Threats Leads to Increased Uncertainty
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 [28]. 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. Additionally, the Fraud Discovery Institute has alleged that six of Herbalife's products contain excessive amounts of lead.
The Difficulty of Obtaining Business Licenses Leads to Increased Uncertainty
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 [29].. Herbalife has stated that applying for direct selling licenses is expensive and cumbersome. If successful, however, Herbalife will see explosive growth in its net sales in China.
Competition
Because the company's Formula 1 accounts for 30% 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.
- Alticor Inc. (AMWAY, QUIXTAR):USA--The company is a a network marketing company that sells a wide variety of goods, one of which is nutrilite dietary supplements.
- Weight Watchers International (WTW)--The company provides its customers with a diet program and regular support meetings during which customers discuss their program. Herbalife is similar in that many of its Formula 1 customers meet at the distributor to provide each other with weight-loss advice.
- Ediets.com, Inc.--The company does not market nutritional supplements or weight-loss products, but operates a website which sells customers subscriptions to weight-loss plans.
- Nu Skin Enterprises (NUS) --a direct selling company that markets nutritional supplements.
- General Nutrition Centers--GNC sells nutrition related products throughout the US and 49 countries in the world.
- Shaklee Corporation--A network marketing company that sells environmentally friendly nutritional supplements, among other products.
- Nature's Sunshine Products (NATR) --A company that also employs a network marketing system and that manufactures and markets herbs, vitamins, minerals, remedies, and other products.
References
- ↑ Herbalife 2007 10K, pg. 5
- ↑ Herbalife 2007 10K, pg. 8
- ↑ Herbalife 2007 10K, pg. 5
- ↑ Herbalife 2007 10K, pg. 5
- ↑ Herbalife 2007 10K, pg. 5
- ↑ Herbalife 2007 10K, pg. 49
- ↑ Herbalife 2007 10K, pg. 13-15
- ↑ Herbalife 2007 10K, pg. 51
- ↑ Herbalife 2007 10K, pg. 51
- ↑ Herbalife 2007 10K, pg. 6
- ↑ Herbalife 2007 10K, pg. 6
- ↑ Herbalife 2007 10K, pg. 8
- ↑ Herbalife 2007 10K, pg. 6
- ↑ Herbalife 2007 10K, pg. 9
- ↑ Herbalife 2007 10K, pg. 8
- ↑ Herbalife 2007 10K, pg. 8
- ↑ Herbalife 2007 10K, pg. 8
- ↑ Herbalife 2007 10K, pg. 8
- ↑ Herbalife 2007 10K, pg. 15
- ↑ Herbalife 2007 10K, pg. 54
- ↑ Herbalife 2007 10K, pg. 54
- ↑ Herbalife 2007 10K, pg. 55
- ↑ Herbalife 2007 10K, pg. 55-56
- ↑ Herbalife 2007 10K, pg. 56
- ↑ [Ogden CL, Carroll MD, Curtin LR, McDowell MA, Tabak CJ, Flegal KM (2006). "Prevalence of overweight and obesity in the United States, 1999-2004". JAMA 295 (13): 1549-55. doi:10.1001/jama.295.13.1549. PMID 16595758]
- ↑ [Morrill A, Chinn C. The obesity epidemic in the United States. J Public Health Policy 2004;25:353-366]
- ↑ Herbalife 2007 10K, pg. 15
- ↑ Herbalife 2007 10K, pg. 27
- ↑ Herbalife 2007 10K, pg. 32-33
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