Limited Incentives for Retail Sales
38. While the company claims to focus on product sales, personal statements, company literature, and the Compensation Plan minimize retail sales activity, whether through resale or through development of direct-sale customers. Instead, the company focuses its guidance on encouraging members to purchase product for the purposes of qualifying for recruiting rewards and recruit down-line members to do the same (duplication). This emphasis on a duplication approach, centered on recruitment and bonus-qualifying purchases, is demonstrated by Herbalife’s 2-4-1 plan (also known as the 4-2-1 plan). According to senior distributors, a new member can reach President’s Team in 10 months and earn >$8000 per month. Note that all instructions center on two actions: 1) purchase 500 volume points per month, 2) recruit and train two new members every month who will do steps 1 and 2. Also note that this plan is unrealistic. Herbalife’s 2014 Statement of Average Gross Compensation Paid by Herbalife to U.S. Members states that “During 2014, 31 U.S. Members achieved the level of President’s Team. They averaged seven years as an Herbalife Member before reaching President’s Team, with the longest duration being 18 years and the shortest being less than three years.”
39. If new entrants follow the aforementioned system of duplication, suggested by Herbalife’s top distributors, firm growth will rest entirely on ongoing recruitment and bonus-qualifying purchases. Monies paid, derived from behavior that follows this suggested pattern of growth, are not significantly connected to sales to ultimate users and are, instead, effectively rewards for recruitment.
40. This paragraph contrasts earnings made through recruitment with the earnings associated with a retail sale. Pershing Square demonstrated that the percent of participants’ income from recruiting rewards exceeds that from retail profit in slides 93-150 in their presentation Who Wants to be a Millionaire?
41. Distributor training discourages retail sales. Chairman’s Club member Stephan Gratziani stated "[S]uccessful people in retailing in our business, it’s a very small percentage. . . . The majority of our people have a difficulty in selling products, in general.”
42. In addition to incentivizing distributor recruitment over retail sales and discouraging retail sales in distributor training, Herbalife places significant limitations on distributor’s ability to re-sell the product to ultimate users. It prohibits sales in business/retail outlets (e.g. eBay, Craigslist, etc.), or home shopping networks. Herbalife Nutrition Clubs are required to abide by an onerous set of restrictions and rules, including: (i) no exterior signage at residential locations, (ii) no mention of Herbalife on the Club exterior, (iii) windows and doors must be covered, (iv) no advertising or promotion, (v) no attracting walk-in customers, and (vi) Club Operators may charge membership fee only to cover operating costs - prohibited from earning retail profit. In videos of Herbalife meetings, little time is devoted to helping distributors learn to retail the product to those outside the organization. Pricing issues also make re-selling to retail customers difficult.
As described in paragraph 21, Pershing Square demonstrated that Herbalife junior distributors cannot make substantial retail profit because the products are available on eBay and other online marketplaces for prices lower than even the discounted wholesale prices that junior distributors are paying for products.
43. Paragraph 43 of the Declaration of Stacie A. Bosley Ph.D. paragraph 43 is idiosyncratic to Vemma's discontinued Customer Referral Program. I am not aware of an analogy for Herbalife.
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