Herb Greenberg, wrote a comentary at Linked In, which was brought to my attention by Tom Haupt. I had already viewed Greenberg’s investigative report over at CNBC on the direct selling industry. After reading Herb Greenberg’s piece at Linked In, I decided to comment. Below you will find Greenberg’s piece and my comment.
“In my nearly 40-year career as a journalist I’ve never come across a situation as bewilderingly bizarre as the Wall Street battle over multi-level marketer Herbalife.
It started with activist Bill Ackman laying out why he is short around 25% of Herbalife’s shares. (He thinks it’s a pyramid scheme.) He was countered several weeks later by a number of very smart investors, notably activist Dan Loeb, who have made it clear they’re betting against him. (They think Herbalife isn’t a pyramid)
No matter who wins, their mudslinging is little more than a sideshow.
Here’s what I know:
After 10 months of independently digging into Herbalife and the industry, culminating with the CNBC documentary, “Selling the American Dream,” I can say with a fair degree of certainty: Multi-level marketing, which has been dogged by the same legal questions and controversies for 65 years, needs to be cleaned up.
And this isn’t just about Herbalife or other companies like Amway, NuSkin, Usana, Mary Kay — all of which insist they’re not pyramids — but the hundreds of smaller private companies you’ve never heard of that fly and grow under the radar.
Multi-level marketing is a form of direct selling. It involves layers of salespeople who not only sell product, but sell a “business opportunity” geared to recruit salespeople who will recruit other salespeople.
One of my favorite lines from our “Selling the American Dream” is one top Herbalife distributor admonishing others at a sales event: “People, if you want to move your check, you need to recruit others….”
That’s because the more they recruit, the more money they make by sharing bonuses and commissions from their so-called “downline.”
Critical to the “pyramid scheme” question is the balance between recruiting versus product sales. While remarkable there are no firm rules defining pyramid schemes, the FTC has a general guideline: If more money comes from recruiting than product sales, then it’s probably a pyramid.
Yet (and this is where it becomes bewilderingly bizarre) the anti-Ackman bulls — including my friend, Australian hedge fund manager John Hempton, who uses the world “scumbag” to describe Herbalife and the industry — say it really doesn’t matter because the cops are politically muzzled and therefore won’t do anything.
What’s worse — in the year 2013 in the USA — they’re not kidding.
But despite their almost arrogant complacency, they’re also ignoring the risks that maybe this time will be different.
Based on my investigation, here’s what I believe they may be missing:
- Having been muzzled for years, the FTC and/or other agencies may have little choice (thanks to the public brouhaha over Herbalife and the mockery being made of being on a politically charged short-leash) but to start scrutinizing a big company or two. They haven’t done that since the 1970s, when the FTC sued Amway. Amway won. Times are different.
- Congressional staffers, looking for the next subprime lending or for-profit education, are likely to see multi-level marketing as red meat in predatory business practices. The industry tends to attract people down on their luck — either looking to get rich quick or just make a few extra dollars.
- A crackdown in the U.S. on a big company (only a handful are public) should filter down to smaller companies — and could cause a domino effect around the world, where many of these companies are seeing their biggest growth.
- The result, in the very least, is likely to be a rest of the industry’s business models. For large companies, like Herbalife, this could result in sharply slower growth.
This much is clear: While this story is likely to fade from the headlines, it isn’t likely to go away anytime soon.
Troy Dooly’s Comment
@Herb, as a voice inside of Network Marketing aka MLM, and having watched your piece several times, I see two main focal points which should be addressed. First which is the smaller of the two, is the fact Herb, you only used Kevin Thompson (a proponent of direct selling) for a few minutes at the end. I think a more balanced coverage would have helped to better understand the real issues.
I agree that Direct Selling, specially the compensation structures known as MLM, do have issues. But to take the word “Recruiting” out of context and lump MLM to pyramids schemes, is what causes more questions than answers.
Case in point; all companies recruit! Starbucks recruits, Apple recruits, heck even CNBC recruits. They recruit customers, viewers, advertisers, and even show hosts. And they pay several layers deep for the recruitment of these individuals. Viable Direct Selling companies all recruit. They recruit more sales reps inside the network to buy and sell their products. Companies “posing” as viable MLM companies, push recruiting, and create compensation plans around the money flowing into the plan, not around the sales of products moving out of the warehouses.
Where it gets sticky is that people who do not make it in a traditional MLM, will take an prostitute the compensation plans, but finding an incidental product to push, knowing that all they are doing is pushing a Ponzi or pyramid scheme. And in some cases even these look legit because the product being pushed, without a compensation plan is a viable product.
I watched this happen in 2012 in the penny auction niche, and in 2013 we are seeing it happen in the mobile application niche. Both with viable business models. But when you place a compensation structure to them, throws the business into a possible Ponzi or pyramid situation. In 2012 one such business model, promoted penny actions, and I covered that story and at times praised the company for working to make changes that would provide a viable product mix. After regulators took over the business, it was disclosed that there was very little internal consumption and even less sales outside of the compensation structure. Yet, reps were paying up to $10,000 for “product” no one used. This is a far different business model, than what you will find at Herbalife or any viable direct selling company.
In these situations, most presentations lead with the money, not the product. Herb, I feel that if you had gone to the DSA, MLMIA or the ANMP the three associations known inside of the direct sales industry you could have received a little more understanding of the legit meaning of recruiting inside of direct sales, especially at the DSA (Direct Selling Association).
The second and far more important focal point I find in your review and your commentary here is the fact you do bring up a viable issue. One we inside of direct selling must face… We need very clear and defined best practices which are accepted at the highest levels of the regulatory chain, and ones that clearly provide the basis that all companies and independent representatives much abide by.
In most cases we have these in place; now we must now be willing to hold each other accountable to them. Where we are lacking is in clearly explaining and defining why high levels “internal consumption aka “wholesale” sales are as good as “retail sales.” And in making clear the “recruiting” other sales reps and product users and getting paid on those sales is just as viable inside of MLM as it is in any other industry driven by a recruiting/sales business model. I have taught for 30 years, to never join a company, where you would not use the products with or without a compensation plan. My first company was A.L. Williams (not without its own controversy), today known as Primerica Financial Services. I am no longer a representative with that company (I do have stock), but I just renewed my life insurance policy with them for another 20 years.
I have found that some distributors are still using an antiquated 1980’s hype driven presentation model, of pushing the “American Dream of getting RICH!” when in reality the American Dream” is different for many people.
Because most of Middle America is looking for additional income, a way to lose weight, more money for healthcare coverage, healthier lifestyles etc., this allows ethically challenged folks to take advantage of the situation. Similar to what we heard in the media about Wall Street, bankers and mortgage brokers a few years ago. It was Wall Street greed, and the poor main street person, was the victim. Yet, no one forced Main Street into barrowing more than they could afford, or getting caught up in the “flipping houses” crave. From Wall Street to Main Street, Americans want a better lifestyle and to leave something folks will remember them by. So whether it is Wall Street, Sports, Media, Politics, or MLM, we all face the ethical challenges of those who will prostitute the business model.
Where I agree with you in the review and here in your commentary is the fact, many small companies which call themselves MLM, network marketing or direct selling, are the bigger issue. They are underfunded, create cheap and at times dangerous products, or try a promote a product just to cover up the monetary shell game, and in the end do not fit anyone’s definition of a viable direct selling company.
In at least one case last year, a company took in $1.2 billion dollars and had 2 million people join. It did catch the eye of the regulators and we will see where it goes. But in most cases because the laws are not clear in some areas, or companies launch overseas these companies go under the radar, allowing folks to join for free or only $10 to $100 less to join until there is so much chatter on the net they catch the media or regulators eye. Although, $100 seems like no big deal, you get 2.2 million people to push a program like that, and before you know it the founders are rolling in the dough, and then the company is shut down.
I would like to see you and others really seem to care about your viewers, focus on the issues we face. I would love to invite you and your crew to the ANMP Convention (Association of Network Marketing Professionals) March 1st – 3rd in Dallas to get a firsthand experience of the direct selling profession, not just an individual company, or from critics who do not find anything positive about direct selling.
Herb, and others who read this, the direct selling industry has created some great products and services over the years, and in a few cases the companies have become well-known in their respective industries.
In closing, Herb although I do not agree with all you have written or shot in regards to direct selling, I do fully understand your points, and agree that the issues have to be addressed. We inside of the direct selling industry can self-police ourselves, or we can let the regulators do it for us.
Living An Epic Adventure,