Enforcement of Herbalife’s settlement with the FTC is certainly one of the more bizarre episodes of MLM regulation I’ve seen.
As part of the settlement, Herbalife agreed to “restructure” their business. And a big part of the restructuring was only paying commissions on actual retail sales going forward.
Considering retail sales volume was negligible to the point the FTC felt confident suing the company prior to the settlement, surely post-settlement Herbalife’s US MLM operations would be in trouble?
Post enforcement of the settlement last May, Herbalife’s US revenue has fallen only by single digits quarter on quarter.
Outside of the stock market investor environment, this has led to speculation as to how Herbalife have curbed what should have otherwise been a dramatic decline in sales volume.
I might not have published anything on it myself, but this is certainly something I’ve personally wondered about.
Herbalife’s FTC settlement also saw the appointment of an Independent Compliance Auditor, to ensure adherence to the settlement terms.
In terms of public information, all we’ve been given is a hilariously redacted compliance report dated July, 2017.
Now, through a recent conference call, an explanation for Herbalife’s US sales revenue has surfaced.
Turns out Herbalife’s US affiliates have been fudging their retail sales figures.
Earlier this week Herbalife management informed affiliates that the Independent Compliance Auditor, was making changes to “documented volume” in Nutrition Clubs.
Presumably following an investigation, the Auditor found Nutrition Clubs were being used to fudge commissionable sales volume reported back to Herbalife.
Affiliates were doing this by recording recruited affiliates of other Herbalife affiliates as their own retail customers.
E.g. You and me are both Herbalife affiliates. You recruit John and I recruit Mary.
John and Mary buy Herbalife products to generate sales volume.
Under the FTC settlement I can’t record Mary’s purchases as my own commissionable volume because she’s an affiliate.
Likewise you can’t record John’s purchases for the same reason.
As per the discovered loophole, you record Mary’s purchases as personal retail volume and I do the same for John’s purchases.
Given the personal nature of affiliate recruitment, it’s easy to see how groups of affiliates working together to circumvent the FTC settlement could impact Herbalife’s US sales revenue figures.
And of course prior to being informed by the Compliance Auditor, Herbalife management had no idea this was going on.
In a memo sent to distributors after the call, Herbalife explained:
While we understand that these may be genuine consumptions, sales to another Distributor do not count toward Documented Volume to earn.”
As of May 1st, Herbalife affiliates will no longer be able to use the loophole to record fake retail sales volume.
Whether this will reflect Herbalife’s true retail figures going forward remains to be seen. Who knows what other loopholes affiliates might be using.
Christine Richard of Orion Research claims to have documented Herbalife affiliates buying product from other affiliate’s Nutrition Clubs since September, 2017.
Opines Richard of the May 1st changes;
If distributors can’t count on each other to boost their “documented volume”, then it will no longer make sense for them to run all over town drinking shakes.
If distributors stop being each other’s retail customers, then they are going to start falling short of the documented volume they need to earn commissions and advance in the marketing plan.
Then, the whole Nutrition Club business won’t make much sense anymore.
Despite submitting a number of memos documented evidence of settlement agreement breaches, to date the FTC appears to have done nothing.
Can we get some, y’know… actual enforcement of the Herbalife settlement perhaps?