Why Bill Ackman’s Key Argument Is Flawed: Herbalife Ltd. (HLF)

Tupperware’s CEO recently has praised his organization’s “Sell and Earn” model. However one should understand that it has more to do with the type of product they sell: Kitchenwares requiring less repeat purchases. Tupperware has failed miserably when they tried to apply the same model to their beauty product offerings. North American sales of their beauty products have been on a decline for last several years and I believe it has more to do with their “Sell and Earn” model than anything else.

Thus, “Save and Consume” model is not inferior to “Sell and Earn” model. In fact, the type of model a company is using or should use is much more dependent on the type of products they are selling and whether their products require repeat purchases. As long as internal consumption is not just incidental to participation in a scheme, it is as good as external retail sales and it won’t change anything in my example above. In fact FTC’s 2004 advisory clearly states that “the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.”

Conclusion

To sum up, Bill Ackman’s argument that Herbalife is a pyramid scheme because its distributors make more money from recruiting others rather than retail sales is utterly flawed and misleading. Also, Herbalife’s “Save and Consume” model/ internal consumption cannot be held against it when compared to companies like Tupperware.

Bonus

I am sure you must be wondering if recruiting rewards versus retail profit argument is clearly flawed why is it getting so much attention off late and is even seen in some of the FTC letters. Here’s the answer:

Many organizations charge high joining fees and use a part of the fees from new joiners to pay older ones as recruitment reward. The rest goes to the promoters of organizations as profit. These structures where recruitment rewards and organization profits are not having retail basis are clear examples of pyramid schemes. The key here is high joining fee which makes a sizable amount of organization/ older distributor’s profit share. If the contribution of joining fees to organizations total profit is not material, it is unlikely that the organization will turn out to be a pyramid scheme and attract FTC action.

The article Why Bill Ackman’s Key Argument Is Flawed originally appeared on Fool.com and is written by Shweta Dubey.

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