Herbalife’s deals with LA Galaxy and Olympic athletes are key for its push overseas, where FTC rules don’t apply
“How many of you would like to make at least a million dollars a year?” John Tartol, a top Herbalife distributor, asked a wildly cheering crowd filling a Los Angeles auditorium in 2012.
For years, supplement-maker Herbalife Ltd. relied on these rag-to-riches pitches to attract people into the business of selling its weight-loss shakes, protein powders and teas. A brochure used until 2014 featured photos of ebullient people in front of mansions and fancy cars and offered “the opportunity to earn more than you ever thought possible.”
But those promotional promises must end with Herbalife’s $200-million settlement this month with federal regulators, who said the company had engaged in “deceptive and unlawful acts” by misleading people. The overwhelming majority of distributors earned little or no money, the regulators said, with many losing thousands of dollars. The company said it disagrees with many of the Federal Trade Commission’s findings.
Not banned, however, is the increasing stream of cash that Herbalife has been spending each year to sponsor sports stars and sporting events around the world, including, most prominently, Los Angeles’ professional soccer team the LA Galaxy.
The sports-related push has been part of Chief Executive Michael O. Johnson’s plan to transform Herbalife from a controversial multi-level marketing company into a global nutrition company. More than 80% of its sales are now overseas — where the FTC has no power.
This summer, the company is sponsoring the Olympic committees of Costa Rica, India, Israel, Italy and Vietnam. Among its 200 sports sponsorships is a Croatian triathlete, a Colombian BMX racer and a Malaysian squash player.
“Largely it’s back to business” for Herbalife after the settlement, said Timothy Ramey, a Pivotal Research Group analyst who owns Herbalife shares.
“I think sports marketing is a key part of that,” he said. “Their whole shift has to be fewer Lamborghinis and more Spandex.”
In June, 11,000 Herbalife distributors watched in a Seoul auditorium as Herbalife introduced a new energy drink, its label emblazoned with a photo of international soccer star Cristiano Ronaldo.
“The world is wearing the Herbalife brand and it is a testament to our products,” Johnson explained in a message to distributors after it signed the deal with Ronaldo in 2013.
What’s unclear is whether the international sports campaign, which cost $30 million last year according to an executive, can stem losses that may come with the strict new rules laid down by the FTC.
Bill Ackman, the billionaire investor who first claimed Herbalife was a pyramid scheme in late 2012, told investors this month that he believes it is only a matter of time before the new legal requirements cause the company to collapse.
“Herbalife has been shut down by the FTC — it just doesn’t know it yet,” said Ackman, whose hedge fund has bet $1 billion that the company’s stock will plummet. Instead, the stock price has soared about 50% from where it was just before Ackman announced his position in December 2012.
At issue is whether Herbalife’s rising sales come from actual consumer demand for its supplements. According to the FTC’s investigation, the company’s compensation program for distributors was driven not by selling products to people who actually consumed them, but by recruiting additional people into the network.
The system, the agency said, put pressure on distributors to buy large quantities of weight-loss powders and other products so that they qualified for greater discounts and recruiting-based rewards.
As a result, many distributors bought Herbalife products they found difficult to sell, the FTC said. Those distributors gave away the powders and teas to friends, consumed the goods themselves, or threw them away, the agency said. Some distributors sold excess products at flea markets or auction websites, the FTC said, despite Herbalife rules prohibiting such sales.
One top distributor paid more than $8 million for Herbalife products, which were purchased in the names of junior members down the line from that person’s place in the network, according to the FTC. Those purchases generated so much in additional rewards and higher payments from Herbalife that they more than covered the distributor’s $8-million outlay. The distributor then donated the products to charity, the FTC said.
Under the settlement, Herbalife must now verify through receipts that at least 80% of its sales are made to legitimate retail customers.
The company said many of the FTC’s findings are “factually incorrect” and that it had agreed to the terms to avoid more costly litigation.
“The terms of the settlement in no way change our business model as a direct selling company but simply build upon current procedures,” Johnson said in a message to distributors posted on Herbalife’s website. “Because of this, we are confident and excited about the future of our business.”
Megan Jordan, an Herbalife spokeswoman, said the company would have no further comment until it releases its earnings early next month.
At least one large sports organization recently ended its Herbalife deal.
Herbalife had paid for the potential to have its name emblazoned on the jerseys of thousands of children playing in the American Youth Soccer Organization, which has more than 50,000 teams across the U.S. The teams had the option of putting Herbalife’s name on their jerseys, said Mike Hoyer, the group’s national executive director.
The agreement ended in December, he said.
“It worked out for the better,” Hoyer said. “It let them address their controversy,” he said speaking of Herbalife, “and let us go out and find new sponsors.”
The LA Galaxy, however, says it has no plans to end its sponsorship, which pays the team more than $4 million a year. The Galaxy is continuing to get more involved with Herbalife, said Chris Klein, the team’s president.
“This has been a fantastic partnership,” Klein said.
The Galaxy is owned by Anschutz Entertainment Group. AEG also owns the downtown entertainment complex L.A. Live, where Herbalife rents space for its global headquarters.
Brian McKinley, Herbalife’s vice president of sports marketing, explained the sports sponsorship strategy in an interview with Direct Selling News last year. He said the deals helped establish the company’s credibility and provided marketing tools that its distributors could use to find customers.
For example, Herbalife distributors purchased more than 60,000 Galaxy jerseys when David Beckham joined the team — the first time the team allowed Herbalife or any company to put its name on players’ jerseys, he said.
The jerseys made Galaxy fans “walking billboards for our product,” McKinley said. “It shows that the LA Galaxy chose us as much as we chose them.”
Soccer is especially popular in Latin America and Europe, where Herbalife has been expanding.
According to last year’s annual report, almost 11% of Herbalife’s sales are in Mexico, and nearly 13% more are in South and Central America.
When the Galaxy won the Major League Soccer cup in 2014, Herbalife flew a group of its star players, as well as team president Klein, sports science manager Alex Savva and its head coach to Ecuador and Peru for a victory tour.
During the trip, Herbalife created videos showing the team giving soccer lessons to children in poor neighborhoods while promoting its products.
“Herbalife helps our players on the field, as well as off the field,” Savva said in a video. “They are getting the best nutrition possible.”
Asked about the promotional spots, Klein said, “The videos are authentic. The players are using the product.”
The FTC said part of the $200-million settlement will go to distributors who lost large amounts of money. Those details will be announced at FTC.gov.
Anthony Waller, 48, of Las Vegas said he became a distributor after being told about the money he could make.
He paid to go a Herbalife meeting in a Huntington Beach oceanfront hotel a few years ago, he said. He remembers watching videos of distributors showing off their boats, planes and bedroom closets filled with expensive shoes.
“People walked out with stars in their eyes,” he said.
Soon Waller was spending hundreds of dollars a month on Herbalife products, promotional brochures and drink shakers for potential clients, he said. Many people tried the supplements, he said, but didn’t buy more.
“All of a sudden the light comes on and you realize that you’re their best customer,” Waller said.
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