Herbalife International, Inc. History

Address:

1800 Century Park East
Los Angeles, California 90067
U.S.A.

Telephone: (310) 410-9600
Fax: (310) 216-5169

Public Company
Incorporated: 1979
Employees: 2,391
Sales: $944 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: HERBA
NAIC: 45439 Other Direct Selling Establishments; 445299 All Other Specialty Food Stores; 325412 Pharmaceutical Preparation Manufacturing

Company Perspectives:

Herbalife is united with a single purpose&mdashø capitalize on the core strengths that have raised Herbalife to the worldwide status it enjoys today and, through strategic decision-making, to lead Herbalife toward greater success in the future. Key Dates:

Key Dates:

1980:: Mark Hughes establishes Herbalife and begins selling diet aids out of the trunk of his car.
1982:: The FDA sends a 'Notice of Adverse Findings' to the company.
1985:: Herbalife is labeled one of the fastest-growing companies in the United States by Inc. magazine amidst negative publicity.
1986:: The company officially takes on the name Herbalife International and goes public.
1988:: The company continues aggressive international expansion into Japan, Spain, New Zealand, Israel, and Mexico.
1991:: With the help of international business, sales reach $191 million.
1993:: Sales reach $700 million.
1995:: The company introduces a line of personal care products.
1997:: The firm again becomes subject to negative publicity when Clint Fallows, a former distributor, files suit against Herbalife.
1999:: Hughes attempts to take the firm private.
2000:: The buyout attempt falls short and, in May, Hughes dies unexpectedly.

Company History:

Herbalife International, Inc. markets and distributes a broad spectrum of more than 150 herb- and botanicals-based weight management and dieting products, cosmetics, and general health and nutrition products, through a worldwide network of more than one million independent distributors in 50 countries. Herbalife products, sold under a variety of brand names, include the Thermojetics Weight-Management Program, the Health & Fitness Bulk & Muscle Program, the Dermojetics herbal and botanical skin care products, the Cell-U-Loss cellulite-attacking supplement, Colour cosmetic products, as well as perfumes for men and women under the Vitessence brand name. Herbalife has thrived despite negative claims against its marketing schemes, product ingredients, and distribution methods.

'Herbalife uses `network marketing' as a way to describe its marketing and sales programs as opposed to multi-level marketing,' according to the company's 1995 annual report, 'because multi-level marketing has had a negative connotation in certain countries in which Herbalife does business.' Nevertheless, Herbalife's distribution network closely resembles the typical multilevel marketing approach--sometimes referred to as a pyramid scheme--and has been accused of crossing the line into the illegal endless-chain marketing. Multilevel marketing remains legal in most states in the United States, with the condition that the company's sales force of distributors actually receive earnings by selling products to people not related to the company. In an illegal endless-chain scheme, earnings are achieved primarily through recruiting new salespeople into the pyramid.

In the Herbalife network marketing plan, potential distributors buy into the network by purchasing Herbalife products, generally at a 25 percent discount off the retail price, which they may then in turn sell to others. Once they place orders above a certain amount--ranging from $2,000 to $4,000--a distributor may become supervisor, at which point they receive a 50 percent discount on Herbalife products. Distributors also become supervisors by recruiting new distributors into the network. They then receive a percentage of each recruit's sales--usually about 8 percent. As supervisors rise higher in the pyramid, their earnings have the potential of rising dramatically, depending on the number of supervisors below them.

Herbalife distributors are supported by a range of company career and training programs. Among these are the company's annual distributor convention, called the Herbalife Extravaganza, which features five-day intensive training; HBN, a private satellite broadcasting network that provides training in recruitment and retention techniques, as well as marketing support and training; bonus vacation programs for top-selling distributors; and the company's own magazine, featuring testimonials of success stories by Herbalife distributors and customers. Top distributors may earn $250,000 per year and more; nonetheless, the average annual earnings among all Herbalife distributors has been estimated at $1,500. As independent contractors, distributors receive no salary or benefits from the company.

Company founder and CEO Mark Hughes, owner of more than 60 percent of the company, died unexpectedly in 2000, just after failed attempts to take his company private.

American Success Story Beginning in 1980

Master salesman Mark Hughes began Herbalife in a Beverly Hills warehouse in 1980, selling the new company's dieting aids from his car. Hughes, whose parents were divorced soon after his birth in 1956, was raised in Lynwood, California, outside of Hollywood. By ninth grade, Hughes had dropped out of high school. He became involved in drug use and by the age of 16 was sent to the Cedu School, a private residential home for emotionally disturbed and troubled teenagers. It was there that Hughes developed a knack for salesmanship, rehabilitating himself by selling door-to-door raffle tickets in support of the school. By the end of his tenure, Hughes had joined the school's staff.

Another turning point for Hughes came at the age of 18, when his mother died due to an overdose of diet pills. As Hughes would tell it, according to Inc. magazine: 'My mom was always going out and trying some kind of funny fad diet as I was growing up. Eventually, she went to a doctor to get some help, and he prescribed ... a form of speed, or amphetamine. ... After several years of using it, she ended up having to eat sleeping pills for her to sleep at night. And after several years of doing that, her body basically began to deteriorate.' The death of his mother stimulated Hughes's interest in herbs and botanicals, the use of which had become popular during the 1960s. Hughes set out to develop a dieting program based on herbal and botanical products that would enable people to lose weight safely.

Before founding Herbalife, Hughes the salesman received another kind of training when, in 1976, he began selling the Slender Now diet plan from multilevel marketer Seyforth Laboratories. Hughes quickly rose to become one of the pyramid's top earners. When that operation collapsed, Hughes joined another multilevel marketer, selling Golden Youth diet products and exercise equipment. By 1979, however, Hughes, then 23 years old, decided to form his own company.

Together with Richard Marconi, former manufacturer of the Slender Now products, Hughes developed the first Herbalife line of diet aids. Marconi, who claimed to hold a Ph.D. in nutrition, would later admit that his doctorate was a mail-order certificate from a correspondence school; nevertheless, Marconi would remain an officer at D & F Industries, Inc., which would continue to manufacture much of the Herbalife line throughout the company's history. Also joining Hughes in the new venture was Lawrence Thompson, formerly of Golden Youth, and earlier, Bestline Products, which in 1973 was fined $1.5 million for violating California's pyramid scheme laws. At both Bestline and Golden Youth, Thompson worked with Larry Stephen Huff--later to become a Herbalife distributor--who was involved in what Forbes labeled the 'father of all pyramid schemes,' Holiday Magic, Inc., a multilevel marketer charged by the Securities and Exchange Commission (SEC) in 1973 with defrauding its distributors of $250 million.

The Herbalife plan involved limiting meals to one per day and supplementing the diet with protein powders and a regimen of as many as 20 pills per day. According to the company, Herbalife was an instant success, selling $23,000 in its first month and $2 million by the end of its first year. Hughes, described by Inc. as 'a honey-tongued spellbinder' and 'a tanned and blow-dried California swashbuckler,' and by Forbes as a 'firebrand preacher,' brought multilevel marketing to a new height, by taking the Herbalife message to television. Booking two- to three-hour slots on cable television, including the USA Cable Network, Herbalife was an early purveyor of the so-called 'infomercial.' The Herbalife television programs, led by Hughes himself, were, as described by Forbes, 'full of inspiring testimonials from common people and resemble[d] old-style revival meetings in their fervor.' At the same time, Herbalife published its own magazine, Herbalife Journal, equally filled with testimonials, for which the company reportedly paid $200 each, from distributor success stories to weight-loss victories of Herbalife customers. Within a short time, the Herbalife slogan, 'Lose Weight Now--Ask Me How,' began appearing on buttons and bumper stickers everywhere.

Legal Challenges in the Mid-1980s

Herbalife grew rapidly. By 1985, the company appeared on Inc. magazine's list of fastest-growing private companies. (That magazine labeled Herbalife's five-year growth 'from $386,000 to $423 million, an increase of more than 100,000 percent, [as] by far the highest growth rate in the history of INC. 500 listings.') In that year, the company claimed more than 700,000 distributors in the United States, Canada, the United Kingdom, and Australia, bringing annual (gross) revenues of nearly $500 million. Yet, as early as January 1981, the Food and Drug Administration (FDA) began receiving complaints of nausea, diarrhea, headaches, and constipation, which were attributed to the use of Herbalife products. Herbalife distributors reportedly were instructed to assure customers that these side effects were the result of the body purging itself of toxins. By 1982, when the company published that year's edition of the Herbalife Official Career Book--a guide given to distributors that contained a full product list and descriptions of the uses and benefits for each product, as well as advice on building their Herbalife sales--the FDA took action against the company.

Among the complaints leveled against the company was a number of the claims Herbalife made for its products in the Career Book. The Herbal-Aloe drink, for example, was said to help treat kidney, stomach, and bowel 'ulcerations'; and Herbalife Formula #2 was said to be a treatment for 75 conditions ranging from age spots to bursitis to cancer, herpes, and impotence. In the summer of 1982, the FDA sent Herbalife a 'Notice of Adverse Findings' requiring the company to remove the mandrake and poke root ingredients--both considered unsafe for food use--of Slim and Trim Formula #2, while finding questionable the existence of 'food-grade' linseed oil also in the product. In response, Herbalife removed the mandrake and poke root and promised to modify the product claims found in the 1982 Career Book.

Herbalife was well into its surging growth--and Hughes was riding high himself, purchasing for $7 million the former Bel-Air mansion of singer Kenny Rogers, and marrying Angela Mack, a former Swedish beauty queen--when the FDA released a 'Talk Paper' on its complaints against Herbalife to the press and public in August 1984. The company's troubles increased several months later when Canada's Department of Justice filed 24 criminal charges for false medical claims and misleading advertising practices against Herbalife. In December of that year, Hughes went on the attack, filing a suit against both the FDA and the U.S. Secretary of Health and Human Services, accusing them of 'grossly exceeding their authority by issuing false and defamatory statements and by engaging in a corrupt trial-by-publicity campaign against the company.' In a press release, Hughes said: '[We're] not about to stand around and let this agency or anyone else issue blatant lies about us or our products, or to lie down and roll over while they take pot shots at us. In the five years we've been in business, literally billions of portions of Herbalife products have been consumed by millions of people. And we have never been sued or subjected to any formal proceedings by the FDA.' In the same press release, Hughes also suggested that the FDA 'attack' on Herbalife was inspired by legislation pending in Congress that sought to regulate the rapidly expanding dietary supplement market.

Although Hughes would withdraw the lawsuit the following year, Herbalife began to suffer from the negative publicity surrounding not only its products, but also its marketing tactics. After a still-strong first quarter, the company ended 1985 with only $250 million in retail sales. In March 1985, Herbalife itself was charged in a civil suit brought against it by the California attorney general, the California Department of Health, and the FDA. That suit, which included Hughes as a defendant, charged Herbalife with making false product claims, misleading consumers, and with operating an illegal endless-chain scheme. At the same time, both the U.S. Senate and U.S. Congress began investigations into the company, during which time the investigating subcommittees pursued allegations that Herbalife products had been responsible for as many as five deaths. While the civil suit was based in California, the Washington investigations brought the negative publicity surrounding the company nationwide.

With sales stalling, the company cut its workforce--which had reached approximately 2,000 people--laying off 270 in April 1985, and nearly 600 more the following month. Herbalife distributors were also hard hit, leaving many with unsalable inventories of Herbalife products and many others seeing their income drop to nothing overnight. Sales dropped even more precipitously the following year. Despite repeated vows to fight the charges against his company, Hughes reached an out-of-court settlement with the California attorney general's office. Under terms of the settlement, Herbalife paid $850,000 in civil penalties, investigation costs, and attorneys' fees. Herbalife also agreed to discontinue two of its products, Tang Quei Plus and K-8 at FDA insistence that, although the products posed no safety risks, the claims made for them by the company would require them to be considered as drugs under the Food, Drug and Cosmetic Act. In addition, the company agreed to make further changes to its Career Book, including dropping claims for its Cell-U-Loss product as a natural eliminator of cellulite. By the end of 1986, Herbalife posted a $3 million loss.

Going Overseas and Back Again in the 1990s

Herbalife's domestic sales were at a standstill, so Hughes took the company overseas to expand its international markets. To finance the expansion, the company went public in December 1986, merging with a public Utah-based shell company, which allowed the company to go public much faster than if it had been required to file an initial public offering. Hughes became chairman of the new company, now called Herbalife International, taking 14.8 million of 16.8 million shares of outstanding common stock. The remaining two million shares went to newly named director and executive vice-president, Lawrence Thompson.

By 1988, Herbalife had moved into Japan, Spain, New Zealand, and Israel, and soon added Mexico as well. The company's aggressive expansion forced it to take a loss of nearly $7 million that year, but international sales built quickly, raising worldwide sales to $191 million in 1991. Meanwhile, domestic sales continued their slide, reaching a low of $42 million that year. At the same time, critics of the company pointed to an emerging pattern: that in many of the countries Herbalife entered, sales would surge initially, then plunge, often in the face of government scrutiny.

Nonetheless, Herbalife continued to grow strongly through the first half of the 1990s. Retail sales doubled to $405 million in 1992 and jumped again to nearly $700 million in 1993. Although 80 percent of sales still came from international markets, Herbalife's U.S. sales began to climb, reaching $85 million. Buoyed by this growth, Herbalife filed for a secondary offering of five million shares in 1993.

The company came under attack again, however. An Herbalife program introduced in 1992 called Wealth Building--in which newly recruited distributors could achieve supervisor status, with an immediate discount of 50 percent, if they made a first purchase of $500--was seen as skirting the edge of an illegal endless-chain scheme. The company's newly introduced Thermojetics Program of products also was criticized by the FDA and others for containing the Chinese herb ma huang, which contains ephedrine. In response to a Canadian threat to ban Thermojetics, the company agreed to reformulate the product. Despite this publicity, sales of Thermojetics were credited with raising Herbalife's retail sales still higher, to $884 million in 1994 and to $923 million in 1995, for net earnings of $46 million and $19.7 million, respectively.

The company's international operations also was faced with problems. In France, claims that a group of Herbalife's distributors were part of an unpopular religious group led to falling sales in that region. In 1995, the firm suspended the sale of Thermojetics Instant Herbal Beverage in Germany after receiving complaints from government agencies about the product. The suspension led to a sharp increase in product returns and distributor resignations as well as a decline in sales of related products.

The firm continued to thrive, however, despite the conflicts in which it was involved. In 1994, the company began developing a new line entitled Personal Care, which focused on health awareness. The products were launched in 1995 and included The Skin Survival Kit, Parfum Vitessence fragrances, and Nature's Mirror, a line of facial products. Herbalife also entered the catalog sales market in 1994 and developed 'The Art of Promotion' catalog that was used by distributors and complemented existing product lines.

Continued Growth in the Mid-1990s

The company entered the mid-1990s focused on international expansion as well as continuing its growth in existing markets. By 1996, Herbalife was operating in 32 countries and international sales accounted for more than 70 percent of total sales--sales in the United States, however, declined by 16.2 percent to $279.6 million. The firm also began restructuring its European distribution system. It closed four warehouse facilities, leaving five in operation, and established new sales centers for distributor meetings. The company also opened a main sales office in the United Kingdom that could process telephone orders from European distributors.

The firm came under fire once again in 1997 when Clint Fallow, a former distributor, filed suit against Herbalife claiming that the firm withheld earned income. The suit, which Fallow detailed on a public web site, garnered negative attention and was the first of many filed against the company by disgruntled distributors.

Nevertheless, the company forged ahead, securing $54.7 million in net income in 1997, a 22.2 percent increase over the previous year. By 1998, the firm had expanded into Turkey, Botswana, Lesotho, Namibia, Swaziland, and Indonesia. The next year, Hughes set plans in motion to take the company private in a $17 per share buyout plan after claiming that Wall Street was undervaluing his firm. Although the Herbalife board approved the offer, many shareholders claimed that the offer was not fair and filed suit against the firm.

Problems Continuing into the New Millennium

Herbalife continued to battle problems into the new millennium. The use of ephedrine in its products raised issues as the FDA linked heart attacks and strokes and even death to its use. Then in April, Hughes abandoned his buyout efforts when he was unable to raise enough capital to fund the deal. The firm settled the suit with shareholders and stock price faltered, trading around $10 per share after the announcement--in spring 1998 the stock had traded at $27 per share.

The company was again faced with hardship when in May 2000, Hughes died unexpectedly. Rumors spread about his death claiming that Hughes himself had not been a picture of health and had died of an alcohol and antidepressant overdose. The MLM Watch, a group that investigates marketing schemes, also claimed that the story about Hughes's mother dying of an overdose of diet pills was false and that newly elected Chairman John Reynolds was not really Hughes's father, as the company claimed. For the first time in five years, sales declined and the firm recorded a 35.1 percent decrease in net income over the previous year.

The company moved forward as it had done in the past when faced with adversity. In 2001, Herbalife expanded into Morocco. Newly elected President and CEO Christopher Pair stated in a company press release, 'The addition of Morocco as our 50th market represents an important milestone for Herbalife. We are committed to strengthening our global presence by making our products available around the world and extending new business opportunities for our distributors.' Despite continuing negative publicity surrounding the company, management continued to focus its future efforts on growth markets.

Principal Competitors: Alticor Inc.; GNC Inc.; Nu Skin Enterprises Inc.

Herbalife International, Inc. History

Company Perspectives:

Key Dates:

Company History:

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