UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.
Earlier this year, Barry Minkow and Fraud Discovery Institute railed on Medifast, a company with a weight-loss plan being marketed with a multi-level marketing plan. The company was built primarily through marketing of the weight loss program through physicians. The Medifast executives realized that the MLM structure was their golden opportunity.
Why is multi-level marketing such a cash cow for the owners and executives of companies like these? Because product and service sales become largely irrelevant. The company instead markets the “opportunity” for making extra money and achieving financial freedom. (Almost no one is able to actually achieve either of these when they sign up to sell MLM junk, but that’s beside the point. Get people to believe it’s possible, and you’re golden.) Recruit people into the MLM, require “minimum purchases” from each to continue to “qualify” in the pyramid, and you are likely going to have exponential growth for the company.
Once Medifast realized there was a chance to make gobs of money via the multilevel marketing model, they focused on that and the company’s earnings have reflected this successful strategy.
With the help of MLM expert Robert FitzPatrick, Barry Minkow demonstrated how a pyramid scheme like Medifast’s Take Shape For Life program works. (And this company isn’t alone with this method of marketing. Plenty of other companies use it. One such company is YTB, which got nailed by regulators for being a pyramid scheme.)
Another financial expert is criticizing Medifast for promoting their alleged pyramid scheme. David Phillips at BNET has written two articles on Medifast and Take Shape For Life (TSFL). The second really focuses on the pyramid scheme aspect.
He raises some excellent points. The weight loss industry as a whole has suffered greatly thanks to the economy. Big declines in revenue are hitting companies like Weight Watchers International and Nutrisystem. How then, can Medifast be doing so well? For the six months ended June 30, 2009 Medifast reported revenue of $74.4 million, an increase of 41% over the prior year, according to the company’s earnings release.
The answer could be that the company’s program is much better than others. There’s no objective data that supports that contention however.
There are zillions of diet pills, programs, and meal plans out there. Why is Medifast so successful of late? The growth isn’t coming from the physicians who promote the program or the weight loss centers that offer products and service. The success is in the Take Shape For Life unit (the MLM arm of the company), which accounted for 58% of revenue in 2009. In contrast, this part of the company contributed only 33% of the revenue in 2008. TSFL alone had a 96% increase in revenue in 2009 over the prior year.
But maybe the MLM part of the company is so successful because it works so well for the “coaches” recruited into the program? We’ll never know for sure, as Medifast doesn’t disclose how much money the coaches are making, how much they spend on expenses of the business, what their attrition rates are, or how many recruits are actively selling or recruiting.
Take Shape For Life, however, makes it clear that to make real money, you have to recruit new people into the plan. This is where the allegations of being a pyramid scheme come in. Like all other MLMs that I’ve looked at, the product or service isn’t really the focus. It’s simply the bait to get someone in and make the company look legitimate. The real focus, however, is the recruiting of new marks into the scheme.
So the company’s products haven’t been proven to be stellar. The traditional outlets for the products are not doing well. And the MLM portion of the company is booming, even though there’s no evidence that the products themselves are actually selling well. Everything points to the real deal being endless chain recruitment into a pyramid scheme.