02 Nov

Herbalife $HLF CEO Michael Johnson on Recruiting

michael-johnson-herbalife-recruitingLast week a video was posted to YouTube showing Herbalife CEO Michael Johnson talking about recruiting. Herbalife had the video pulled from YouTube on the basis of copyright infringement. That is most certainly a bogus claim. I’m not an attorney, but I’m smart enough to understand the concept of fair use:

In its most general sense, a fair use is any copying of copyrighted material done for a limited and “transformative” purpose, such as to comment upon, criticize, or parody a copyrighted work. Such uses can be done without permission from the copyright owner. In other words, fair use is a defense against a claim of copyright infringement. If your use qualifies as a fair use, then it would not be considered an illegal infringement.

The clip was a part of a longer video (about 71 minutes long) was first reported on in June 2015 by Michelle Celarier at the NY Post. The video clip posted last week was about a minute and a half long, and it was posted in order for people to comment upon it. No one was trying to steal some copyrighted materials from Herbalife and infringe on that copyright. Instead, the whole point was to expose what Michael Johnson said about Herbalife’s recruiting.

So why would Herbalife want to make a bogus copyright claim? Because the clip of CEO Michael Johnson put the company in a really bad light. And we can’t have that!
Herbalife has long been criticized for being nothing but an elaborate recruiting scheme:

  1. Recruit new marks (often called distributors or associates) into the pretend business
  2. Get the recruits to buy inventory (often recurring purchases are required to “qualify” for commission payouts)
  3. Use the money from the inventory purchases to pay several levels above the purchaser
  4. Ignore whether or not the purchasers can actually sell the products at a profit (they probably can’t)
  5. See that almost no one profits (and promptly ignore that fact)
  6. Know that a high percentage of people will inevitably give up each year (check out this graphic to see how many resign)
  7. Recruit more new people
  8. … and continue this cycle into infinity

At some point, a market becomes nearly completely saturated and the number of potential recruits drops too low (people have already tried this MLM or another one, and aren’t interested in Herbalife). That’s when Herbalife and other multi-level marketing companies set their sights on large markets overseas, such as China. Despite the fact that China has anti-pyramiding laws, some MLMs have become experts at skirting those laws so that they can recruit there in large numbers.

You see, multi-level marketing is not even a legitimate business model for the distributors. Quoth the Raven explains it well:

Herbalife’s business model is totally absurd and irrational. In order to understand why, all we need to do is imagine how a rational organization would operate. Specifically, how would somebody organize a rational distribution model for a company like Herbalife?

The answer, it seems, is obvious. Distribution coverage in a given territory would be matched to final demand in the market. This is what we see from other organizations, whether salesforces are wholly owned, franchised or otherwise.

Think of an island economy with 100 people. 50 are customers. How many distributors do you need? Is it 1? Is it 2? Who knows?

What we do know is it isn’t 50. This, of course, is why Herbalife has problems.

Herbalife doesn’t recruit its own salesforce. On a day to day basis, its salesforce recruits its salesforce – which is totally bizarre. Even more specifically, an endless chain of salespeople are recruited each and every day because of the incentive system. Too many people chasing the same one object results in one person getting it and most others failing. That’s how Herbalife works on a day to day basis. The people that come and go, lose their money, get spit out of the bottom of the pyramid – Herbalife doesn’t seem to give a shit about these people.

Herbalife has been investigated before. And in 2012, Bill Ackman set his sights on the company. Ackman has been pointing out that the company runs an elaborate recruiting scheme using these [nearly impossible to sell at a profit] products. Below is a chart showing the purchase of a product at the bottom and all the levels above that receive a cut of the money.

 

CEO Michael Johnson and Herbalife have maintained that Ackman is wrong about the company. In fact, Johnson says, the heart of Herbalife is the product. In this January 2013 interview, Johnson responds to a question about sales or distribution (meaning recruiting):

KELLY:Here is the final question for you, Michael. What is the heart of the business, is it sales or is it distribution?

JOHNSON: The heart of the business is product and product results that people get every single day from taking an Hebalife shake, from our energy products, from our great nutrition products for sports, for our skin care products, that’s the heart of Herbalife, it’s the product.

So it is no wonder that Herbalife freaked out when the 2005 video of Johnson was published on YouTube. His statements in the video directly contradict the claim that the company is all about the product. This is a screen capture of one of the slides shown in the video:

herbalife-recruitingYou see that Herbalife is pointing out limited retail and limited retention. The company knows that product sales to third party customers are dismal (and therefore profits are dismal) and that retention rates are dismal. The only way for Herbalife to survive is through [constant] recruiting. And of course, this isn’t rational recruiting like that done in legitimate business models. It is completely irrational recruiting that focuses on recruiting more competitors (try to sell the stuff I’m already trying to sell) and turning your customers (a good thing) into competitors (a bad thing).

The full transcript of the video can be found here, but the best parts include:

It’s the recruiting, meaning bringing new distributors into our company, which is the most vital part of our bloodstream. We bring new distributors in, we grow. It’s that simple. It’s that simple. And the company has built its whole reputation, its whole life, on recruiting.

Our top dogs, Greg calls them The Hunters out there, our Hunters, our top distributors, our Chairman’s Club, our Price Team, they’re professionals at this [pointing to the word “Recruiting” on the slide behind him]. Nobody can do it better. You get next to Alan Lorenz [see: https://www.herbalifepyramidscheme.com/perpetrators/alan-lorenz] and he’ll recruit taxi cab drivers and busboys and waiters and everybody… He doesn’t care who it is and, boom!, he’s got ‘em in this game. Right away, he’s got everybody. How long he’s got ‘em is another question, but he’s got ‘em in this game [again pointing to the word “Recruiting” on the slide behind him]. And that’s what this company built itself on.

[snip]

So what happens today? Today what are we? Today, we’re recruiting. We’re still a recruiting company, and we’ve got to never not be this [again pointing to the word “Recruiting” on the slide behind him]…”

Yes, this video was from ten years ago, but Herbalife has changed very little. Recruiting is still the focus and will always be the focus. MLMs cannot sustain themselves without constant recruiting because they lose distributors so quickly.

I’d suggest that Herbalife had this video removed from YouTube because it is so damning to them.

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