Medifast Multi-Level Marketing Scheme Called Into Question By Expert

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.

Robert FitzPatrick, a multi-level marketing expert known around the world for his analysis of the business model, has released a report on Medifast Inc. (NYSE:MED) and its Take Shape For Life division. TSFL is the multi-level marketing arm of the weight loss company, and is the force behind the company’s overall increase in revenue.

FitzPatrick writes:

The foundation of Medifast’s stock surge is the recent rise in its revenue, which is driven by the “endless chain” income opportunity that it markets to consumers. Medifast’s income scheme is a solicitation to consumers to become distributors that buy and sell the company’s meal replacement products and to recruit others to do the same. Medifast seamlessly integrates its “income opportunity” product with its meal replacement products. It makes earning money a key part of its three-part “system” for weight control and good health – the only company in that field to do this – and it offers consumers the company’s own recruitment scheme as the means to meet financial goals.

He also reports the following:

• About two-thirds of every commission dollar generated by sales or purchases of the bottom 80% are transferred to the top 20%
• 67% of all commissions paid out on total revenue were transferred to the top 10% of active coaches
• Take Shape for Life’s new disclosure continues to conceal critical data factors. In particular it does not reveal how much of the income of the top 1% is derived from retail sales they themselves made and how much is merely “overrides” on the purchases and sales of the “downline.”
• The mean average commission income for the bottom one-half of the “active” sales channel (Fast Track Coaches and Health Coaches) – $24 a week – indicates a monthly retail sales level of about 2 meal replacement customers per coach.
• Medifast does not disclose the overall average retail sales per coach, just as it does not reveal how many coaches are actually enrolled, including those that make no sales but do purchase goods and pay fees.

This report is an update to a mid-2009 report issued by FitzPatrick. The full text of the current report is found here. And here is my analysis of Medifast and Take Shape For Life from last year.