Herbalife Ltd.'s New Survey and Public Statements Raise More Questions about the Legality of its Business
NEW YORK, June 18, 2013 /PRNewswire/ -- Pershing Square Capital Management, L.P. ("Pershing Square") today released the following statement:
Yet Another Herbalife Poll
The polling results recently released by Herbalife Ltd. contradict the results of two surveys previously released by the company – begging the question why it won't simply release actual data that are collected by its distributors – and calling into question the accuracy of these survey results. The company continues to refuse to release these surveys to the public so that their assumptions, methodologies, and approaches can be analyzed.
We note that Herbalife's Nielsen survey relied on data from 349 respondents to determine the buying habits of 7.9 million Americans. Using surveys of a tiny fraction of the population which are then extrapolated to determine the occurrence of rare events for the population at large often leads to overestimates of actual results.
Herbalife Refuses to Release Actual Sales Data
Herbalife has incurred substantial expense in commissioning surveys while it has avoided collecting contractually available empirical data which would answer questions about the sales of Herbalife products to end consumers. Under its Sales & Marketing Plan, Herbalife requires all distributors to complete an official Herbalife Retail Order Form for each sale, a form which includes each buyer's name, contact information, product purchased, and price paid. These records must be maintained by distributors for at least two years and provided to the company upon request.
If Herbalife wished to determine its actual retail sales and the profits earned by distributors on these retail sales, it can simply request the required Retail Order Forms from its distributors. Herbalife's refusal to obtain the actual empirical data which would answer questions as to the amount and profitability of consumer sales begs the question as to why Herbalife continues to attempt to rely on inherently unreliable and incomplete surveys as a defense to its being a pyramid scheme.
If Herbalife is a Legitimate Consumer Products Company, It Should be Tracking Retail Sales as Closely as Possible.
Even putting aside the legal requirements of collecting data about its customers, what legitimate consumer products company would not collect available empirical consumer data for research, sales, and marketing purposes if it could access this information?
Other direct sellers openly collect and report their empirical sales data. In a CNBC interview earlier this year, Tupperware CEO Rick Goings said, "Over 90% of our sales are through a retail customer. Only 10% to the sales force, and they buy that because we have so many new products every year." When asked how he could be so confident in the numbers, Goings said, "We have a report there of what happened the previous week, what the sales were, what the recruits were, who they were to and people that went to the party. We manage our businesses right down to the detail of it."
Herbalife's Surveys Do Not Refute That It is a Pyramid Scheme
Whether Herbalife is a pyramid scheme depends on whether its distributors earn more from retail profits than from recruiting-related compensation. Since the surveys that Herbalife has commissioned only seek to determine whether adults have purchased Herbalife products – and not which products, the amount of products, or the prices paid – the surveys do not provide any information which could be used to determine the amount of retail profits, if any, that distributors have generated from these reported sales. Furthermore, Herbalife has refused to provide copies of either the Lieberman or Nielsen surveys to the public further limiting the public's ability to assess the company's claims.
Herbalife products are offered for sale on the internet from numerous websites at large discounts, often as much as 45% off suggested retail prices with free shipping. The high degree of availability of discounted products calls into question the amount of actual retail sales that are occurring at suggested retail prices. Even if it were factually correct that 7.9 million Americans have purchased Herbalife products, only if those sales occurred at prices which enabled distributors to earn more from these sales than from recruitment rewards would this information be helpful to Herbalife in demonstrating that it is not a pyramid scheme.
A 1986 Permanent Injunction with the State of California Requires Herbalife to Track Retail Sales
Herbalife's failure to track actual retail sales puts the company squarely in violation of its 1986 consent decree with the State of California, which imposed a permanent injunction on the company. The injunction, among other things, prohibits Herbalife from operating a marketing program that pays compensation to distributors unless it is based upon "retail sales." The order requires Herbalife to implement a system to "verify and document" sales of products and requires that "their records are current and accurate to a point in time which does not precede [a] request for verification or documentation by more than 90 days."
Regulators Should Investigate Herbalife Following Repeated Demands from Not-for-Profit Organizations and Federal and Local Legislators
Recently, the National Consumers League, the Hispanic Federation, Congresswoman Linda Sanchez (CA-38), and New York City Councilwoman Julissa Ferraras (21st District – Queens) have called upon regulators to investigate Herbalife.
Councilwoman Ferraras wrote: "Latinos and others in my district are being unnecessarily harmed by [Herbalife's] aggressive recruitment techniques."
Congresswoman Sanchez's letter to FTC Chairwoman Edith Ramirez, dated June 6, 2013, closed with this statement: "I expect you will aggressively pursue [an investigation] in a timely manner."
Herbalife responded to Congresswoman Sanchez by stating that Herbalife offers an "excellent business opportunity" in order to "change people's lives." But in a court filing on May 30, 2013 in Bostick v. Herbalife, a class action against the company, Herbalife said it "made it clear to [Bostick] that only a small percentage of individuals similarly situated could expect to – as is true – generate significant income as a result of their relationship with Herbalife." And "even the top Herbalife distributors, on average, earn only a modest amount of income." In Herbalife's recently revised Statement of Average Gross Compensation, the company admitted that 88% of distributors received no payments from Herbalife in 2012 – and that is before accounting for any expenses distributors incurred trying to profit from the business.
Herbalife wants it both ways – when recruiting, Herbalife aggressively promotes its "excellent business opportunity" to unwary consumers. When caught, Herbalife argues that everyone should know that it does not offer any meaningful chance of making money.
Pershing Square joins these non-profit public interest groups and members of our government in requesting regulators to promptly investigate Herbalife. If, in fact, Herbalife is a legitimate company, it should welcome a review of its business practices by the FTC, the SEC, and other regulators to put to rest whether or not it is a pyramid scheme.
About Pershing Square Capital Management, L.P. Pershing Square Capital Management, L.P., based in New York City, is a SEC-registered investment advisor to private investment funds. Pershing Square manages funds that are in the business of trading — buying and selling — securities and other financial instruments. Funds managed by Pershing Square are short the stock of Herbalife Ltd. Pershing Square may increase, decrease, dispose of, or change the form of its investment in Herbalife for any or no reason, at any time.
APPENDIX: STATISTICAL DIFFERENCES BETWEEN LIEBERMAN AND NIELSEN HERBALIFE STUDIES
In January, Herbalife released the results of a market research study conducted on their behalf by Lieberman Research. Key parameters of that survey were as follows:
- 5% of adults purchased a Herbalife product in the last three months
- The results came from a survey of 2,000 interviews conducted in July 2012 and replicated in October 2012 (both surveys found the same 5% figure)
Meanwhile, key parameters from the Nielsen survey released recently by Herbalife are as follows:
- 3.3% of adults purchased a Herbalife product in the last three months
- The results came from a survey of 10,525 interviews conducted in April and May of 2013
To determine whether these two studies produced statistically different results, we can use accepted statistical principles to calculate a margin of error for each of these estimates.
- At the 95% confidence level (the accepted standard in survey research), the Lieberman estimate of 5% has a margin of error of +/- 0.96%*. That means that with 95% certainty, Lieberman estimates the range for the true population proportion to be between 4.04% and 5.96%
- At the 95% confidence level, the Nielsen estimate of 3.3% has a margin of error of +/- 0.34%*. That means that with 95% certainty, Nielsen estimates the range for the true population proportion to be between 2.96% and 3.64%
- These two ranges contradict each other because they do not overlap. In addition, by applying a commonly used statistical test to compare the difference between two independently collected percentages (z-test of sample proportions), we can determine that these results are statistically different with 99% certainty
These survey results are not compatible. From here, we can conclude that the two survey results contradict each other for one of two reasons:
- The two surveys produced different results because sales of Herbalife decreased from October 2012 to April/May 2013. However, sales data provided by the company does not confirm this hypothesis. (Herbalife reported $216.2mm of net sales in the U.S. in Q1'13, roughly the same as the $218.1mm it reported in Q2'12)
- The two results produced different results because one or both studies relied on an unreliable methodology. This is the only other possible conclusion one can draw – that one or both of these surveys was flawed in some way. Whether it was due to an online methodology, question wording, or some other bias is impossible to say without Herbalife releasing the full results and methodology of both surveys (as well as the results of any other surveys the Company may have commissioned that have not been released publicly)**
*NOTE ON MARGIN OF ERROR CALCULATIONS: A commonly misunderstood fact about margin of error calculations is that they change depending on the percentage estimate in question (e.g. a 3.3% or 5% estimate vs. a much larger estimate like 25%, 50% or 75%). It is industry standard to report the maximum margin of error for a survey – but in practice, the maximum margin of error only applies when the percentage estimate is 50%. The margin of error shrinks as the percentage estimates approach the extremes of either 0% or 100%. In this case, the margin of error reported in Herbalife's press release on the Nielsen study was +/- 0.96% – the correct number for the survey as a whole. However, on the specific issue of the margin of error on the 3.3% estimate for Herbalife purchasers, the margin of error is much smaller (+/- 0.34%). It is these precise margin of error estimates that we are appropriately relying upon in the explanation above.
**We note that the Lieberman survey results are extrapolated to U.S. households, whereas the Nielsen survey results are extrapolated to the U.S. adult population. Without a full release of the surveys, it is unclear whether Lieberman asked if respondents had purchased Herbalife product within the last three months (as suggested by the transcript of Kim Rory at the January 10th, 2013 Herbalife investor presentation), or if Lieberman inquired as to whether respondents or any member of their household had purchased Herbalife product within the last three months.
 According to a paper sponsored by the American Statistical Association written by Harvard Ph.D David Hemenway, "[u]sing surveys to estimate rare events typically leads to overestimates. For example, the National Rifle Association reports 3 million dues-paying members, or about 1.5% of American adults. In national random telephone surveys, however, 4-10% of respondents claim that they themselves are dues-paying NRA members. Similarly, although Sports Illustrated reports that fewer than 3% of American households purchase the magazine, in national surveys 15% of respondents claim that they are current subscribers."
 See Herbalife Sales & Marketing Plan (Rule 17-A: Providing Retail Receipts to Customer).
SOURCE Pershing Square Capital Management, L.P.