Original title: "Best Health Care Product Company in North America" Youshana: Walking in the gray area of pyramid schemes, the supervision does not want to control and can't control it, and China is the largest market
Money talks.
Author | The death knell of Bourgeois
Edit | Xiaobai
What was expected to be a one-on-one interview instantly escalated into a war of words.
Host Scott Wapner's question was like the first cut through the water: "Why do you insist that Herbalife is a pyramid scheme?"
Bill Ackman replied without flinching: "Because I have done exhaustive research, this company fits the characteristics of all MLMs—"
"To hell with it!" Carl Icahn, known as the lone wolf of Wall Street, interrupted Ackerman loudly, "Ackerman is a liar, like a crying child!" The two of them went back and forth, the language was fierce and tense.
It was supposed to be a one-on-one phone interview with Ackerman on CNBC. But at the last minute, CNBC producer Maxwell Meyers temporarily decided to invite Icahn to a phone interview as well.
Two well-known Wall Street activist investors have very different attitudes towards Herbalife. Ackman believed that Herbalife was an illegal pyramid scheme, and, in order to make his stance, he simply shorted its stock. However, Icahn, as the largest shareholder (26%), is a strong supporter of Herbalife.
(Source: CNBC)
It wasn't until the language clash between the two men made headlines in major financial media outlets that regulators such as the Federal Trade Commission (FTC) and the U.S. Securities and Exchange Commission (SEC) belatedly launched an investigation into Herbalife.
1. It is essentially a pyramid marketing company
The nutraceutical industry in the U.S. is a controversial area, and as a nutraceutical company operating on a multi-level direct sales model, Yosana is no exception.
In 2022, the company's revenue will be 999 million (-15.83% year-on-year), gross profit margin will be 80.58% (81.63% in the same period last year), and net profit will be 69 million (-40.47% year-on-year), and in the first three quarters of 2023, the revenue will be 700 million (-9.18% year-on-year), the gross profit margin will be 80.8% (80.87% in the same period last year), and the net profit will be 47 million (-16.86% year-on-year).
(Note: Unless otherwise specified, the amount in this article is in US dollars by default)
(Source: Market Cap App)
The revenue decline in 2022 was mainly due to the relatively subdued performance of sales initiatives and market-specific promotions, coupled with inflation and market downturn in many markets, particularly in the Asia-Pacific region, resulting in a 12.5% decrease in active customers compared to the prior year.
In addition, exchange rate changes also led to a decrease in revenue of 50 million in 2022.
Net profit in 2022 declined significantly due to the fact that operating related expenses, which are expenses for the period, remained unchanged despite the decline in revenue.
This downward trend continues into 2023. Specifically, the year-on-year decline in revenue in the first three quarters was mainly due to the continued decline in the number of global active customers, although the unit price of goods increased slightly, but only partially offset the impact of the decline in revenue.
In addition, currency fluctuations continued to have a negative impact on sales, resulting in a further decrease of $28 million in revenue in the first three quarters of 2023.
The decline in net profit in the first three quarters of 2023 was mainly due to the decline in revenue, while various operating expenses as expenses for the period remained relatively unchanged, resulting in a further decline in net profit.
Yoshana was founded in 1992 by immunologist and microbiologist Myron Wentz.
He initially established a one-man laboratory in Salt Lake City, Utah, in 1974 called Gull Laboratories, which he used to develop tests for the diagnosis of human herpes virus type 4 (EBV).
(Note: Human herpesvirus type 4, also known as Epstein-Barr virus (EBV), is one of the most common viruses that can cause human disease, with more than 90% of the world's population infected with the virus.) ）
In 1992, Watts sold a majority stake in Gull Laboratories and founded Yoshana in the same year. Today, Youshana has become one of the world's top 15 multi-level direct selling companies, specializing in the production and distribution of nutritional supplements, dietary supplements and skincare products.
The so-called multi-level direct selling (MLM) is a business strategy used by some companies to sell their products or services. Instead of selling products through stores or online stores, these companies rely on individuals to market products directly to consumers and build sales networks by recruiting the next level of personnel to earn higher revenues.
(It should be noted that in Chinese mainland, direct selling with more than three layers is an illegal pyramid scheme and an economic crime.) ）
Unlike relatively standardized and homogeneous products, nutraceuticals often require product education and personalized recommendations to customers. Multi-level direct selling can effectively build a large-scale sales network, allowing for personalized and interactive sales services to be delivered in bulk.
Because of this, this direct sales model is very common in the nutraceutical industry.
Due to the need for a large sales team, if hired as a full-time employee, it will put significant cost pressure on the company, including basic salary, social security and other expenses. The multi-level direct sales model allows the sales team to be self-financed, thereby reducing the company's cost pressure.
In some countries, multi-level direct selling with certain certain conditions is a legitimate business strategy, but it is still subject to ethical criticism and legal grey areas due to the potential risk of economic fraud.
In the case of Youshana, for example, various data shows that the company actually makes money from its direct salespeople, rather than from customers.
To get started, new distributors need to purchase $19 in starter materials, which include a brochure that describes the company's products and sales process. Secondly, Youshana requires direct salespeople to pay out of their own pockets to buy Youshana products first, and then resell them to customers.
However, company documents show that 67% of direct salespeople are unable to sell the products they buy. So in terms of effect, this means that in fact, many direct salespeople are attracted by the company with the incentive of "joining us to make money and spend their time freely", and as a result, they become actual consumers of the company's products.
Of the remaining 33 percent of direct salespeople who successfully sell Yoshana's products, nearly 60 percent earn commissions that are not enough to cover the cost of their initial purchase of Yosanna's products.
(Source: Market Cap App)
Or, let's take a look at Youshana's direct sales in the U.S.: According to the company's 2022 Direct Salesperson Income Disclosure Report, the company has a total of 23,200 direct salespeople in the U.S., of which 31.3% (about 7,200 people) receive zero commission income for the year.
In fact, 69.4% of U.S. direct salespeople earn less than $250 in commissions for the year.
（来源：2022 USANA Health Sciences United States Income Disclosure Statement）
According to a 2011 article in The Salt Lake Tribune, the average annual income of the company's 165,700 employees, including those who are new to the company, is only $617.
2. The truth behind "the best health supplement company in North America".
And Yosanna's title as "Best Health Product Company in North America" is also questionable.
Youshana's self-introduction in China is roughly as follows: It has been rated as the No. 1 health supplement by the "NutriSearch Comparative Guide to Nutritional Supplements" for 7 consecutive years. With a top score of 96.1, Yoshana is one of only two five-star brands.
（来源：NutriSearch Comparative Guide to Nutritional Supplements）
Since 1999, Yoshana and its distributors have cited the North American Comparative Guide to Nutrition as evidence that its supplements are ranked number one in the North American industry. Up to now, the book has been updated to its sixth edition, and each edition has been ranked No. 1 among North American health supplement companies without exception.
However, if you take a closer look at the book's author, Lyle MacWilliam, it becomes clear that things are not so simple. McWilliam himself admits that he is a consultant to several health supplement companies, including Usana.
McWilliam and his company, NutriSearch, have collected hundreds of thousands of dollars in "consulting fees" from these health supplement companies. In addition, McWilliam served as a member of Usana's Advisory Board from 2003 to 2006.
Although Youshana claims that it focuses on R&D investment, and marketing is not the focus, in fact, the company's R&D expense ratio from 2020 to 2022 is only 0.93%, 0.93% and 1.16%.
In contrast, the operating data shows that Youshana is more of a sales-driven company. It is important to note that commissions and other costs paid by the Company to its direct sales personnel are not included in the account of selling, general and administrative expenses, but are separately charged under the account of "commissions and other costs of direct sales personnel".
(Source: Company's 2022 annual report)
If we simply add the advertising expenses at the company level (disclosed in the notes) with direct salesperson commissions and other related costs to calculate the sales expense ratio, then this indicator reaches 43.86%, 44.81%, and 44.05% respectively in 2020-2022.
It is important to note that this figure underestimates the true level, as the calculation does not include the various expenditures related to promotion and marketing activities at the company level. Since the exact amount is not disclosed separately, we do not know the true total amount of the sales charge.
(Source: Company's 2022 annual report)
As a result, although the company's gross profit margin has remained above 80% for a long time, the operating profit margin fluctuates around 10-15% due to period expenses arising from various expenses such as marketing expenses and direct sales commissions.
In the first three quarters of 2023, the company's gross margin, operating profit margin and net profit margin were 80.8%, 9.84% and 6.72%, respectively.
(Source: Market Cap App)
Compared with the industry as a whole, the company's operating profit margin of 10.78% at the end of 2022 is at the upper middle level.
(Source: Market Cap App)
The U.S. nutraceutical industry has long been fraught with controversy, such as the U.S. Food and Drug Administration's (FDA) role in dietary supplement regulation.
Under the Dietary Supplement Health and Education Act of 1994 (DSHEA), the FDA's regulatory authority for dietary supplements is limited. The Act defines dietary supplements in detail and requires that these products do not require FDA approval for the safety and efficacy information disclosed on their labels before they can be marketed.
Put simply, nutraceuticals can be marketed without FDA approval, relying solely on manufacturers to ensure that products are safely and accurately labeled before they are marketed.
The FDA's role is simply to take action against any adulterated or mislabeled company after the product is marketed. Therefore, if a health supplement company advertises an unfalsifiable or vaguely stated efficacy on its packaging, such as "refreshing, detoxifying, and strengthening", it is not illegal and will not be regulated.
3. The pressure of China's regulatory policies on Youshana
Yushana's business model has also been controversial.
In 2007, Barry Minkow published a report stating that most of Yosanna's revenue comes from direct salespeople buying products, and more than 85% of direct salespeople do not make a profit from it.
Youshana is also under investigation by the SEC for illegal trading and alleged violations of the Foreign Corrupt Practices Act (FCPA). Mainly against the Chinese subsidiary Baoying, there is a suspicion of bribery in the expense reimbursement system.
However, multiple investigations, including those by the SEC, were eventually dismissed, and the company did not receive any substantive penalties. Behind it can be involved in the complex chain of capital relations and interests in this industry.
For example, the health supplement industry and the pharmaceutical industry spend huge sums of money every year on lobbying for government policymaking, and in 2022 alone, the related lobbying expenditure in this field was as high as 379 million.
（Total Spent on Pharmaceuticals/Health Products，来源：opensecrets）
In addition, the Academy of Nutrition and Dietetics, which plays an important role in shaping government nutrition policy, receives an average of nearly one million "donations" from the industry each year.
Despite the shrinking revenue from the Chinese market in the past two years, Youshana still relies on the Greater China market, including China, and is still the company's largest source of revenue. In the first three quarters of 2023, Greater China contributed 360 million in revenue, accounting for 51.32% of the company's total revenue.
Among them, China's contribution alone reached 323 million.
(Source: Market Cap App)
Dependence on the Chinese market will pose obvious challenges for companies.
Although the U.S. regulations on multi-level direct selling are more relaxed, for example, according to the FTC's assessment criteria, as long as more than 70% of a company's revenue comes from the end consumer and not the direct salesperson himself, it is not considered an illegal pyramid scheme (i.e., pyramid scheme).
However, China attaches more importance to these provisions, such as the Regulations on the Administration of Direct Selling and the Regulations on the Prohibition of Pyramid Selling, which clearly distinguish between legal direct selling and illegal pyramid selling. In recent years, China has paid more attention to the supervision of illegal pyramid schemes.
In China, direct selling must comply with relevant regulations, such as not allowing a multi-level commission system, the remuneration paid to the direct salesperson can only be calculated based on the amount of the direct salesman himself selling directly to the consumer, and the direct salesperson is required to present the direct salesperson card and sales contract before selling.
On March 2, 2022, the National Market Supervision System Price Supervision Competition (Regulating Direct Selling and Combating Pyramid Selling) Work Conference was held in Foshan City, Guangdong Province, which continued to emphasize the regulation of direct selling and the crackdown on pyramid selling, and said that important progress had been made in relevant regulatory work in 2022.
Moreover, with the popularity of social media and the extended stay at home due to the pandemic, the use of the Internet among the people has increased, and China has been paying more attention to the regulation of online MLM since 2020.
For example, in October 2021, the State Administration for Market Regulation once again emphasized the need to adopt a zero-tolerance attitude towards pyramid schemes and carry out legal education across the country.
On March 16, 2023, the Information Office of the State Council released a white paper entitled "China's Internet Rule of Law Construction in the New Era", stating that it will carry out special actions against online pyramid schemes, focusing on online shopping pyramid schemes, online investment pyramid schemes and online entrepreneurial pyramid schemes.
Overall, it is increasingly difficult for Youshana to operate in China, and its revenue in China has continued to decline in the past two years. In 2022, the revenue from China decreased by 10.47%. In the first three quarters of 2023, revenue from China fell by 6.79% year-on-year.
epilogue
After the investigation, the FTC asked Herbalife to adjust its business model and pay $200 million in consumer compensation. Herbalife is required to hire an independent compliance auditor to cooperate with the FTC's regulatory work for the next seven years.
The SEC determined that Herbalife violated sections 17(a)(2) and 17(a)(3) of the Securities Act, which prohibit the acquisition of money or property by misrepresentation or omission of material facts. In response to the SEC's request, Herbalife has committed to making corrections.
In addition, Herbalife paid $55 million in criminal fines to the U.S. Department of Justice for violating the Foreign Corrupt Practices Act and $67 million in fines to the SEC for related matters.
Still, the Herbalife affair had an O. Henry-esque ending. Its share price jumped 51% in 2017. Ackerman's fund suffered a loss of about $760 million. In comparison, Icahn received nearly $1 billion from Herbalife's investment.
（来源：TheStreet）
Looking back at her peers, after being investigated many times, her business has not been affected and continues to operate in a multi-level direct sales model.
在美国，有一句话：“punishable by fine means it's legal for a price”，大概意思是，凡是能用罚款解决的问题，意味着只要交钱就是合法。
For companies like Yosanna, is the fine an opportunity for deep reflection and change, or is it simply seen as a cost of doing business?
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