Tuesday, January 16, 2018

Further notes on visiting Herbalife clubs in Queens

Preface: I once wrote a blog post - a response to Mr Ackman's campaign on Herbalife - which gave notes on visiting a Herbalife club in Queens. This remains one of the top ten most visited posts ever written on this blog.

On Saturday morning I visited two Herbalife clubs in Queens neither of which I had visited before.

One was a well known one - one of the first hits when searching for them using Google. The other was just found using Google Navigation and was about half a mile away.

Both clubs were pretty marginal businesses - but both were stable and viable. One was ten years old, the other five years. The first one was - believe it or not - prosperous enough to have employees.

My purpose was to check implementation of the Federal Trade Commission (FTC) rules on the ground. The FTC rules come from a settlement the FTC had with Herbalife in July 2016.

I went without someone fluent in Spanish (a skill very few Australians have) and that was a problem because neither of the proprietors (or their staff!) spoke English. Very few customers spoke English either - but we sat in the clubs for some time and a steady (although small) flow of customers came through. My colleague spoke broken Spanish which was enough for a basic - but not a detailed conversation. Sometimes customers translated.

In both clubs our names were taken when we ordered and records were kept of who the customers were. This is to ensure compliance with the rules in the Amway Case (reinforced in the FTC settlement) that require a multi-level marketing scheme to demonstrate that 70 percent of sales were to bona-fide customers and not to distributors. We asked whether this was a response to the FTC rules but were told that they had done this "always" - which meant at least for five years. In other words they had been complying with the core FTC requirement in advance.

In the second club the reason the clubs were marginal businesses however was made clear. We asked how many clubs there were around here - and the proprietor said in Spanish and with a wry look - too many. This is consistent with the first time I visited Herbalife clubs in Queens.

One of the clubs organised exercise groups in a park but not in the winter. The other club did not organise such groups.

At the end we found two fluent English speaking customers - a mum probably in her 40s and her daughter in the latter years of school. Their preferred language was Spanish but their English was excellent.

The mum had been coming for about a year and exercised three times a week (the exercise not organised by the club) and had lost about 45 pounds. She was a true believer - and credited Herbalife with her change.

Her daughter was there as much as anything to keep her mum company - but was also a Herbalife customer. She had successfully sold some of the product too - presumably to her mums friends who were (rightfully) impressed by the mum's loss of body mass and improved health.

But she did not sell it any more - because she did not get paid.

Now it turns out the reason that she did not get paid was that she was signed up as a "preferred customer" and not as a "distributor". The distinction between "preferred customer" and "distributor" did not exist prior to the FTC Settlement described above. It was part of the way that Herbalife was forced to demonstrate that it complied with the guidelines in the Amway case.

To be blunt - the direct result of FTC decision is that a young Hispanic woman did not get paid.

And that was the only direct result of the FTC decision I saw.

And so in summary I conclude that the FTC has been ripping off young Hispanic women since July 2016.

I am not sure that is the intended effect.


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