Herbalife: Has The DSA And Multilevel Marketing Given Up On Retailing?

Herbalife: Has The DSA And Multilevel Marketing Given Up On Retailing? by William Keep,Seeking Alpha

Summary

DSA 2013 reports the number of “Direct Sales Representatives”; DSA 2014 reports the number of “People Involved in Direct Selling.” Involved doing what?
DSA says whether the customer is a distributor is “immaterial”; Vemma and BurnLounge courts say otherwise (DSA also claimed to “perfect” the definition of pyramid scheme).
Vemma and BurnLounge notice to Herbalife and others: effective anti-pyramid scheme safeguards (e.g., Amway ’79) still relevant.

Investors know well the risks of “retailing”.

You have seen the numbers. Upwards of eighteen million adults — more than 8% of adult Americans — participate in direct selling (overwhelmingly MLM), presumably to earn part- or full-time income. Despite accounting for less than 1% of total US retail sales, it is not hard to find extreme claims about the importance of the industry (move over 1%ers!). Available public data, however, indicate that most participants are “inactive” and therefore ineligible for company earnings. That is just part of the picture. MLM companies often promote a second income opportunity as independent business owners participants can obtain profits from selling products to non-distributor customers.

Analogous to being a retailer, MLM-style direct selling (as opposed to traditional direct selling) can be similar to owning a store but without the overhead costs. Whether products are delivered by the distributor or direct shipped via the parent company, the distributor establishes the price and accepts the risks of a retailer. Providing information and ensuring a positive buying experience increases customer satisfaction and repeat purchases and limits product returns. In this way, so the story goes, income can be earned based on purchases by distributors in one’s downline, and from the margin on sales to non-distributors.

If the latter income source was ever significant, it appears that things have now changed. Over the past year and a half the DSA has promoted the view that sales to non-distributors are not critical to the opportunity and likely not even relevant. Inaccurately paraphrasing the BurnLounge decision, in 2014 DSA presidentMariano claimed: “the Court affirmed that compensation in a multilevel marketing business must be primarily based on the sale of products and services to the ultimate consumer, whether or not that consumer is also a seller of the products.” More recently he was quoted: “‘The legal analysis should be: is the product being used by real customers?’ Whether the consumer is a distributor is immaterial” (emphasis added). As explained here, this public position by a national trade association contradicts decades of pyramid scheme case law. The DSA sought to bolster its view with a pitiful analysis conducted by a consulting firm that may now well wish it had taken money from someone else (see: the report and the many ways the authors misunderstood and misrepresented the industry).

This DSA website reads: “The direct selling channel differs from broader retail in an important way. It isn’t only about getting great products and services into consumers’ hands. It’s also an avenue where entrepreneurial-minded Americans can work independently to build a business with low start-up and overhead costs…”