Herbalife shares dropped 15% in Wednesday trading after the nutritional supplements marketer announced it is under Federal Trade Commission investigation. The company confirmed the inquiry, stating it would cooperate fully with the FTC. This news follows months of public scrutiny over its business model.
The Federal Trade Commission, consistent with US regulatory policy, does not publicly comment on ongoing investigations. This left Herbalife with the decision to either disclose the inquiry or remain silent. The company chose public announcement, a move likely aimed at managing the narrative surrounding the investigation.
Herbalife released a statement regarding the inquiry. "Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC," the company said. "We are confident that Herbalife is in compliance with all applicable laws and regulations."
Past analyses of Herbalife's compensation plan have consistently identified a significant issue: the lack of incentive for distributors to sell products at a retail level. This structure allows for an endless chain of recruitment. Distributors can qualify each other for commissions and bonuses primarily through their own product purchases, rather than through sales to external customers.
While the plan does require monthly sales to ten retail customers to qualify for royalty override and production bonuses, this requirement is often seen as insufficient. Outside of these specific stipulations, distributors can largely maintain their active status and eligibility by buying products directly from Herbalife. This system effectively promotes internal consumption within the distributor network.
Herbalife frequently asserts that its distributors resell these purchased products to actual customers, thereby counting as retail sales. However, distributors operate independently; they are not employees of Herbalife. What they ultimately do with the products they buy—whether they sell them, discard them, or resell them to other distributors—does not alter the fundamental source of revenue for Herbalife itself.
The critical question for regulators centers on the origin of Herbalife's revenue. When distributors purchase products directly from Herbalife, the company's revenue is generated by these internal sales. This pattern indicates that a substantial portion of product flow is consumed within the distributor base, rather than reaching genuine external retail customers. This internal consumption model has been a point of contention for over three decades.