Herbalife Ltd, a global nutrition company whose business practices are being challenged in a US court and whose marketing strategies have been the subject of public criticism, will officially open a six-storey distribution centre in Phnom Penh today, according to the New York Stock Exchange-listed company.
“With a population of approximately 15.2 million, Cambodia represents further penetration in the company’s Asia Pacific region,” Herbalife said in a statement released yesterday. Regionally, this is Herbalife’s 15th country of operations, including Thailand and Vietnam.
Branded as a personal-care product provider, the highly successful company relies on thousands of distributors to sell its vitamins and health-supplement products.
But media reports show that ex-distributors, rights groups and hedge-fund heavyweights have all recently challenged the company’s business model as being unprofitable for those on the bottom rung of the ladder. Those same groups have also said that Herbalife’s business model targets vulnerable segments of society with enticing dreams of fast money.
Herbalife has continually denied these accusations, which have, in any case, hardly dented earnings. This week, Herbalife posted a strong third-quarter profit, with net income up 27 per cent to $142 million, according to Bloomberg. The company is based in the Cayman Islands.
But the allegations haven’t abated, which may have led Herbalife to post this defence of the operation on its website:
“Is Herbalife a pyramid or ponzi scheme? No. Herbalife’s compensation to Members is based solely on product sales and not on the mere recruitment of other Members. Depending on the level of product sales they make each month, they become eligible for volume price discounts on the products they buy from Herbalife,” it says.
Not everyone agrees.
On October 11, a California judge denied Herbalife’s request to dismiss a lawsuit from a former distributor who alleged that Herbalife was a “pyramid scheme”. The plaintiff, Dana Bostick, says he could not make a profit selling Herbalife products as distributors higher up the ladder received bigger discounts than he did. The trial is ongoing.
According to the US Securities and Exchange Commission, “In the classic ‘pyramid’ scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”
Making similar claims, civil rights groups rallied in Los Angeles to call for California’s attorney general to investigate the marketing practices of Herbalife, Reuters reported. They claim that the company targets vulnerable minorities. Rights group leaders claim that more than 60 per cent of Herbalife’s distributors made no money last year, Reuters reported.
Hedge-fund manager Bill Ackman, who has taken a short position on Herbalife and therefore stands to make a profit if the company fails, has also entered into a public campaign to discredit the company.
Ackman alleges that the company takes advantage of unsophisticated customers with promises of payoffs, according to reports.
“We have not learned any facts that are inconsistent with our belief that the Company is a pyramid scheme that engages in unlawful and deceptive marketing practices,” Ackman wrote in a note to his own investors, according to Bloomberg. “In fact, there have been a number of materially positive developments that increase the likelihood of regulatory intervention and the Company’s closure.”
An Herbalife Cambodia spokesperson disputed the claims yesterday.
“Pyramid schemes are illegal, while direct selling organisations such as Herbalife, are regulated by law and have strict conditions that protect the consumer and the distributor, such as a 12-month product buy-back policy for unsold products.”
Cambodian Economic Association president Srey Chanty said he had not heard of Herbalife and could not comment on its status.
But he added that conditions in Cambodia made consumers more vulnerable to promises of get-rich-quick schemes, which had come and gone without thorough investigation in the past.
“The system is very weak and these guys can take advantage of anything. You have very poor governance, you have a very poor legal framework, you have poor enforcement,” he said.
Lawsuits and public spats didn’t stop the curious-minded from turning out for the launch.
At the new headquarters yesterday on Street 169, Herbalife distributor Quang Ethan, who had travelled from Vietnam for the launch, seemed smitten with the multinational, even though in his first two months, he has yet to reap the rewards.
“The first time is not easy,” he said.