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A world of risk for direct sales

Companies find faster growth in foreign markets, but Herbalife hits obstacles in Mexico.

January 06, 2007|Daniel Yi | Times Staff Writer

A 24% plunge in Herbalife Ltd.'s stock Friday, after the supplement maker's announcement that it expected slower sales growth in Mexico, illustrates the rising importance of foreign markets to the bottom line of U.S. direct-sales companies.

Direct-sales or multilevel marketing has been used for decades to peddle goods as diverse as plastic containers and cosmetics. Century City-based Herbalife, for example, sells nutritional supplements directly to customers, who in turn help sell them to acquaintances, friends and family in exchange for commissions and discounts.

But even direct-sales icons such as Tupperware Brands Corp. and Avon Products Inc. now do the bulk of their business outside the U.S. At Herbalife, sales abroad account for more than 80% of business.

Of the estimated 59 million people worldwide who participated in direct-sales marketing in 2005, fewer than a quarter of them are in the U.S., according to the Direct Selling Assn., a Washington-based trade group. A decade ago, Americans accounted for 35% of the world's 24 million direct sellers.

About 85% of direct-sales marketing happens outside the U.S. today, compared with 20% two decades ago, Neil Offen, the trade group's chief executive, estimated.

"It's been a complete reversal," he said.

Much of that growth is in Third World countries including Mexico and Brazil, which typically have higher rates of unemployment and underemployment than the U.S. In those countries, direct-sales marketing offers entrepreneurial opportunities with little start-up costs, Offen said. Because direct-sales operations do not need stores or sales staff, it is also relatively easy for companies such as Herbalife to expand quickly.

Last year, Mexico surpassed the U.S. as Herbalife's largest market, company executives said, accounting for about a fifth of its $1.5 billion in annual sales for products including weight management pills and nutritional shakes. The U.S. is the company's second-biggest market and Brazil is No. 3.

The fast growth in Mexico has caused some "growing pains," according to Herbalife, which is incorporated in the Cayman Islands but operates out of Century City.

The company said several Mexican distributors were breaking its rules by selling products in smaller-than-authorized quantities or advertising themselves as retailers. The supplements can be sold only in arranged group settings or by referral. Herbalife blamed rushed training for the problems.

The troubles in Mexico, which also included counterfeit products and unregistered sellers, caused Herbalife to downgrade its 2007 growth forecast to 6% to 10% from a previous forecast of 10% to 15%.

Michael Johnson, Herbalife's chief executive, said the company would take aggressive measures to fix the problems, including sending a senior group of managers to Mexico within a week.

His comments did little to mollify investors. The company's shares dropped $9.56 on Friday to $29.74, a loss of 24%. Herbalife went public in December 2004 at $14 a share.

"There's no clear timeline for a fix," Christopher Ferrara, an analyst at Merrill Lynch, said about Herbalife's troubles in a report to investors. "This is a complex situation, and we are unsure whether such activity can easily be halted."

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daniel.yi@latimes.com

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