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Latinos crucial to Herbalife's financial health

L.A. company Herbalife estimates Latinos account for about 60% of its U.S. sales made through its network of independent distributors.

February 15, 2013|By Stuart Pfeifer, Los Angeles Times
  • Herbalife distributor Angel Perez, left, gets a hug from customer Elizabeth Sandoval, who was grabbing her morning cup of tea at Perez's Herbalife nutrition club in Inglewood.
Herbalife distributor Angel Perez, left, gets a hug from customer Elizabeth… (Mark Boster, Los Angeles…)

The future of Herbalife is riding on Latinos.

The Los Angeles company estimates that Latinos account for about 60% of its U.S. sales made through its network of independent distributors. And a growing slice of those sales are coming from informal nutrition clubs run out of people's homes and strip mall shops.

It's a cultural phenomenon that got its start in Mexico and is quickly catching on among immigrants who have moved to Southern California. Budding entrepreneurs like Angel Perez, a 27-year-old from Inglewood, are forming the backbone to Herbalife's growth.

Perez runs her nutrition club out of a tiny, aging retail shop that from the outside shows no signs that she's even open for business. But behind a single glass front door, covered by a green curtain, there's a lively atmosphere inside.

Colombian singer Shakira's voice blares from overhead speakers. "Hola! Como estas?" Perez says before blending an Herbalife meal-replacement shake for a customer. She charges club members $4 per visit, entitling them to a protein shake, hot tea and glass of aloe vera juice. 

But these nutrition clubs — and Herbalife's business structure — have come under intense scrutiny.

The company is in the middle of a Wall Street battle between two billionaire activist investors. On one side, hedge fund manager Bill Ackman contends the company is a pyramid scheme in which most of the independent salespeople lose money and get stuck with a product that nobody wants. Ackman said he wagered $1 billion that the company would fail, shorting an eye-popping 20% of the company's shares.

Betting against him is Carl Icahn, who dismisses pyramid scheme accusations with high praise about Herbalife's business model. Icahn disclosed this week that he bought nearly 13% of the company's shares, and was talking to executives about taking the company private.

At the heart of this battle: Herbalife's army of salespeople.

Among the biggest accusations facing the company is that it targets low-income members of minority communities, including Latinos, by making unachievable promises of vast wealth from selling its line of protein powders, vitamins, supplements and beauty products.

One of Ackman's biggest allegations is that most distributors end up with garages filled with products they cannot sell. Meanwhile, the distributors who brought them into the business get rich for recruiting them.

Herbalife, founded in 1980, has faced such criticism for decades. The debate centers on the way the company compensates its distributors, allowing them to profit from their own sales as well as sales made by distributors they've recruited — and distributors those distributors have recruited.

The company challenges the criticism, saying it's a legitimate company that sells nutritious products while offering entrepreneurs like Perez a chance to build their own businesses.

Herbalife President Des Walsh said the company does not target any specific demographic. The company's popularity among Latinos exploded in recent years, he said, when U.S. distributors imported the nutrition club concept from Mexico, which is second to the United States in Herbalife sales.

"This wasn't a company focus on the Latino community," Walsh said. "This was the Latino community in the United States seeing and hearing of the tremendous success of nutrition clubs in Mexico and then seeking to replicate that here."

Its marketing efforts do hit the Latino community. The company recently signed a 10-year, $44-million sponsorship of the Los Angeles Galaxy professional soccer team, which has a massive Latino fan base. Each year, it holds a national convention in Spanish called "Extravaganza Latina."

Before nutrition clubs started in Mexico, the only way for consumers to buy Herbalife products was in bulk containers to be used at home. A cheaper alternative is being served up at the nutrition clubs, where consumers can buy single servings and drink them in social settings, surrounded by other people with similar weight-loss goals.

This concept has taken off among Latinos, who are taught at an early age that natural remedies such as herbs and juices are a better option than U.S.-style medicine, said Alexandro Jose Gradilla, chair of the Chicano Studies Department at Cal State Fullerton. That makes Herbalife products popular among immigrants.

Selling the products for profit is also a good fit for Latinos because it allows distributors to take advantage of relationships within the close-knit immigrant community, Gradilla said.

Herbalife spokeswoman Barbara Henderson said in a statement that the company "follows all applicable laws in dealing with distributors, whether Latino or not," but she did not elaborate further.

On a recent afternoon, dozens of independent distributors filled the lobby of a massive Herbalife warehouse in Carson, waiting to pick up products for their small businesses. Nearly all of them spoke to Herbalife staff in Spanish.

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