Greg Probert (L), president and chief operating officer, and Michael 0. Johnson, CEO of Herbalife, came to the company without knowing how it worked but they still made it grow. (Aurelia Ventura/La Opinión)
Under the leadership of two former Disney executives, the company has developed a strategy that has given it 13 consecutive quarters of double digit profits
Yolanda Arenales, Business Writer
Four years ago, when Michael O. Johnson decided to lead Herbalife, leaving behind almost two decades as a high executive at Disney, some thought he was crazy.
“I even had my doubts at the beginning, because I did not understand how this company worked,” recognized Johnson, who nonetheless, now confirms that it was the best professional move.
With Greg Probert, also a former Walt Disney executive who became the chief operating officer for Herbalife, Johnson began what he calls a “sophistication” process of this company, whose headquarters are planned to relocate to downtown Los Angeles, near the Staples Center and to Torrance, in the former Nissan Motor Corp. building.
“The company needed for people to be accountable,” stated Johnson, indicating that he has tried to create a more corporate environment that still maintains some of the freshness of the small business Mark Hughes started in 1980 selling products from the trunk of his car.
From his previous company he says he brought the “magic and emotion,” both needed for Herbalife to maintain its leadership. “Like Disney, here we are also trying to tell a good story, with good content and a great distribution system,” explains Johnson.
At the moment, his strategies seem to be yielding good results. The $508.1 million in net sales during the first quarter of this year reflect an increase of 11.5% compared to the same period in 2006, and make this the 13th consecutive quarter of double digit growth.
The U.S. and Mexico are among the most successful regions for Herbalife, with increments of 22.5% and 12.6%, respectively. The company’s net sales for 2006 were of $1.8 billion and it expects to have an 8% to 10% growth this year.
“The problem with having grown so fast recently is that you can’t keep up with such a high pace,” said Johnson, justifying the slower percentage of growth expected as compared to the last few years.
“I think this company went through some difficult times, but we’ve surpassed them, and while there’s always room for improvement, we are on the right track,” stated Johnson.
There is a great general interest not only in controlling weight issues and the obesity epidemic, but also for good physical wellbeing,” he said.
According to a recent Marketdata Enterprises study, the weight loss business is part of an annual $55 billion industry, which will reach the $68.7 billion mark by 2010.
With 72 million people dieting in the U.S., according to this study—70% of that total without professional support–, the success of this industry seems to be guaranteed.
Probert indicated that close to 45% of the Herbalife business comes from weight management control products, another 45% from nutritional supplements, and 10% comes from cosmetics and its skin care line.
According to Herbalife, almost 50% of its distributor force—mostly women—is comprised of Hispanics, but Johnson clarifies that the sales growth is not only attributed to minorities.
The compensation system for its distributors in the pyramid sales model is another point of controversy for Herbalife.
Although Probert recurs to the classic argument that it is up to each distributor to generate a small income or reach compensation levels equivalent to that of a high paid executive, an article published in Forbes in October 2004 stated that 87% of these people earn a little more than $500 a year. Herbalife did not provide any data regarding this.
A NEW PRODUCT A YEAR
Johnson’s development strategy includes the launch of at least one new product each year (for instance the Shapeworks weight management program in 2004 or NouriFusion, the skin care line it launched in 2005) as well as the affiliation with popular scientists that endorse the company’s products.
Having Doctor Heber, professor of medicine and director of the Center for Human Nutrition (CHN) of UCLA’s Medical Department heading the company’s scientific board, is without a doubt crucial to Herbalife.
In like manner, the company benefits from the prestige of a Nobel Prize winner in medicine, Dr. Louis Ignarro, creator of the nutritional supplement Niteworks, which is attributed with improving cardiovascular health. As is the case with the rest of Herbalife products, Nitworks is not a medication, but rather a dietary supplement, which exempts them from FDA oversight.
Without detriment to the scientific integrity of these scientists, their collaboration with Herbalife has raised controversy. A donation of a few million dollars to the CHN, directed by Heber or the alleged high royalties Ignarro garners for marketing Niteworks raises the question of whether these scientists involvement is far from altruistic.
“We will continue our relationship with UCLA,” stated Johnson, indicating that the investment –not provided—in scientists and these academic entities is “money well spent” and a research and development cost, not marketing.