Founded by entrepreneur Mark Hughes in 1980, Los Angeles-based Herbalife sells its products through a network of more than two million independent distributors in 76 countries.
This gave it unique access to people that were trying to lose weight, said chief financial officer John DeSimone, who was speaking at the Barclays Back to School consumer conference in Boston yesterday.
Citing new Euromonitor International data showing that Herbalife had captured almost a third of the global meal replacement shake market, he said: “In 2003 we had 12% of the category. In 2009 it was 23% and in 2010 we were up over 30% in market share.”
Redefining direct sales
The secret of its success was its sales model, he said.
While the traditional direct sales model was “characterized by medium to high-priced purchases made infrequently”, Herbalife had “completely redefined” this model through its daily consumption approach, which was all about smaller, more frequent purchases, he said.
Because distributors were increasingly interacting with customers though nutrition and weight management clubs, it was also a more efficient model, he claimed.
“Customers are now going to distributors rather than distributors going to customers. This also allows distributors to have more customers than with the traditional model. It also improves compliance, making sure the consumer is taking our meal replacements every day, and if the consumer loses weight, that builds credibility, it builds the brand and creates long term customers.”
Because what was being sold was a meal, not a supplement, the money consumers spent on meal replacements was not discretionary, but replaced what they would otherwise have spent on food, making the business model surprisingly resilient in difficult times, he claimed.
The ‘stickiness factor’
The social aspect to clubs also improved loyalty, ensured more repeat purchases and improved discipline among distributors, because if they had customers coming to them, they were more motivated to turn up, he said.
In the US, more than 50% of consumers attending nutrition clubs attended every day, with at least 50% of these spending an additional $75 a month on products other than meal replacements, he added.
On a mission
Herbalife is on a mission to triple volumes by 2020 as it ramps up its presence in emerging markets and expands its distributor base in mature markets through new concepts such as sports nutrition range Herbalife24.
The firm, which posted a 35% surge in net profit to $111.2m on net sales up 27.7% to $879.7m in the second quarter, has also pledged to manufacture more of its products in-house in future.
Almost two thirds (62.8%) of Herbalife’s sales came from weight management products, 22.4% from targeted nutrition (dietary supplements), 4.9% from sports nutrition and energy products, and the remainder from skincare and other products, said DeSimone.
The firm expects to grow sales by 24% in full year 2011, he said.