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Herbalife Now #2 Diet Company by Revenues. Success With Nutrition Clubs

Herbalife is a public company but one that flies "under the radar" in terms of its participation in the weight loss market. Based on the company's Q3 2012 report, the company had total North American net sales of $644 million. This represented 21% of the company's worldwide sales of $3.01 billion. Herbalife had total world wide sales of weight management products (meal replacement shakes, supplements) of $1.88 billion. Consequently, Marketdata estimates that the firm had North American sales of diet products worth $403 million for the first nine months of 2012. On an annual basis this would come out to $537 million. This ranks Herbalife among the largest diet market competitors, probably number two, ahead of Jenny Craig and NutriSystem.

Makes you wonder--should more diet companies use the MLM model to spur growth? Medifast seems to be the only other major diet company doing this, with its Take Shape For Life division.

Herbalife, as a multi-level marketing company, has used "nutrition clubs" to sell its weight loss products. The company has 36,000+ non-residential nutrition clubs operated by its distributors worldwide, accounting for about 40% of its volume. Herbalife requires these clubs to operate under very restrictive rules. The company defines these clubs as follows:

"Nutrition Clubs are social gatherings publicized exclusively through word of mouth and attended only by persons who are personally invited by the Club operator, another independent Distributor or a customer, either through oral conversation or through conversation accompanied by the provision of a written invitation. Nutrition Clubs are not intended to attract "walk-in" traffic, therefore, Nutrition Clubs' advertising is limited solely to promoting services that are offered at the Club's location, such as a Weight loss Challenge, a wellness evaluation or wellness presentation."

Club operators may offer rewards such as free products for the referral of new members, but are prohibited from paying cash for referrals. Many of these Nutrition Clubs have been around for years, and there are about 8,500 in the U.S.

Herbalife Nutrition Clubs are different from other types of popular businesses, which may see some customers 3 or 4 times per month, since most of their nutrition club customers (over 55% here in the U,S.) actually visit the club on a regular or even a daily basis as per the chart below which is based on a 2010 survey conducted by Herbalife. These clubs develop a loyal following which allows them to produce more sales from fewer customers.

Herbalife nutrition club members replace one or more unhealthy meals from some fast food joint on a daily basis with a low calorie healthy Herbalife shake. By visiting the nutrition club for their meal, they usually don't spend more money than they would have purchasing unhealthy food, and are getting a more nutritious meal. Over time this new healthier lifestyle for the club's customer usually ends up helping them to have a better more health outward appearance.

Over the years these clubs have refined their methodologies and have created a formula to increase daily sales based mainly on sales to a few loyal customers and using word of mouth to grow their business. This is why many people outside of Herbalife can't quite figure out where Herbalife's sales growth is coming from.

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