The big story about the MLM, Advocare, dropping out of MLM and adopting a “single-level” system (actual direct selling) supposedly as a result of “confidential talks” with the FTC is highly suspicious on its face. At its website, Advocare states:
On May 17, AdvoCare International announced a revision of its business model from multi-level marketing to a direct-to-consumer and single-level marketing compensation plan. AdvoCare has been in confidential talks with the Federal Trade Commission (FTC) about the AdvoCare business model and how AdvoCare compensates its Distributors. Based on more recent discussions, it became clear that this change is the only viable option.
Advocare has been operating as an MLM for 25 years and is an “award-winning” member of the Direct Selling Association. Among hundreds of MLMs selling “supplements”, Advocare stands out for its high profile endorsements from paid sport stars, creating the impression that its products, which are not evaluated by the FDA, provide extraordinary benefits and “energy.” One product marketed to children as young as 4 was found to contain as much caffeine as small cup of coffee. Revenue exploded from $89 million in 2010 to $719 million in 2015.
That Advocare is in fact quitting MLM is obviously true, but as to why, the part about the FTC forcing its hand is difficult to swallow. No doubt, many would love to believe that the FTC made them do it. It keeps alive some battered faith that the FTC is still open, employees alert, and the agency protecting the public from pyramid schemes. It supports the belief that news media exposés, such as ESPN’s investigation of Advocare, are noticed by regulators. It revives some hope that the truth about MLMs as cultic pyramid recruiting scams is finally being recognized by regulators. Despite a long history of MLM impunity and FTC-approved exemption even from making normal disclosures in solicitations, the story inspires a reassuring view that perhaps MLMs can no longer defy or ignore the FTC but now can be made to surrender only from “talks” with a fearsome FTC.
Hard to Believe
But then, we have to recall what the source of this narrative is. It is Advocare itself. Those who hope the story is true also generally understand that MLMs are colossally deceptive. So, to believe Advocare’s the-FTC-made-us-do-it story requires also believing that this MLM is now telling the unvarnished truth.
Also, to believe the story one must credit the current FTC with vigilance over MLM “compensation plans.” This is quite difficult to accept since Advocare’s “compensation plan” is no worse than hundreds of other MLMs’. It is typical. All MLM “comp plans” are more or less the same pay-to-play, reward-for-recruiting flim-flams and top-loaded money transfer scams claiming “unlimited income” from “endless” expansion. Payments to participate are disguised as quota-based “product purchases” even if they are made inside the sales channel, and rewards for recruiting are disguised as “commissions” on “sales”, even if few distributors have “customers.” All MLMs are allowed by the FTC to claim that the laws of supply and demand and market saturation do not apply to them.
After the scandal of the Herbalife “settlement” in 2016, the FTC’s credibility fell to the same or below the level of Advocare’s. It took a short-selling hedge fund two years and $50 million of publicity and research just to get the FTC to officially look into Herbalife. Then, the FTC took two more years of supposedly “investigating” Herbalife, even though meticulous data and field research was already available from two previous class action lawsuits and the hedge fund’s investigative campaign. Most analysts had expected the short-selling hedge fund to abandon its exposure campaign during this drawn-out process, taking the FTC off the hook, but it held on and persisted. The FTC had to do something.
As it turned out, it was revealed that the FTC was locked in “negotiations” with Herbalife to arrange a friendly settlement. On the day the settlement was announced, in July 2016, it was also revealed that the lead-negotiator for Herbalife against the FTC was none other than the FTC’s own previous chairman, Jon Leibowitz! Now on Herbalife’s payroll and meeting with colleagues he had recently overseen as Chairman of the FTC, Leibowitz got the FTC not to label Herbalife an illegal pyramid scheme; Herbalife was allowed not to admit to any wrongdoing, and to pay a small fine (relative to Herbalife’s ill-gotten revenue gained with methods the FTC itself deemed unfair and deceptive). No upper level officials at Herbalife were affected. The company was allowed to continue operating and was generously given time to make “reforms” that were filled with loopholes and escape routes. The net effect was that the price of Herbalife’s stock, despite all the damaging revelations and the FTC staff’s own findings of massive wrongdoing, went up sharply, rewarding the Wall Street speculators that sustained the scheme during the firestorm of exposure and punishing the whistle-blowing hedge fund.
Straight From Herbalife to Advocare
There is a straight line connection from Herbalife to Advocare following the career of Advocare’s founder, Charles Ragus. Ragus joined Herbalife as a distributor just two years after it was founded and soon became one of its top-gun recruiters. He then joined up with several other Herbalife distributors to start up a near perfect clone of Herbalife, called Omnitrition. In a class action suit brought by Omnitrition distributors, a federal appeals court concluded that “on its face, Omnitrition’s program appears to be a pyramid scheme.” The ruling established legal grounds for identifying pyramid schemes based on retail selling versus internal purchases of the “distributors.” Ragus then founded his own MLM, Advocare, in 1993. Advocare looks, sounds and operates uncannily like Herbalife and also sells a “weight loss” potion remarkably similar to Herbalife’s. Ragus, Advocare’s founder and chief promoter, died in 2001 at age 58. His obituary does not a cite cause of death.
Apart from the general absence of credibility for MLM, Advocare and the Federal Trade Commission, various other factors might be at play that would appear more likely causes for Advocare’s sudden flight from MLM than Advocare’s official claim that it was only because the FTC made them do it. There are rumors of internal struggles involving family members of Ragus, the deceased founder. There was an employee layoff last year, indicating cash-flow factors. The company faces a class action lawsuit charging it is an illegal pyramid scheme. It has been enmeshed in lawsuits in the past around the safety or efficacy of its “health” products.
Disappearing Act
Though MLMs routinely promise “annuity income for life” and many claim to be “debt free”, suddenly shedding distributors and the liability of future payments to them is a classic MLM disappearing act. It is often accompanied by announcing a plan to restructure or a bankruptcy caused by creditors or “shutting down” due to regulatory action. But MLM schemes only seem to go away. As if by magic, they quickly resurrect. The closing or restructuring announcements are immediately followed by behind-the-curtain reorganizations under new names or the migration of the “lines of sponsorship” over to multiple existing or emerging MLMs. In the end, nothing changes. In fact, with sign-up bonuses, new claims of “getting in on the ground floor”, more aggressive waves of recruiting and sometimes the launching of “new” MLMs, the overall MLM racket is invigorated with the abrupt closing of an MLM. If the FTC is involved in the disappearing act by claiming to have “shut down” the fraud, then the ruse works even better by adding the false impression that there is effective oversight of MLM and leaving consumers even more vulnerable to recruiting. The net effect is that more people get roped in. Indeed, the conference call phone lines are on fire right now with Advocare’s top guns making deals for their next recruiting gigs.
Recruiting Free Fall
Perhaps the most tangible red flag that that the story is illusory about the FTC being the primary cause for Advocare to leave the MLM world is the Advocare figure of 100,000 distributors being affected. These are the recruits who supposedly get “checks” from the company based on “team-building”, which will be eliminated as an income source under the new plan.
In its 2017 “income disclosure”, Advocare claimed that over 126,000 distributors received a company check. In 2016 it was over 157,000. The year before that was 177,000. In 2015, Advocare claimed that 623,003 distributors purchased products. Three years later the number was down to 387,372. So, from 2015 to 2019, the number getting checks dropped 44% and in three years the total making purchases dropped 38%, according to Advocare’s figures. Having risen spectacularly from 2010 to 2015, Advocare appears to be well on its way to disappearing with or without the FTC’s help, a classic “pop and drop” pattern in MLM. At this moment, Advocare is in recruiting free-fall, the death-knell of MLM bubbles.
Virtual Zero
Though this is in no way distinct to Advocare but rather is representative of the entire “industry” of MLM, Advocare’s own data show that its “commissions and bonuses” that will be stopped under the new plan never were an “income opportunity.” That term is a cruel hoax. The median “income” of those getting a check was $2.40 a week. Two-thirds of all “distributors” got no checks at all – zero. Of the one-third who got any check even for one penny, half of them received less than $2.40 a week!
Of the total participants that Advocare claims were signed up in 2017, ninety-four percent (94%) received on average from zero to $9.60 a week, before costs and purchases are deducted. And those absurd numbers are just for one year, without factoring 20 years of attrition. The true number of recruits that ever gained a net profit as a percent of all that ever joined would be a virtual zero. Losers in total would number in the millions. Their aggregate losses in the hundreds of millions went to company owners and a handful of guileful recruiters fortuitously positioned at the top. Again, this data from Advocare showing massive consumer losses is not distinctive. It is typical and it is inevitable based on the business model common to all MLMs.
No Comment
At this time, there is no mention of Advocare anywhere on the website of U.S. Federal Trade Commission. In a phone call, Melissa Dickey, an FTC attorney in the Consumer Protection Division, told me she could not confirm or deny media reports of FTC-Advocare talks or whether the FTC had forced Advocare out of MLM, as Advocare’s press release claims. Inquiries about Advocare are met with “no comment.” Perhaps there will be an announcement at some point that will, as happened in the Herbalife case, involve the announcement of an FTC investigation/prosecution of Advocare and a simultaneous “settlement.” As noted, the best MLM disappearing acts include government regulators. They function like the pretty lady that distracts the audience from the magician’s sleight of hand.
Fantasy Business
Whatever the cause – FTC pressure, class action lawsuit, family feuds, financial shortfalls or recruiting collapse – a reality-based assessment must conclude that Advocare’s claim that the company will move to “a direct-to-consumer and single-level marketing compensation plan” is a deluded fantasy or a camouflage for cutting and running. There is no evidence of consumer demand for Advocare’s brand of “pills, potions and lotions.” There are no historical data on bona fide retail sales of Advocare products that were unrelated to or unaffected by distributor purchasing quotas tied to the soon to be banned “unlimited commissions.”
Data aside, to get a real-world sense of how implausible a “direct selling” model is for Advocare, just iimagine selling Advocare’s unknown brand of potions on a person-to-person basis, working under a “non-exclusive” contract that can be terminated “for any reason” with a 30-day notice. Here’s the door approach, using the website’s description of a flag ship product:
“Hello, Madame. Can I interest you in AdvoGreens™ Reds Powder Canister Phytonutrient Supplement, a convenient, great tasting source of phytonutrients and additional ingredients to complement a healthy diet. AdvoGreens™ Reds Powder features a powder blend that provides antioxidants, including vitamins A, C and E, to help enhance your overall wellness and enzyme, prebiotic, and probiotic blend that helps support digestive health. The flavor is “berry” and it’s only $32.95.”
