In the previous (Part I) of this series, it was seen how the fictionalized language that was invented by MLM promoters serves to prevent critical analysis. Terms, which have nothing to do with how MLM actually operates, serve as protective coating, preventing a witness or narrator from accurately describing MLM realities, even if he/she knows the truth. The pseudo-business terminology camouflages nearly total losses, pervasive deception, lack of customers, money transfer and social disruption.
But the greatest of these disguising words and phrases that divert the public, regulators and journalists from seeing MLM for what it is or being able to communicate what they have witnessed – making MLM effectively invisible, while operating in plain sight – is the term “direct selling.” In this phrase, MLM can remain invisible not only by false titles and terms, but a false identity. This false identity was gained by taking over the status of a deceased business sector, door-to-door sales, and then rewriting history to claim that MLM is direct selling’s rightful heir and direct descendant.
The recent controversies around Herbalife reveal the power of the false identity in shielding MLM from real-world analysis. Faith in the company remains solid among Wall Street’s bulls, seemingly unaffected by facts, data, and revelations – except for Herbalife’s recent profit and growth slowdown.
Hard data showing 99% loss rates among the distributors are dismissed. Absence of an identifiable retail customer base or any retail profits is dispatched by claims that most of Herbalife’s salespeople buy the goods for themselves and don’t want profits. A zero-median-income among “Supervisors”, that is, even those in top one-fifth of the sales chain make no money on average, is ignored as if it were normal for no one to gain a profit from working for Herbalife. A virtual 100% quitting rate every couple years among all the customer/distributors, despite the company’s claim of product demand so strong that advertising is unnecessary, is similarly treated as perfectly normal. And so it goes. All other evidence of targeting Latinos with a fake business proposition, breaking anti-pyramid laws in China, and active investigation by US regulators are blithely ignored.
What gives Herbalife a free pass from reality-based analysis is a mind-numbing, thought-stopping, bliss-producing factor. It is that Herbalife is envisioned by its supporters as a pure and courageous champion of ”direct selling”.
In the American folklore “direct selling” is a sanctified institution, a building block of capitalism, the very definiti
on of entrepreneurship. It is the Yankee Peddler, the sentinel that keeps the economy faithful to the American Dream. Whatever Corporate America may do, and no matter about downsizing, franchising, unemployment and Recessions, there is always that last sanctuary of the free market where a red-blooded American (or even an immigrant) can still make a living. Direct selling is Adam Smith, Dale Carnegie, the self-made man, and the spirit of capitalism. Perceived as the veritable icon of this hallowed and centuries-old American institution Herbalife is exempted by believers from vulgar scrutiny.
Except that it isn’t true.
This essay is offered as a bucket of cold water thrown, respectfully, into the faces of some spellbound investors and consumers who view Herbalife as the paragon of direct selling, a font of opportunity for everyman and bastion of boot strap economics.
Indeed, if Herbalife were that mythological figure, it might be logical to overlook its egregious excesses in the way tha
t Fed chairman, Alan Greenspan famously poo-pooed a catastrophic bubble that spawned an epidemic of Wall Street Ponzis and a monumental banking and housing fraud upon Main Street. He excused it all as “irrational exuberance.” As he later confessed, Greenspan fervently believed in the self-regulation of capital markets. He learned it in Ayn Rand books. In this view, markets were incapable of self-destruction and or inflicting massive harm upon communities. Fraud would be preemptively rooted out by the market’s own immune system. Fixed in that belief, he blissfully ignored signs of the coming cataclysm.
Analogously, Herbalife, identified as the essence of “direct selling,” could never do what Bill Ackman and others accuse it of. Those accusations are contrary to Herbalife’s identity, its essence and its mission. Such charges and evidence are, therefore, not worth examining or taking seriously, data and analyses be damned.
But, Herbalife is not direct selling. It is “multi-level marketing.” Multi-level marketing, as practiced by Herbalife and hundreds of others such as Nu Skin (NYSE:NUS) or Usana (NYSE:USNA), is an entirely different type of enterprise, invented in the 1950s and self-defined only in recent decades, with fraud and cultism accusations ever rapping on its door. MLM revenue is existentially dependent upon the continuous influx of capital investments from newly recruited contract “salespeople” to reward earlier recruiters, in an ever-churning recruiting cycle in the absence of sustainable, market-based sales or retail profit. Consumer products in MLM are not the output but the medium, a mere device for transferring money from the large base of new recruits to a tiny few stationed securely at the top and orchestrating the constant recruiting. MLM does not drift into chicanery as direct selling occasionally did. MLM is inherentlydeceptive and unfair, by virtue of its design. Success is determined by adeptness in the arts of mass deception about “income opportunity.” As overwhelming data show, multi-level marketing offers no measurable income opportunity to 99% of its participants. (See the report, “What Is This Thing Called Multi-Level Marketing?”)
Yet, according to conventional belief, MLM is the direct descendant of door-to-door salesmanship. It is believed
to be the repository of the traditions, values, business practices and retail economics of door-to-door selling’s golden era in the 1930’s, through the 60’s when the foot soldiers of American business hit the streets to generate income and bring useful goods into American homes. This was also the era when milk and ice were delivered to homes, everyone read “the papers,” and doctors made house calls.
Today, almost no one knocks on doors anymore, unless it is a scam, a would-be burglar, or a religious proselytizer. Indeed, no one is at home or has time for pitches from strangers in living rooms. And what products require personal salespeople in the USA or in much of the rest of the world? Certainly not protein powder drinks. One of the last of the old time, legitimate direct sellers using the door-to-door system was Encyclopedia Britannica. Publication of the printed books ended in 2012, having long since been replaced by CD ROM and online reference sources. The door-knocking EB sales reps had vanished from the earth by about 1990, along with the direct selling model, for all practical purposes.
MLM is obviously not direct selling as popularly portrayed. In Herbalife’s case it lacks the most basic requirements – retail customers that buy products from the direct sellers and salespeople that earn profit from personal retail selling. Herbalife’s pay plan is a direct contradiction of the direct selling model, offering every customer the seller’s own wholesale price and flooding every area with as many salespeople as it is humanly possible to recruit. To this is added a pay formula that accelerates recruiting with carrots of ever increasing rewards for recruiting, and fatal penalties if personal “purchasing” (self-consumption) stops or recruited “downlines” deteriorate.
But, not only is MLM not “direct selling,” it is not direct selling’s progeny. The first members of what was to become the Direct Selling Association, DSA, were California Perfume Co. (now Avon), Freeport Manufacturing, McLean, Black & Co., Mitchell & Church, Mutual Fabric, National Dress Co., Queen Fabric, Security Co., Standard Dress, World’s Star Knitting – not a “pills, potions and lotions” scheme among them, the dominant creature that inhabits the so-called field today. Moreover, the DSA, as a later essay will more fully document, fought, in vain, to keep the new MLM companies, which began to appear in the 60’s, out of the organization’s membership. The true direct sellers considered MLMs to be perversions of direct selling, pyramid scams in short. Yet, as regulators allowed the pyramids to proliferate, true direct sellers found they could not survive upholding retail-based selling. Economic and cultural forces were ending their era, but MLM accelerated their demise by siphoning off salespeople candidates with their “unlimited” income offers, spiced with “no selling required” claims.
Today, two of the longer running companies with ties to the real direct selling world, Avon (NYSE:AVP) and Tupperware (NYSE:TUP), have eschewed membership in the USA’s “Direct Selling” Association. The American DSA is now 90% MLM and, the organization claims, its members constitute 90% of “direct selling.” If this be so, true direct selling died long ago in America, and today’s DSA members merely grabbed the domain name. MLM only took over the name and the identity of a deceased business model. DNA tests would show it is not part of the family.
MLM’s Big Bang
How could MLM have gained control of the very identity of direct selling without being its legitimate heir? A closer look at MLM’s origins reveals the historic switcheroo. As in most cultural developments, several independent threads could be found that may trace back to MLM’s Big Bang, but the clearest, continuous link to MLM’s ancestry goes to the Nutrilite company, founded in 1939 by German-born Carl Rehnborg, a self-educated “scientist,” a classic purveyor of a “cure-all” potion of the type that had no roots in direct selling but a long and deep tradition in the American Traveling Medicine Show.
As records show, Nutrilite, an utterly ordinary food supplement and vitamin based upon miniscule amounts of vegetable material, was touted by Rehnborg as a miracle cure-all. Step right up folks!
According to federal court records, Nutrilite was illegally sold with the use of a booklet that informed prospects that Nutrilite had “cured or greatly helped” such “common ailments” as “Low blood pressure, Ulcers, Mental depression, Pyorrhea, Muscular twitching, Rickets, Worry over small things, Tonsilitis, Hay Fever, Sensitiveness to noise, Underweight, Easily tired, Gas in Stomach, Cuts heal slowly, Faulty vision, Headache, Constipation, Anemia, Boils, Flabby tissues, Hysterical tendency, Eczema, Overweight, Faulty memory, Lack of ambition, Certain bone conditions, Nervousness, Nosebleed, Insomnia (sleeplessness), Allergies, Asthma, Restlessness, Bad skin color, Poor appetite, Biliousness, Neuritis, Night blindness, Migraine, High blood pressure, Sinus trouble, Lack of concentration, Dental caries, Irregular heartbeat, Colitis, Craving for sour foods, Arthritis (rheumatism), Neuralgia, Deafness, Subject to colds.”
Such claims are classic Medicine Show fare, but Nutrilite carried on the tradition with the inconvenient presence of a vigilant Food and Drug Administration, FDA, and it lacked the facility of being able to pick up and leave town with alacrity when its products were exposed as placebos, as was often necessary for Medicine Show operators. The FDA ordered Nutrilite to stop making false medical claims. The company fought the ruling all the way to the Supreme Court, which eventually sided with the FDA.
This practice of selling alleged cure-alls that were at best harmless but could be lethal when replacing actual medical treatment is the most famous hallmark of the traveling Medicine Shows. The Medicine Show’s health products, however, were also infamous for being laughingly overpriced relative to production costs and usefulness. In the adept hands of Medicine Showmen, the ridiculously high prices were cited as proof of the products’ “unique” value, just as today’s MLM touts its “patented” formulas at absurd prices, noting they are “not available in stores.” Nutrilite vitamins in the early 1950’s sold for $19.50 for one month’s supply, about $185 in today’s dollars! Currently, Amway sells the Nutrilite “Perfect Pack”, containing vitamins and supplements for $163.50, also a one-month’s supply, promising the buyer “optimal health.”
The Medicine Show industry, which until World War II employed thousands, combined snake oil product sales with Main Street entertainment. Some promoters claimed the ability to mesmerize large audiences. Promoters often assumed fake “medical” identities and credentials or claimed to have acquired secret medical knowledge from Native Americans, the “orient” or from Quaker traditions. (Carl Rehnborg of Nutrilite claimed to have learned “secret” Oriental health remedies while in China; Herbalife’s founder, Mark Hughes, made exactly the same claim.) Some Medicine show entertainers were also famous in Vaudeville, and later radio and movies. It was this cultural phenomenon, with expertise in group persuasion, corn-pone entertainment and the marketing of mostly worthless health products at exorbitant prices, and whose promoters considered outrageous deception a boastful core competence – this is what laid the groundwork for today’s MLM “industry.”
To those afflicted by the MLM-is-direct selling” delusion, I invite you to attend any of Herbalife’s or other MLMs’ “extravaganza” events and you will be magically transported to that earlier era when “patent” health formulas were offered from stages draped in American flags, delivered by charming rogues in flamboyant attire, with a beaming grin and bombastic oratory. The classic Medicine Show pioneered the use of shills in the audience to prod sales and to proclaim heart-rending but fake testimonials of miracle results.
In mirror reflection of the Medicine Show model, the MLM program is always accompanied by inspiring “motivation” speakers, endorsing (and well paid) celebrities and entertainers, and inspiring musical performances. Most employ other Medicine Show hallmarks – phony religious piety and appeals to “family values” to cover over the crassest commercialism, price gouging and medical fakery.
Today’s MLM shills are both in the audience leading laugher at canned jokes, applauding on cue and shouting affirmations and on the stage making false claims of “six figure” incomes and “if I did it, so can you”. The variety show presentation and its feigned values, which for thousands is at least entertainment, as the Medicine Shows were for townspeople of yesteryear, have proven a winning formula for creating an emotional atmosphere ripe for recruiting, with product purchases as the price of admission. Variation was not needed or encouraged.
And so, just as the Medicine Shows were uncannily similar across the country, though independently operated, MLMs today are virtual carbon copies of one another, using the same lawyers, software developers, website designers, rousing rhetoric and speakers, and stage productions. Some of MLM’s “upline” recruiters move seamlessly from one new scheme to another, regardless of products sold, bringing with them loyal followers, as Medicine Show stars often did. And while the Medicine Show was mobile, pitching its medicinal cures to townspeople then moving on before the claims could be tested, the MLM schemes are functionallymobile. Their constituents churn at 50-80% rates each year. MLM’s signature hoopla events are held in various cities, and the claims and promises are seldom tested before new audiences replace the disappointed or flummoxed early ones who have already lost money and quit.
Both, the Medicine Show and the MLM Extravaganza benefit from desperate hope and the placebo effect. Having paid the high prices and heard the persuasive pitches, purchasers often do feel better after consuming the potions, for a short time at least. MLMers often do feel encouraged, briefly, about the state of their lives even if their wallets have been lightened and their hopes for “unlimited income” are soon dashed.
Direct Selling, the Real Thing
In contrast, the door-to-door tradition of direct selling was a solitary vocation, requiring tenacity, adaptation and a thick skin. Rejection, humiliation and low pay were hallmarks. But, for many products, a steady client base could be developed, providing reliable, repeat business. Real direct selling was sustainable, tin men and con artists
notwithstanding. But, never was it a source of “emotional ecstasy.” Optimism, yes, was a necessary quality for door-to-door selling, but stoicism, with a dose of cynicism were also needed to persevere. Door-to-door salespeople generally (not always) sold practical items, like Fuller Brush, affordable indulgences, like Avon, or genuinely unique items like Encyclopedia Britannica. The tricks of the trade were personally developed. In true direct selling, income was measurable, comparable and based on the number of homes successfully entered, all very “finite.” In the culture of door to door sales, everyone knew there was no such thing as a “secret” to success and income was not “unlimited.”
For anyone too young to know about or otherwise never exposed to the realities of true direct selling and who therefore may have difficulty spotting MLM’s fake direct selling résumé, I recommend the documentary film, Salesman, about a team of Bible salespeople, produced in 1969 at the twilight of the direct selling era.
Completing the genealogy of MLM, the Rehnborg Medicine Show languished through the Second World War until it fatefully connected with two of history’s most wily entrepreneurs, Lee S. Mytinger and William S. Casselberry, who obtained exclusive sales rights to the Nutrilite cure-all. It was they who concocted the system of the “endless chain” of salespeople and a pay formula based upon downline recruiting by every sales representative and reward-driven “internal consumption,” forever blurring the line as to what a “retail sale” is. Upliners got paid on downliners’ purchases (effectively required for qualification purposes) and sales. The rate of reward escalated, per sale, the larger the downline and its volume grew, transferring more of the total dollars straight to the top. Nutrilite pioneered the practice of unlimited, universal and incentivized recruiting without protected territories, but also imposed a two-year restrictions on all the salespeople against leaving and selling a competitive product.
The new model subverted retail sales in favor of recruiting and trapped salespeople into handing over personal contacts and relationships, but the anti-retail/pro-recruiting and price-fixing rules and incentives were buried in an arcane pay formula, requiring decoding worthy of an Enigma Machine. Regulators were unprepared for and could not see the deceptive power of this new recruiting-based pay-plan. It took the FTC another 20 years to bring legal action against the new system for pyramid scheme fraud and even then, it showed ineptness in penetrating and explaining the recruiting scheme’s disguise as a “sales” compensation, paying “commissions” on “direct selling.” However, the Feds did find more than enough infractions by Mytinger and Casselberry in the old Medicine Show tradition of false medical claims, a keystone of Nutrilite sales. Casselberry and Mytinger, using the false medical claims and the new endless chain pay, took Nutrilite to sales of $500,000 a month. Part of the success was due to two champion recruits named Jay Van Andel and Richard Devos, who over a nine-year tenure with the company through the 1950’s became Nutrilite’s top salespeople.
And here is where the great identity switch took place. As the FDA and FTC breathed down the neck of Mytinger and Casselberry, their two protégé’s Van Andel and Devos, broke off to eventually form the Amway Company, dodging FDA oversight and the Mytinger/Casselberry non-compete clause by offering a non-health type product. (Later, this form of “non-compete” that sought to control recruited downlines was expanded by Amway and other MLMs to include any other MLM company, regardless of product, indicating that the true “properties” to be owned and restricted were the souls of the recruits themselves.)
Most importantly, the Amway founders seemed to have understood that in the modern era where regulators and a wary news media lurk and the public might be less gullible than the Medicine Show’s small town audiences were, the new progeny of the Medicine Show required a safe identity, a protective brand for the modern age. The foxy Nutrilite apostates, DeVos and Van Andel, found the perfect passport – patriotism and direct selling. They named it Amway, the American Way, apotheosis of “direct selling.” For good measure, they initially targeted conservative Christians, further camouflaging their pyramid scheme as a moral crusade against an increasingly evil and uncaring world and offering their own form of salvation and deliverance, a heaven on earth, unlimited income, amen!
The Amway founders, while creating an effective clone of their old Medicine company, Nutrilite, had learned that the bogus medical products, besides drawing government scrutiny, were not the key asset for success. The real draw was the electrifying and illusory pay plan that their old mentors Mytinger and Casselberry invented. Medical science, the spread of pharmacies, the automobile and better roads made the traveling medicine show obsolete. But the new era had unleashed consumerism and greater financial pressure on households. More than health, which the Medicine Show’s customers desperately needed at that time, the new “need” was for more income.
While medical claims could be debunked, the new “infinite” pay plan was virtually incomprehensible to regulators or the recruits. But, once on the chain, without understanding the consequences, each new recruit quickly discovered that money could be made only by extending that “endless chain.” Chasing retail profits was for fools and losers while the “potential” money to be made from recruiting was, well, “unlimited.”
And, by insinuating into the recruit’s personal relations and exciting life-long dreams, the company could extend control over the recruit for much longer, years or even decades. Some could be persuaded to literally abandon their family and friends and bankrupt themselves – in obedience to the buy-and-recruit mandate – in search of the heavenly rewards. Such was its power in adept hands. The inevitable massive rates of failure could be adroitly ascribed to lack of personal talent or poor character (Losers are just quitters!) or simply for having not worked long enough. Infinity is a long time.
“Direct selling”, often a wearisome and soul-killing task based on a fallible product and an easily recognized income limit, was transformed in Amway, whose leaders showed special Pied Piper talents, into a soul-stirring and, for some, addictive and self-destructive quest for “wealth beyond your wildest dreams.” Based on the illusion of “exponential expansion” (5 recruit 25 who recruit 125, etc.), anyone could – theoretically – gain the top position of their very own and huge Amway downline. The math did not end. From the first to the last, the opportunity was said to be exactly the same – infinite. The world is a very large place and saturation is difficult to define. (In reality, just 13 continuous recruiting levels would exceed the earth’s entire population, but who’s counting? Calculators are for those without vision.)
Even more of a breakthrough, the new sales program was no longer tethered to retail sales, thereby lifting MLM above competitive pricing, supply and demand and brand awareness. Amway had turned to another Medicine Show standby, soap. When medical claims proved too volatile, some Medicine Show hucksters found that ordinary soap could be elevated in status to a wonder-product that just might also have dramatic health benefits. And so, laundry soap replaced the miracle Nutrilite cure-all at Amway, priced far above grocery store equivalents.
Later, it was discovered, that virtually any product would do, since the recruits themselves were the true commodities. Amway eventually became a virtual grocery/department store catalogue. Yet the best products to infuse the scheme with the trappings of “sales” remained the old Medicine Show fixtures of “pills, potions and lotions.” In due time, Amway regained sales rights to Nutrilite and eventually bought the company outright. Today, Amway’s products reflect its ancestral Nutrilite’s promise to cure “whatever ails you.” Amway sells specialized products for “Bone Health, Brain Health, Digestive Health, Emotional Health, Energy, Heart Health, Immune Health, Joint Health, Liver Health and Vision Health.”
In keeping with Medicine Show tradition of linking to esoteric knowledge, MLMs routinely make claims to “secret” economic formulas that offer the “last best hope” for the American Dream, the anti-dote to an uncaring Corporate America and freedom from a dictatorial government. As Medicine Show operators pretended higher learning or spiritual missions, MLM leaders, such as Devos and Van Andel, cast themselves as economic geniuses and benevolent world leaders wanting only to help the common man.
In the early 1970’s, about 25 years after Mytinger and Casselberry launched the mother of all MLMs, which would soon beget hundreds of identical offspring, the FTC accused Amway and two other fast-growing advocates of the new model, Holiday Magic and Koscot Interplanetary, of running illegal pyramid schemes. Only Amway survived the regulatory action in 1979. Devos and Van Andel proved that even a federal judge (only one judge made the fateful decision to allow Amway to stay in business) could be sold on its bogus claim that it was a “direct selling” company, following the great American tradition of peddling, battling “oligopolistic” corporations like Procter & Gamble and giving the little guy an even chance to make some money.
In the environment of this de facto legality for MLM and bolstered by a new “de-regulation” administration taking national office in 1980, Herbalife was founded the very next year by 24-year old Mark Hughes. He told the world he started Herbalife because his own mother was 30 pounds overweight and died (when he was just 19) by overuse of diet pills and bad dieting. His mission was to save others from such a fate. No Medicine Showman could top Hughes – a benevolent missionary inspired by his very own mother’s tragic death. Reportedly, an autopsy showed that Hughes’ sainted mother died from an overdose of a narcotic, at a weight of 105 and height, 5-feet-6-inches. Hughes, himself later died of a prescription drug overdose mixed with high levels of alcohol.
Before launching Herbalife, Hughes had worked at an another MLM company called Seyforth Laboratories that sold “Slender Now”, a powdered milk-shake weight loss product. Seyforth and a similar company, the Cambridge Diet Plan, were all the rage – combining a magical solution to weight loss and health with the mystical Amway compensation plan. MLM was on the march. Real Direct Selling companies, meanwhile, lay sick and dying, made ill mostly by modernity but also smothered by the new MLMs that lured away potential salespeople with mesmerizing “unlimited income” promises.
Over the ensuing decades, a few direct sellers would convert to MLM, targeting the salespeoples’ capital and making the “income opportunity” their main offering, not their products. But more commonly, hundreds of brand new MLM schemes, with no historical ties at all to direct selling, were launched in the fertile and newly vacant ground of a protected “direct selling” status and moribund regulators. MLM occupied the abandoned villages of direct sellers and claimed all rights and privileges, even the family name.
True to its real identity as the love child of the Medicine Show, less than five years after its founding, Herbalife was prosecuted by the California Attorney General for bogus health claims, of the Medicine Show genre. As reported at the excellent website, MLMWatch, edited by Dr. Stephen Barrett, “In 1986, Herbalife International, Inc., and its president Mark Hughes, agreed to pay $850,000 to settle charges…that the company made false medical claims and engaged in an illegal pyramid-style marketing scheme. The… suit… cited the following questionable claims made for Herbalife products: Slim and Trim Formulas comprise an effective weight loss program which can produce a typical weight loss of 10-29 excess pounds a month. Cell-U-Loss can attack “cellulite,” eliminate inches, suppress appetite, improve circulation, and help many other conditions. Herbal-Aloe can aid digestion, “heal” and “cleanse the system.” N.R.G. can increase energy, increase mental alertness, and provide a “nutritional lift.” (The fact that caffeine is one of its active ingredients was not disclosed.) Lifeline aids the cardiovascular system. Schizandra Plus can combat damage that leads to premature aging. Tang Kuei is effective against hot flashes and can help the regularity of the menstrual system and relieve menstrual disorders. Flora-Fiber “scrubs and cleanses” the intestine with fiber and prevents disease. K-8 stops “induced depression” and “elevates your mood so you can handle stress.”
The Great American Medicine Show goes on while Direct Selling turns over and over in its grave.