It appears that once again Wall Street has reacted emotionally and drastically to a “multi-level marketing” company, Usana (USNA) this time, revealing extreme lack of confidence and knowledge about the company and its sector.
Usana’s second quarter disclosure showed a 0.6% decline in revenue for the period, which provoked a near 20% Wall Street sell-off. This equates to a decline of $1.4 million in year-over-year revenue for one quarter producing a $350 million drop in enterprise equity. Obviously, Wall Street sees Usana as a fragile and strange entity whose behavior and economic drivers are not understood. Its previous track of explosive growth was also inexplicable but rapid revenue growth is seldom closely examined. Now a slight dip is treated as evidence of drastic redirection, prompting equity flight.
Apart from the recent sell-off prompted by a twitch in Usana’s “trajectory,” Wall Street would seemingly have plenty of other reasons for being suspicious of Usana. Buying stock in a company presumes a certain level market transparency and fluidity with a public float. But Usana is 51% owned by one person, the founder, Myron Wentz, not only an insider but an “activist investor.” In 2008, Wentz tried to take the company private at a share price of $26, when shares ranged from $18 to the $50’s. At the time, Wentz reportedly stated the motive was to reduce transparency. In an article entitled, “Usana Chief Wants Privacy,” Forbes wrote at the time, “In taking Usana private, the company’s head remarked on the benefits of operating “without the pressures and distractions brought on by the public market.”
Wentz reportedly lives in Mexico where he owns an alternative health clinic. He renounced his US citizenship for tax haven, St. Kitts and Nevis. Wentz recently gained billionaire status from a giant spike in share price this year, rising nearly to $150. Now it is in the mid $50’s, about where it was nine years ago, during the last spike. In 2007, the SEC reportedly looked into an insider trade by Wentz executed at $60.98, Usana’s five-year high in share price, which netted Wentz $51.8 million. Recently, Wentz and other insiders sold company stock valued at $8,371,021. Corporate insiders own 53.20% of the company’s stock.
Loss of Faith
If ignorance of the true nature of Usana and its sector, “multi-level marketing,” is not admitted by the investor class, then loss of trust of the company’s management and the sector must surely play a part. Usana’s modest scale back in expected revenue and its reassurance to investors, “We continue to be confident in the Company’s long-term growth trajectory,” are flat-out not believed, if measured by investor reaction.
And what a trajectory it has been! Revenue and recruits doubled between 2010, when Usana acquired Baby Care, a small China-based company that served as a gateway into licenses to operate in the country, and 2016, when total annual revenue topped a billion, and nearly a half-million souls signed up for Usana’s multi-level marking “business opportunity.” In all, millions of people are or have been “salespeople” for Usana as it exploded in revenue. The vast majority of all these “distributors” mysteriously disappeared during that time and apparently do not even buy the company’s “health” products any more, despite recruiters’ claims of near miraculous benefit to users.
If “miraculous” seems a sarcastic and inappropriate characterization, I invite you to view a 40-minute YouTube video, entitled “Invisible Miracles” in which Usana’s work is compared to a moon-landing with benefits on par with Martin Luther King’s. Dr. Wentz is introduced standing atop a mountain and is portrayed as a peer of Linus Pauling, Mother Teresa, Albert Einstein and Thomas Edison (not kidding). The video is narrated by Denis Waitley, a frequent motivation speaker at multi-level marketing rallies and a former board member of Usana. Waitley was forced to resign from the Usana board when it was publicly revealed that he had falsified his academic credentials which were provided to the SEC. The revelation was included as a claim against Usana in a class action lawsuit suit. Waitley was one of four Usana officials who were found to have made false claims on resumés some of which were provided to the SEC. These included the chief financial officer, the vice president of research and development, and a member of Usana’s medical advisory board who claimed he was a licensed medical doctor until the Wall Street Journal reported his medical license had been suspended.
If Wall Street, staffed by Ph.D.’s and critical thinkers, is uncertain about Usana’s business and jittery concerning its future, the experts’ plight is only marginally different from that of ordinary folks of Main Street. The content of Usana’s famously expensive “health” products are protected from disclosure or analysis by the Dietary Supplement Health and Education Act of 1994, DSHEA. Its “business opportunity” solicitations are immune from any financial disclosure requirements under the FTC’s new “Business Opportunity Rule” that exempts “multi-level marketing.” It is impossible for a consumer to do due diligence on Usana’s business opportunity solicitation. The most basic factors of analysis are not provided, e.g., total number of distributors in an area, failure or churn rates, average retail sales, or costs of doing business on average.
Investing in Usana’s “income opportunity” is an act of faith in its viability, just as taking a Usana pill is a leap of faith as to its contents or usefulness. Paying the inflated prices for the Usana pills that are swallowed by consumers is based on faith that the “supplements” are uniquely beneficial. The consumers’ blind and manipulated faith is mirrored in the commercial faith of Wall Street institutions that have bet their clients’ funds on Usana’s perpetual “growth” and its legitimacy as a “direct selling” company.
Wall Street’s recent sell-off response indicates a sudden loss of faith and seems extreme and irrational, but it is only the flip side of its faith-based buy-in. Whether buying or selling the stock, investors must be working without adequate knowledge of the company. The recent sell-off, therefore, corresponds to the millions of consumers who, also in the dark, bought in as “associates” and then quit in droves within a year.
So, if investor and consumer support is so fragile and volatile, how has Usana achieved such remarkable revenue growth? And if the underlying problem with investor support is lack of knowledge or understanding, will this recent sell-off prompt any deeper inquiry, as occurred with Herbalife?
As the data offered in this report indicate, Usana does actually reveal, though in oblique ways, what its business really is all about. Its sales data plainly show its fate in geographical and historical revenue terms. The SEC filings for Wall Street-investors and the “income disclosure” data offered to Main Street-investors reveal how Usana survives and the fate of those on Main Street who are lured to invest. When available data are revealed and clarified, Wall Street investors and Main Street hopefuls perhaps could choose to invest – or not -with greater knowledge and with a perspective rooted in facts, not faith. This article attempts to offer some of that revelation and clarity.
Seen One, Seen Them All
Without being sucked into the Herbalife vortex in this article, it must first be asserted clearly that, based on leadership, business structure, pay plan, marketing model and chronology, Usana is a copy-cat of Nu Skin (NUS), which is a copy-cat of Herbalife (HLF), which is a copy-cat of Amway. What is true for one, on fundamentals, is true for all the others. Many of the early recruiters of each migrated from one to the other as they launched. This is how all MLMs are founded. One begets others, based on the realization among high-level recruiters that the only way to get to the true top of the recruiting chain where all the “commission” money goes is to start out there. Product knowledge is unnecessary and largely irrelevant. The real product of these and all other MLMs is the same, the famous MLM “unlimited income opportunity.” It is now estimated that there are more than 1,000 MLMs operating in the USA, all competing for the same pool of hope-filled recruits.
So, with Amway as the model, Usana’s pathway is in plain sight. Amway’s amazing revenue growth over the last 10 years has been based almost totally on explosive expansion in China; and its precipitous three-year drop in global revenue of 25% is also accounted for by the inevitable declines in China. To speak of Usana’s future, therefore, does not require a Ph.D. or complex analysis. China, following Amway, has been Usana’s “pop” and without it, the company would already have been known for its predictable “drop.”
Without its six-year boom in China, Usana would have met the same fate much earlier of another close MLM relative, Mannatech (MTEX), once a MLM star with rocket-like growth like Usana’s but now an obscure and dwindling MLM peddling its own version of miraculous (Manna) but non-FDA-approved “health” products that officially treat and cure nothing at all. In a lawsuit that was settled with payment by Mannatech of $7 million, the Texas Attorney General described Mannatech as a “scheme to exploit families, including those challenged by cancer, Down’s syndrome, cystic fibrosis and other serious illnesses… and exaggerated claims about the therapeutic benefits of Mannatech’s dietary supplements and nutritional products were unlawfully used to increase sales.” Mannatech also gained dubious distinction for being promoted by former presidential candidate and now Donald Trump cabinet member, Dr. Ben Carson, whom it paid as much as $42,000 for each product-endorsement speech.
Mannatech did not get a foothold in China and only in 2016 announced it would try to enter that market with e-commerce, rather than boots-on-the-ground MLM, which requires political connections and licensing. In the latest 10K, Mannatech described its late-entry sales foray into China as “a cross-border e-commerce model, where consumers in China can buy Mannatech products manufactured overseas directly from the Company’s subsidiary via the internet.” Without the China life-extension, Mannatech’s revenue dropped 20% since 2010 and 34% in the last 10 years. Its P/E ratio is minus-18.
Product or Proposition?
The pop-and-drop phenomenon, universal among “multi-level marketing” companies and pyramid schemes in general, portends Usana’s most recent and future performance. Pop-and-drop is inherent and predestined. Consider. Why do hundreds of thousands of new Usana “salespeople” – who are said to be so loyal and excited about the brand they not only want to buy the goods but also pay additional fees and sign contracts to become eligible to sell them – disappear each year? Shouldn’t, by now, Usana have established brand awareness on Main Street? Shouldn’t its testimonials and endorsements by celebrities already have created a stable customer base that would enable its salespeople to easily take repeat orders? Shouldn’t, after all these years, Usana have an enormous and growing body of regular users in the USA, where it started? Even if millions of the salespeople abandoned the “income opportunity” and are no longer under contract, wouldn’t they at least still be users?
Yet, as Usana’s data show, from 2010 to 2016 “USA” revenue declined 14%. USA is placed in quotes because, just as declines starting being noted, Usana changed its definition of “USA” to include the UK and The Netherlands! It now refers to the USA and Europe as a single market, and it does not disclose actual revenue only from the USA, as all other companies do normally in SEC filings. So, actual USA revenue may have decreased much more.
Meanwhile, from 2010 to 2016 “Greater China” revenue grew 227% and accounted for 72% of all Usana revenue increase.
This is the classic pattern of all other MLMs, as exemplified by the grandfather of all MLMs, Amway, that popped and dropped across the entire planet. Amway led all other MLMs on a global recruiting rampage, enabling it to “grow” even as its existing markets languished and declined. The “growth” in new markets was also misleadingly touted to the hapless prospects in older areas that the market in their own saturated towns “has never been better” using the global “growth” data to prove it.
Recruiting, it must be re-emphasized, is the function of the MLM financial promise, having little or nothing to do with demand for consumer products. It is a financial proposition offering income. Indeed, in today’s languishing job world, the MLM income proposition is the most exciting – and deceptive – deal in the Main Street marketplace. It is far more potent that any Madison Avenue ad campaign or new product offering from Apple. To witness a MLM “extravaganza” is to stand in awe that any mundane business enterprise selling commodity goods could evoke such states of ecstasy. A closer examination of the utopian scheme actually being promised helps explain the mass mania.
Only MLMs offer “unlimited” income. Only MLMs offer “extraordinary” income opportunity “for all,” regardless of education and background. Only MLMs offer “financial independence” based on a tiny initial investment. Only MLMs claim success can be achieved “without selling” and by only talking to a few friends and family. Only MLMs can claim that success is determined by attitude, belief and commitment (to recruit) alone. Only MLM can claim (and not be laughed off the stage or be prosecuted for fraud) that the price of its products, the state of the national economy, the role of competitors, the size of markets, the math of saturation and the personal costs of business are totally irrelevant, because the market is “infinite” and only faith and persistence (never quit!) matter. The only reason, prospects are told, for losing in the Usana business opportunity is by quitting, and only “losers” quit. This is a proposition few can refuse, seeing it perhaps as their last best hope for the American Dream. After investing and then losing, few can explain why, other than that it must have been their own fault. They had quit.
With more than 40 years of experience, this MLM financial proposition to Main Street has been honed into a black art involving ritual, spectacle and dogma. Its logic and argument are irrefutable. Resistance or questions are only evidence of negativity, a sure sign of “losers.” The proof of its reality is on the stage, drenched in bling, with a Ferrari parked out front. The lack of alternative opportunities to the MLM proposition, incredible as the MLM promises may seem, is regrettably apparent to all who are solicited – unemployment, outsourcing, loss of job security, low pay, loss of pensions, and ever-rising costs for education, housing and health. To close the deal, MLM’s claims are reinforced by Dr. Oz, Madeleine Albright, Donald Trump, Bill Clinton, Carl Icahn, and Betsy Devos. Who could question them?
Yet, it is the enormous success in selling the bogus MLM financial scheme that also reveals the absurdity and irrelevance of the MLM consumer “products,” and it is the universal failure rates of consumers in that income scheme that explain the absence of repeat “customers” for the “products.” When the magic of the income promise fades, the products are revealed as ordinary, overpriced, unneeded, even ridiculous, and they are quickly forgotten.
Old Time Economics
Regarding those niggling and conventional economic factors of customers, brand equity and consumer demand, Usana does offer some data on what it calls “preferred customers.” Their existence supposedly indicates a conventional external market demand for its products and brand apart from the “associates” whose eligibility for recruiting-based “income” requires personal purchasing of the products.
Usana’s 2016 10K reported, “Sales to Associates account for the majority of our product sales, representing 92% of product sales during 2016.” Whether Usana’s “preferred customers” who account for only 8% of revenue are merely the residue of “associates” quitting each year, a kind of statistical waiting room before totally vanishing from the records, no one knows. What is known is only that Usana claimed there are 93,000 of them, purchasing, at 8% of revenue, a mean average of $865 of Usana goods a year each, about half of what a “salesperson” buys on mean average.
Usana’s data also show that while salespeople, called “associates,” more than doubled in number between 2010 and 2016, “preferred customers” increased just 21%. In 2010 the “customers” accounted for 10% of revenue and now just 8%. The ratio of “Associates” to “Customers” in 2010 was 3 salespeople for every customer. In 2016, there were 5 salespeople for every customer. Usana also reported that “auto-ordering”, the suspicious pattern identified by the FTC in its Herbalife investigation of deceptively induced purchases by contract-distributors (pay-to-play), increased from 41% to 51% of total revenue.
So, as to the first fundamental Usana question that the investor class might ask, whether Usana is a “direct selling” enterprise, based on selling customer-demanded products in the competitive open market or an “endless chain” financial scam with quota-required products serving as currency, the data lean overwhelmingly to pyramid recruiting as Usana’s stock in trade.
As to the future of this recruiting activity as a reliable driver of revenue, regardless of deception or public harm, the recent quarterly figures and the reduced projections seem to have shaken some investors’ faith in the company’s reassurance of “long-term growth trajectory.” Even China, some investors may be concluding, is not “unlimited.”
China Problem
A company’s whose “growth” is accounted for mostly by its newest market while older markets decline and that newest and final market area holds that company’s future hostage is surely in a precarious position. Whether one wants to call Usana a recruiting scheme at its peak stage or not, it is indisputable that its future is based existentially on the money from the “last ones in,” in this case, mostly the people of China. How safe is that revenue source?
Usana has reported grave danger from unnamed Chinese regulators, armed with a recent law that effectively bans the multi-level marketing model. So, how do Usana, Herbalife, Nu Skin, Amway and Mary Kay function in China under this law? It is beyond the scope of this article to offer more than a few unavoidable and disturbing facts, possibilities and scenarios:
- The anti-pyramid law enacted in China in 2005, which I influenced in some part as a consultant and have studied closely, bans the MLM pay plans that are used everywhere else in the world.
- Field research in China conducted by short sellers and independent media concerning Herbalife, Amway, Nu Skin and Usana have shown that the same USA-style recruiting and payments are being made by these MLM companies in China, despite the law.
- Publicity from these MLM companies celebrate new “millionaires” in China, whose only possible means of gaining such incomes are from the standard MLM pyramid pay plan. No one can become a millionaire selling MLM vitamin pills and protein power drinks door-to-door.
- Chinese authorities, therefore, could swiftly close down or fatally harm any major MLM operating there by merely enforcing existing law. No “complex economical analysis” or parsing of the meaning of “pyramid scheme” is required in China. Investigations and prosecution can equate to a public execution.
- Chinese officials could, for nefarious or for naïve purposes, favor one MLM company over another. Bloomberg reporters showed how Amway has gained extraordinarily close ties to the Chinese government by funding Chinese provincial officials to travel and study at Harvard University, effectively making Harvard a stand-in for Amway. Can we assume that Amway would not influence its friendly Chinese government patrons to look more critically at MLM competitors like Usana?
- Chinese officials could even – as the Usana stock volatility has recently demonstrated – move stock values of American-based MLMs up or down suddenly and violently with simple press releases about investigations. Is it beyond imagination to think some officials in China might be tempted to do this for profit?
Income or Scam?
In conclusion, let us return to the initial question about what Usana and MLM really are, separate from the issues of jeopardy and the end-game in China and the prospects for expansion, as existing markets saturate. We have already addressed the question of “direct selling” and revealed that 92% of Usana’s revenue is generated by direct purchases – not sales – made by “salespeople” and most of this is by “auto-order” under the pay plan. Usana offers no evidence or data that the “salespeople” ever sell the goods on a retail basis. If they personally “consume” the same average annual amount as “preferred customers” do, they would have only a few dollars a month of goods to sell! The Usana data show the “salespeople” purchase on average only $38 a week in goods, providing virtually no retail income opportunity worth pursuing.
The other defining question is whether Usana offers a viable “income opportunity.” Beyond retailing, there is also the bonus and commission-based income, tied to “building the business,” otherwise known as recruiting. Many MLM companies do offer some insight into this question with their “income disclosure.” Usana also offers such a document, though it is among the hardest to decipher.
With some patient organizing of the Usana data into a discernible spreadsheet, we can find meaningful answers to the question of how many people in the USA make how much in a one year’s time frame and how the total “commissions” are allocated to each rank on the recruiting chain. We must bear in mind that the one-year time frame is itself perhaps the greatest of sleights of hand used by MLMs. MLMs churn people at a rate of 50-80% annually. They have no significant organic growth and no stable sales force or customer base. Like a shark, they must keep recruiting or collapse within a year. They operate in a state of continuous collapse. In each year, the same small cadre of recruiters is positioned at the top while hundreds of thousands below flow in and out, funding their “commissions” and the company’s profits. Thus, a freeze-frame of single years, one after the other, would count those same recruiters over and over again while excluding the vast numbers that had already passed through in all past years. A longer time frame that counted everyone involved would reduce the “winners” as a percentage of all who invested to an infinitesimal proportion. So, as bad as the data below show for the “income” of recruits in one year, the true picture of the fate of recruits is far worse.
To the consumers being solicited each year, the most relevant piece of information would be the percent of those who join each year that actually gain a net profit, that is, the fate of their peers, the last ones in? That important fact is not disclosed by Usana or any other MLM. My own analysis indicates it is as close to zero as one could get statistically, meaning that Usana’s very existence depends – each year – on getting new revenue from hundreds of thousands of new consumer-investors who gain no financial return. Here is the annual data offered by Usana:
These data show:
- The top 1% (1.21%) received 68% of all commissions paid by the company.
- The next group, constituting 7% of the sales network, receives 21% of all commissions. That group has a mean average “income” of $57 a week.
- 93% of sales network at the bottom received 10% of all commissions and gained a mean average income of $2 a week.
- 60% of all Associates earned Zero.
- Usana reports in its 2014 10K that it expended 45% in net revenue for “Associate Incentives.”
- The total payout in the USA was $55,711,597 in 2014, based on calculating the disclosure’s data.
Without making a “complex economic analysis” that the FTC claims is required to sort out whether an individual multi-level marketing enterprise is an illegal pyramid scheme or not, I would direct investors to take note of one stark data point gleaned with calculation from the Usana income disclosure. It is that 31% of Usana’s total net revenue is transferred to the top 1% of Usana’s recruiters each year. This calculation is based on 45% of annual revenue expended for “incentives” and the top one-percent getting 68% of those incentives. This is a massive monetary transfer occurring every year, in which those making the financial contributions gain no net financial gain.
The company expends only 18% of its revenue to make or source its fabled “health” products and then only another 23% to run the whole business. The largest single expenditure – 45% – is for recruiting and that recruiting model transfers over 2/3rds of all the “incentives” to pay the top 1% to relentlessly recruit using testimonials, extravaganzas and sweeping promises of wealth and security. That ought to settle any question about what Usana’s mission is and what it chiefly invests in – endless chain recruiting for its so-called “income opportunity.”
Usana survives and “grows” on revenue gained from its latest markets – now China, which is the last stop and where regulators are menacingly examining how Usana is operating. It also survives on revenue from “last ones in” to join its “income opportunity.” That ever-churning unfortunate mass of humanity gains virtually nothing, but their investments are critical to prevent Usana’s collapse. These “last ones in” (the losers who soon become quitters) increasingly translate to Chinese recruits, but they also include the unlucky ones lured from within the saturated old markets, such as the “USA.”
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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