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Economist

Multilevel marketing: The bottom line

January 3, 2013

?IF I am right, its share price will go to zero,? says Bill Ackman, the founder of Pershing Square Capital, a hedge fund, who insists he has never felt so confident in shorting a company?s stock. On December 20th he invited an audience of his peers to hear his declaration of war against Herbalife, a seller of dietary supplements and vitamins. His claim that the 32-year-old company is an ?illegal pyramid scheme? had an immediate impact: Herbalife?s share price fell from over $40 a couple of days before the presentation to $26 on December 24th. However, Herbalife is fighting back. Its managers deny Mr Ackman?s accusations and promise a detailed rebuttal soon. The company?s shares have rallied, ending 2012 at almost $33, a market capitalisation of around $3.6 billion.Herbalife is one of the world?s best-known ?multilevel marketing? companies, along with Avon and Amway. Hordes of independent individual sellers, many sporting badges with the slogan ?Lose weight now. Ask me how?, distribute its products. These sellers are recruited by people on a higher tier of the marketing structure, who receive a slice of the commission on sales made by those whom they recruit.Multilevel marketing is a huge business. In 2011 direct selling (the vast majority of it through multilevel marketing) by around 16m distributors generated sales of almost $30 billion in America. Worldwide, some 92m...

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