Latinos crucial to Herbalife’s financial health

The future of Herbalife is riding on Latinos.

The Los Angeles company estimates that Latinos account for about 60% of its U.S. sales made through its network of independent distributors. And a growing slice of those sales are coming from informal nutrition clubs run out of people’s homes and strip mall shops.

It’s a cultural phenomenon that got its start in Mexico and is quickly catching on among immigrants who have moved to Southern California. Budding entrepreneurs like Angel Perez, a 27-year-old from Inglewood, are forming the backbone to Herbalife’s growth.

Perez runs her nutrition club out of a tiny, aging retail shop that from the outside shows no signs that she’s even open for business. But behind a single glass front door, covered by a green curtain, there’s a lively atmosphere inside.

Colombian singer Shakira’s voice blares from overhead speakers. “Hola! Como estas?” Perez says before blending an Herbalife meal-replacement shake for a customer. She charges club members $4 per visit, entitling them to a protein shake, hot tea and glass of aloe vera juice.

But these nutrition clubs — and Herbalife’s business structure — have come under intense scrutiny.

The company is in the middle of a Wall Street battle between two billionaire activist investors. On one side, hedge fund manager Bill Ackman contends the company is a pyramid scheme in which most of the independent salespeople lose money and get stuck with a product that nobody wants. Ackman said he wagered $1 billion that the company would fail, shorting an eye-popping 20% of the company’s shares.

Betting against him is Carl Icahn, who dismisses pyramid scheme accusations with high praise about Herbalife’s business model. Icahn disclosed this week that he bought nearly 13% of the company’s shares, and was talking to executives about taking the company private.

At the heart of this battle: Herbalife’s army of salespeople.

Among the biggest accusations facing the company is that it targets low-income members of minority communities, including Latinos, by making unachievable promises of vast wealth from selling its line of protein powders, vitamins, supplements and beauty products.

One of Ackman’s biggest allegations is that most distributors end up with garages filled with products they cannot sell. Meanwhile, the distributors who brought them into the business get rich for recruiting them.

Herbalife, founded in 1980, has faced such criticism for decades. The debate centers on the way the company compensates its distributors, allowing them to profit from their own sales as well as sales made by distributors they’ve recruited — and distributors those distributors have recruited.

The company challenges the criticism, saying it’s a legitimate company that sells nutritious products while offering entrepreneurs like Perez a chance to build their own businesses.

Herbalife President Des Walsh said the company does not target any specific demographic. The company’s popularity among Latinos exploded in recent years, he said, when U.S. distributors imported the nutrition club concept from Mexico, which is second to the United States in Herbalife sales.

“This wasn’t a company focus on the Latino community,” Walsh said. “This was the Latino community in the United States seeing and hearing of the tremendous success of nutrition clubs in Mexico and then seeking to replicate that here.”

Its marketing efforts do hit the Latino community. The company recently signed a 10-year, $44-million sponsorship of the Los Angeles Galaxy professional soccer team, which has a massive Latino fan base. Each year, it holds a national convention in Spanish called “Extravaganza Latina.”

Before nutrition clubs started in Mexico, the only way for consumers to buy Herbalife products was in bulk containers to be used at home. A cheaper alternative is being served up at the nutrition clubs, where consumers can buy single servings and drink them in social settings, surrounded by other people with similar weight-loss goals.

This concept has taken off among Latinos, who are taught at an early age that natural remedies such as herbs and juices are a better option than U.S.-style medicine, said Alexandro Jose Gradilla, chair of the Chicano Studies Department at Cal State Fullerton. That makes Herbalife products popular among immigrants.

Selling the products for profit is also a good fit for Latinos because it allows distributors to take advantage of relationships within the close-knit immigrant community, Gradilla said.

Herbalife spokeswoman Barbara Henderson said in a statement that the company “follows all applicable laws in dealing with distributors, whether Latino or not,” but she did not elaborate further.

On a recent afternoon, dozens of independent distributors filled the lobby of a massive Herbalife warehouse in Carson, waiting to pick up products for their small businesses. Nearly all of them spoke to Herbalife staff in Spanish.

Some said they had successful businesses that generated thousands of dollars of monthly income. Many said they ran nutrition clubs based in storefronts or at their homes. Others just had a dream.

Hipolito Bolaños, 55, wore a pin on his shirt that read, “Pierda peso ahora. Pregunteme como!” the slogan made famous by Herbalife founder Mark Hughes: “Lose weight now, ask me how.”

“My hope is to open my own club, to build a business out of it,” Bolaños said in Spanish. Other than pitching products to friends and co-workers, he had no business plan. He said he first started using Herbalife products to deal with joint pain developed while working a construction job in New York.

Gustavo Parra, who was loading the trunk of his BMW 528i with Herbalife products, runs a nutrition club in a Bellflower strip mall. He has a long list of customers and more than 500 distributors beneath him who feed his monthly commissions, which he says nets $6,000 to $12,000 a month.

“I can’t believe this happened to me,” said Parra, 44, who came to the United States about 25 years ago from Mexico and has been selling Herbalife products for 10 years. “I love this job because I help people feel great and the company pays me.”

Parra’s success story is an exception. About 90% of Herbalife distributors make little or no income, the company acknowledges.

Ismael Vasquez of Riverside said he gave up his nutrition club in January 2012 because he wasn’t making enough money. “There was not a lot of profit, just $500 to $600 per month,” Vasquez said.

He had other concerns.

Herbalife encourages distributors to be more than salespeople; it asks them to build relationships with customers, to counsel them about the products and help them achieve their goals. Vasquez said distributors do not receive enough training to do that.

“Some of the people we had in our organization, they were not promoting the product in a way that was recommended by the company,” said Vasquez, who now works at a Montebello bakery. “They would create their own ideas, telling people they could use aloe [vera juice] for eye drops. When we would find out about those kinds of things, we would try to correct it.”

Operating from homes is a concern to the Los Angeles County Department of Public Health.

It’s against the law to prepare and sell food — even nutrition shakes — from homes, said Eric Edwards, a county environmental health specialist. The county has shut down two Herbalife nutrition clubs in the last year for operating in retail space without proper health licenses, according to health department records.

“You can’t operate a restaurant out of your home,” Edwards said. “When they are making the shakes they are preparing food. Then they’re expected to follow all the same rules, regulations and laws that a restaurant would.”

Walsh, the Herbalife president, said the company instructs its distributors to follow all local ordinances.

Ruben Guerra, chairman of the Latino Business Assn., said he knows people who have made “pretty good money” selling Herbalife products.

However, he believes it’s a job that requires a significant investment of time and energy in order to succeed.

“Unfortunately, some in the Latino community are vulnerable mainly because they come from Mexico or poor communities and they’re always feeling like they want to get ahead,” Guerra said. “When they tell you about these get-rich-quick ideas, they’re very vulnerable. Who doesn’t want to get rich quick?”

Times staff writer Salvador Rodriguez contributed to this report.

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