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Unbridled Growth
 

For five years, Herbalife International's health and diet pitch has made it one of the fastest-growing companies in American history. Now a series of investigations has challenged everything from the products it sells to the way it sells them.
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Mark Hughes gives no impression of a prophet under siege -- not, at least, until the very end of the Atlanta rally. Herbalife International, the company he founded in 1979, was named defendant in a legal action brought by the state of California in March. Hughes himself was denounced as a "snake oil" salesman by a United States senator in May. But the 29-year-old entrepreneur is beaming with confidence as he steps into the spotlight at the back of the auditorium to begin the show this past spring.

The evening has been choreographed with care. Displays of the full Herbalife product line stand on stage, towering up toward the lights: soups and shampoos, powders and pills, herbal nostrums to beat cellulite bulge or scrub the intestinal tract, to relieve arthritis or help with irregular menstrual cycles. The auditorium is filled with the Herbalife elite, men in tuxedos or Sunday-best suits, women in billowing chiffon and polyester. Most wear buttons on their chests. "Lose weight now," the buttons read. "Ask me how."

Hughes stands still for a moment, stretching his entrance, a tanned and blow-dried California swashbuckler resplendent in black tie and diamonds, brown eyes flashing over a perfect, polished smile. Then he begins working his way through the throng, cheers from the assembled crowd washing over him. People on the aisle reach out to hug him, to shake his hand or touch the hem of his pin-striped, midnight-black tuxedo.

The rally is Herbalife's core, a sales tool and reward alike. Edited down to an hour, it will be broadcast coast-to-coast over USA Cable Network and by scores of stations all over the country. Tonight, it brings the distributors together to clap their hands and stamp their feet, to whistle and cheer at the testimony of the ordinary men and women who have found health and wealth by following the Herbalife path. One by one, the most successful are paraded on to center stage. A Georgia man who lost 68 pounds is followed by his wife, claiming 70 pounds "and half my body fat" gone. A Florida golden-ager wows the crowd -- 101 pounds in just eight months! -- only to be topped by a 270-pound urban cowboy, sobbing in his dark blue Western-style suit and boasting a loss of 228 pounds in only seven months.

But the best of the faithful not only use the product, they sell it as well, and the crowd cheers loudest for the couples whose stories combine pounds lost with fortunes found.

"I lost 50 pounds and Jim lost 32," one wife reports, smiling up at her husband. "I'll net Jim tell you the money part of it, because he's got it down to the penny."

"It's easy to figure out," Jim says, "because the most success I ever had was selling mattresses in retail stores . . . and the most I ever made was take-home $1,000 a month." Then he discovered Herbalife, and now he and his wife work together in their own distributorship. "In the first quarter of this year, we've already made over half a million dollars! This year!"

That is the kind of testimonial that brings the crowd to its feet. Writ large, it is the kind of experience that has turned Herbalife into the fastest-growing private company in America, #1 on the 1985 INC. 500. Hughes started in 1979, with space in a Beverly Hills, Calif., warehouse; he sold his diet powders from the trunk of his car. Within five years he had moved to the top of a 14-story corporate headquarters, the Los Angeles nerve center for a direct-marketing empire of nearly 700,000 independent distributors in four countries. Sales have climbed, in five years, from $386,000 to $423 million, an increase of more than 100,000%, by far the highest growth rate in the history of the INC. 500 listings.

Of late, however, Hughes and the Herbalife faithful have had very little to cheer about. They are no strangers to controversy: The company has been embroiled in widely publicized disputes with the Food & Drug Administration since 1982. But in 1985 the issue became corporate survival. In March a complaint filed by the California attorney general and the state Department of Health Services charged Herbalife and Hughes with making "untrue or misleading" product claims and with operating an "endless chain marketing scheme." Inspired by "90 complaints of alleged illnesses . . . 32 reports alleging fraud . . . and four reported deaths of persons using Herbalife," the Permanent Subcommittee on Investigations of the U.S. Senate's Committee on Governmental Affairs called hearings in May. Since then, week after week, Herbalife has been slammed in the press: in The New York Times, People magazine, and local newspapers across the country. Sales are down. So are applications for distributorships.

Hughes will get to the allegations -- the "stories," he calls them -- at tonight's rally. But that's not where he wants to begin. Instead he wants to tell the crowd how he started Herbalife. It was "certainly much more than just a business or an opportunity for making money," he explains. It began -- as most of the crowd knows well by now -- with the death of his mother.

"My mom was always going out and trying some kind of funny fad diet as I was growing up," he remembers. "Eventually she went to the doctor to get some help, and he prescribed to her a product called Dexamyl, kind of a fad diet then.

"For those of you who don't know about it, it's a drug, a narcotic. It's a form of speed, or amphetamine. You're not able to eat or sleep.

"After several years of using it, she ended up having to eat sleeping pills for her to sleep at night. And after several years of doing that, her body basically started to deteriorate. And she started seeing four or five doctors to keep her habit up."

Hughes doesn't quite have his facts straight. Dexamyl is a barbiturate; it's Dexedrine that is the amphetamine. But it doesn't matter. Once into the familiar story, Hughes is a honey-tongued spellbinder whose warm brown eyes seem to touch them all without ever leaving the camera. When he reaches the climax -- "I was 19 years old when she died from an overdose" -- he can still muster a tear. Then he goes on the offense.

Of course there are going to be attacks, he explains patiently. "Anytime you have this many people getting healthy on a product, you don't think there's going to be people who get upset with that? . . . Let me tell you something. We've not only got the millions of people using our products. We've not only got the millions of distributors selling our products. But we've got the cash to fight this battle.

"Listen, nobody's more responsible for what's been said about these products and Herbalife than me. I'm responsible for the claims it makes, the products it sells, and everything else.I've got more at stake in this company than everybody sitting in this room.

"And let me tell you something. If I didn't think we were going to make it, if I wasn't here to fight, I would be running to the hills."

The rhythm is familiar: call and response, appeal and exhortation, the cadence of the tent, of sawdust and miracles. He has always been a fighter, and he won't let Herbalife go down without a struggle. All he needs is their help. Use the product. Wear the button. Spread the faith.

By the time he reaches the end, the auditorium is awash in adrenaline, men and women on their feet, ready to march together. They were fat, and he made them thin. They were poor, and he showed them riches. How can they not believe?

Hughes exits, stage left, to applause and music that, it turns out, was specially composed to sound like the theme from Rocky. It makes great TV.

Rocky" almost fits Mark Hughes, except that the denouement of his fight is still in question. Indeed, the story of his exotic career would make a wonderful TV movie, if not a full-length feature film. Teacher, exemplar, and redeemer to the faithful, he is also an entrepreneur extraordinaire, the latest in a long line of fast-talking hucksters to hit pay dirt by catering to America's national obsession with weight loss and fitness.

Hughes's own redemption story is at the core of the company mythology. It is a California tale, beginning in a broken home some 15 miles south of Hollywood; Mark's parents separate before he is born and divorce soon thereafter. By ninth grade he is a dropout; by age 16 he has drifted into drugs. Then comes the break: Hughes is ordered to Cedu School, a private residential school for troubled teenagers. There he discovers his gift for selling. Handsome, increasingly enthusiastic, he works his own rehabilitation selling raffle tickets door-to-door to raise money for the school, and eventually becomes the school's youngest staff member ever. It is there, so the story goes, that he meets his destiny. The death of his mother leads to years spent exploring the mysteries of herbs, then to the creation of Herbalife.

In fact, Herbalife was not Hughes's first endeavor. He served an apprenticeship selling a diet product called Slender Now. When that disappeared, he sold one called Golden Youth. It was not until February 1980, when he was 23, that he decided to try his own line, developing the Herbalife products with Richard Marconi, a manufacturer of Slender Now tablets.

The Herbalife diet itself is simple. Want to lose from 10 to 29 pounds a month? Without exercise? Just replace two meals each day with two glasses of juice or skim milk doctored with the company's protein powder, and take a dozen or so different herbal formulations. Herbalife works, the company says, by "burning excess calories," and it will "naturally cleanse the digestive system." Other products promise additional help for various problems: Cell-U-Loss, for example, is guaranteed "naturally to attack cellulite." Nature's Raw Guarana (N.R.G.) is sold as a natural energy enhancer, a "nervine, tonic, slightly stimulant aphrodisiac, febrifuge." All products are sold "100% Satisfaction Guaranteed Or Your Money Back."

But it isn't the diet that made Herbalife such a phenomenon, it's the marketing plan. Herbalife products are not cheap: The weight loss program alone costs about $30 a month, and purchased at list price, the full line would cost about 10 times as much. But no one has to pay list price. Many customers become distributors instead, accepting a minimum 25% discount on everything they buy in lieu of the widely advertised money-back guarantee. That's only the beginning. With that discount, you can make a profit selling Herbalife yourself. Recruit other salespeople, and you can earn a commission on everything they sell as well. Recruit enough salespeople, or sell enough volume on your own, and you can become a supervisor, with a 50% discount on products. You earn royalties based on the orders filled by everyone you recruit, and on the orders filled by everyone they recruit. The higher up the pyramid, the bigger the payoff. Hughes himself sits at the top, with 54% of the equity and one of the largest distributorships in the company.

Multilevel marketing is a tough game, but Hughes has played it well, borrowing tools like his evangelical pep rallies from such giants as Amway Corp. and Mary Kay Cosmetics Inc., then turning them into media productions. And the company has always tried to help its distributors succeed. Besides the product discount, the glossy Herbalife Journal, the TV shows, and ads in the likes of USA Today, each distributor has the Herbalife Official Career Book to show the way to riches. "Whom Do I Know?" the book asks, suggesting some 60 potential customers, everyone from "the best man at your wedding" to the person "who sold you your dog" or "who runs your delicatessen." Basic selling techniques are explained, although the new distributor is reminded that "nothing in the world can take the place of persistence." The Career Book also offers a full list of the Herbalife product line, and explains the purposes of each product. The 1982 edition -- which has since become a bone of contention -- suggested that the Herbal-Aloe drink could be valuable in the treatment of "ulcerations of the kidneys, stomach or bowels," while Herbalife Formula #2 could help with 75 different conditions, including age spots, herpes, jaundice, cancer, bursitis, lumbago, and impotence.

People who follow the Herbalife diet will lose weight. Of course, most people who cut down to one meal a day will lose weight anyway, with or without Herbalife's help. As for the rest, many academic nutritionists believe that Herbalife's products, which contain herbs, diuretics, and mild laxatives in various combinations, are medically useless, except perhaps for their placebo effect.

The company suffered no serious consequences from its representations until 1982, when it first tangled with the FDA. That summer, the agency sent Herbalife a "Notice of Adverse Findings" citing violations of the Food, Drug, and Cosmetic Act. The agency pointed out that mandrake and poke root, contained in Herbalife's Slim and Trim Formula #2, "have been considered as unsafe for food use," and questioned whether "food-grade linseed oil" in the same product" actually exists." The agency also charged the company with misbranding, false representation, and "meaningless and misleading" declarations.

In response, officials at Herbalife took out the mandrake and poke root, and began to modify some of its claims. But when the FDA published a "Talk Paper" on August 21, 1984, explaining its findings to the public and the press, the company became litigious. Filing suit in federal court against the FDA, Herbalife accused the agency of "false and defamatory statements" and a "corrupt trial-by-publicity." The suit was eventually withdrawn, but not before Hughes had served notice that he would stand his ground.

For a time, the negative publicity generated by this dispute had no effect on the Herbalife juggernaut. By February, when Milton Berle, Donny and Marie Osmond, and comedian David Steinberg hosted the company's fifth anniversary show, sales were climbing to more than $500 million a year. Herbalife had incredible momentum: Suddenly the "Lose weight now. Ask me how" button seemed to be in every mall and grocery store, and the bumper sticker on vehicles from BMWs to pickup trucks. Hughes started collecting L.A. -- style toys: a Mercedes-Benz and a Rolls-Royce, a beachfront house in Maui and a multi-million-dollar Bel Air mansion, purchased in 1984. He married a glamorous Swedish beauty queen who he reportedly met when she passed him a note in a Hollywood disco. The sky seemed the limit: First quarter 1985 sales were up to $228 million, and company officials were predicting sales of $150 million a month by the end of the year.

Then came the March 6 legal action in California. The complaint, filed jointly by the California attorney general and the food-and-drug branch of the state health department, ran 24 pages, and charged Herbalife with 21 different citations of untrue or misleading statements. The company's assertions about "the amazing magic of natural herbs" were "untrue or misleading." Most of the herbs in Herbalife products are "non-effective for the purposes advertised." To promise that Cell-U-Loss could "naturally eliminate cellulite" was "misrepresentation." To claim that Herbalife N.R.G. gave "a natural lift" was unjustified, too, since "defendants misleadingly fail to disclose that one of [the product's] active ingredients is caffeine."

In addition, the company was charged with violating both the state civil code and the penal code in its marketing scheme. Herbalife Journal featured stories headlined "Lady Truck Driver Earned $250,000.00 To Become the Ultimate Lady Executive," or "The Shines -- From a Choice of Bankruptcy and Welfare to an Income of $400,000.00 in Just 12 Months." But it was "untrue or misleading" to suggest that such success was common; "their marketing system," the state charged, "comprises a lottery."

The charges might have been had, but the Senate subcommittee hearings two months later were worse, if only because they were reported coast-to-coast. Some of America's top nutritionists called for government intervention, saying that Herbalife's products contain "ingredients which are useless" and "potentially harmful" and that the company's claims are "fraudulent in the extreme." Worst of all for the company was the testimony of Hughes's former disciples.

Bernard Lehman, a victim of Hodgkin's lymphoma, had been having trouble getting by on his Social Security checks. Then he met an Herbalife distributor who had set up his offices in a local coffee shop. Herbalife's products, Levin was told, would increase his breathing capacity and help his cancer. And if he went on to be come a distributor it could solve his money problems as well.

"As my wife says, we got suckered, because we believed that we could make lots of money," Lehman admitted. He and his wife had both gotten ill on the product, but he decided to become a distributor anyway, because "we thought our own bad reactions to taking the product [were] unusual." Unfortunately, no one would buy it. When he called the company to complain, Lehman testified, Al Levine, in the public relations department, "told me to 'stick it up my ass," reminding him that distributors had no guarantee. He was stuck with $700 worth of product that he couldn't sell.

Cynthia Lee, a 35-year-old widowed mother of two, testified that her late husband had become a distributor to pick up some extra cash, too. Bivian Lee was a veteran of the National Football League, strong as a horse and still in shape, until he started using Herbalife products.

"After a few days, however, he began to complain," his wife reported."For almost two weeks he complained about shortness of breath; he began vomiting after his meals, having diarrhea, and getting chills. When I told him I was worried about him, he said that according to the Herbalife pamphlet it was a normal symptom. 'It's just cleaning my system out,' he said."

In less than one month, he was dead. "I saw him deteriorate from a . . . perfectly healthy man . . ." Cynthia Lee testified. "And it all began when he started taking Herbalife."

From the outside, Herbalife's corporate headquarters in Los Angeles suggests permanence, as if the traumatic spring and summer of 1985 had never touched the company. The building towers at the edge of the San Diego Freeway, a 14-story concrete-and-glass megalith sitting amidst the rental-car parking lots and motels that surround Los Angeles International Airport. A tasteful red metal sculpture proclaims the corporate aesthetic in the courtyard, while the bright green Herbalife logo beams from the top.

Inside the office, however, it is clear that Herbalife is reeling. Some 220 employees were laid off in early May, and another 573 were furloughed after the Senate subcommittee hearings. Signs of the departures are visible in the corridors. A giant Hewlett-Packard computer system sits behind its glass wall, waiting to record the $150 million in monthly sales the company expected this year, but the cubicles that surround it are empty, the desks and phones unused.

Amidst the emptiness, the public stance taken by company executives is relentless optimism tinged with paranoia. Michael Rosen, Herbalife's executive director of marketing and a friend of Hughes's since his Cedu days, thinks of the trauma as "a shock wave that shook the faith of a lot of the distributors," but promises that "the recovery is here."

"We're a five-year-old company, and we didn't do a lot of homework on government relations and public relations," he avers. "But the game is not over yet. This set us back a year, but I think we're finally growing up and developing our own political power.

"It was never Mark's intention to deceive," Rosen continues. "All we have ever been guilty of is aggressive sales." The company has always cooperated with federal and state officials, he says, and will continue to do so. He promises that Herbalife will make whatever changes need to be made no comply with the law, just as it has in the past. In 1983, for example, the company revised the Career Book. A disclaimer has been added to the Herbalife magazine as well: "Reports by and referring to large earnings of successful Herbalife distributors, actually selling Herbalife products are not representative of what you may earn. . . ." They will probably even list caffeine as an ingredient in their N.R.G. product, although they are not strictly required to do so.

In the meantime, company officials try to cloak themselves in martyrdom. "Any innovative program which brings new health ideas into the marketplace will always have controversy around it," explains Dr. David Katzin, head of Herbalife's medical advisory board. "This whole thing reeks of special interest groups that feel threatened, economic interests that are being threatened."

"It's an attempt by the health care industry to get control of things people should have freedom of choice in," agrees Perry Turner, corporation counsel. "As to whether it is a concerted conspiracy, that is up for grabs."

Hughes himself, in time-honored fashion, blames the media for the company's problems. The press has been "telling America untrue things," he charges in a written statement, harming "more than 750,000 Herbalife distributors whose livelihood depends on their integrity, diligence, and honesty." Take the 1982 Career Book -- talk about "digging up old skeletons." Or take the suggestion that the herbal ingredients in Herbalife could help cure everything from cancer to herpes -- that was merely a report on the history of the healing power of herbs, although "we didn't make it clear enough that those same healing powers would not necessarily result from using Herbalife products." The media have never treated him fairly, Hughes complains: "They imply that I'm sick, that perhaps I'm a flimflam man, and that I'm definitely too young and far too undereducated to run a $500-million company."

How about the reports of deaths from Herbalife's products? The Senate subcommittee hearings, says Hughes, did not find evidence that anyone died from taking his products -- not "conclusive evidence," anyway. And the press never made that clear.

Finally, the charges that Herbalife is a "pyramid that's ready to collapse" are dismissed by Hughes as "gross oversimplications." "Almost every company has layers of management," he explains. "Big companies have dozens of layers. Herbalife has essentially three -- not much different than the multilevel-marketing plans of Amway or Mary Kay cosmetics."

Inside the company, the California fraud complaint is largely discounted. Corporate counsel Turner told INC. twice that the suit was about to be settled. The charge that the company operates an endless chain, he says, "is based on the fact that they had not analyzed our marketing plan sufficiently," and would probably be withdrawn. Indeed, he expressed optimism that the entire matter would soon be settled "to the satisfaction of both sides."

In the California attorney general's office, there's rather a different view. "That's the impression they've been trying to give the press since day one," says Albert Shelden of the AG's office. "I don't know the basis for that statement," agrees his colleague, Herschel Elkins. "Our action is pending, and we regard this as a very significant case."

However the case should turn out, the company still has some cards up its sleeve. Stories from Washington suggest that some Administration officials believe the FDA overstepped its bounds, and that the agency will pull back from its investigations of Herbalife. (In fact, according to an October 15 "Talk Paper" issued by the agency, the FDA is continuing its investigations of Herbalife's labeling practices and promotional claims, but has decided that "the present Herbalife product line does not contain concentrations of herbs or recommended usage levels that pose a risk of health hazard to consumers.") Some critics are being silenced: Although he was willing to testify in front of the Senate subcommittee, for example, the Dean of the School of Pharmacy and Pharmacal Sciences at Purdue University now refuses to discuss the company on the record. They are "extremely litigious," he says. "Shortly after I gave my testimony, Purdue officials received threats of lawsuits."

Then there's the charismatic Hughes himself. Month after month he works the road, 20 to 25 days month, rally after rally. In September alone he visited Dallas, Houston, Orlando, London, San Diego, Phoenix, Chicago, Minneapolis, Detroit, Toronto, Boston, Atlanta, and Valley Forge, Pa. Two rallies in each town, with a rally in Los Angeles broadcast by satellite to gatherings around the world.

He has to keep it up, of course, just as he promised that night in Atlanta. There is too much at stake to fold up and move on. And the image of stability is all-important: The company can never hope to win the public back, let alone attract the new distributors it needs, if it looks as if it's about to go under. To every allegation of misconduct or misrepresentation, Hughes and his cohorts point to their thousands of satisfied customers.

For all the expressed optimism, however, for all the willingness to change what they must and defend the rest, the meteoric rise of Herbalife is already history. Without public trust, no fad diet -- let alone a multilevel-marketing scheme -- can grow.The American landscape is filled with the skeletons of Herbalife's predecessors: liquid protein, grapefruits, the Cambridge Diet, and so on.

But the evangelist who took hucksterism to a new state of the art won't give up yet. "Lose weight now," he preaches. "Ask me how."

It has taken the American public five years to learn the answers.

Last updated: Dec 1, 1985




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