Last Friday, Pershing Square presented at the Robin Hood Investment Conference a summary of their pyramid scheme thesis for Herbalife (HLF). The presentation can be found here.
Investors would be wise to pay attention to slides 50,51 and 52. When I was in college, I worked as a real estate analyst for Canada's largest grocery store chain. My summer job was to analyze potential sites for retail viability. Specifically, we would model/proforma an income statement for a given retail location using bottom-up analysis. The analysis was always the same.
We started with a simple question: "How many people live within the trade area of our site?"
From there we used government census data to assess the demographic information of the people who lived in the site's trade area. eg. What was their annual income? How much were they likely to spend on groceries per week, etc.
We mapped a primary trade area around each site in 1/4 square mile blocks. Within each cell on the grid we knew exactly how many people lived there and what their weekly spend was likely to be on groceries. We then estimated the % market share we were likely to earn from each cell on the grid. Multiplying the market share % by the # of people in the grid by the estimated weekly grocery spend allowed to us to work-up our revenue model. We went through this process in detail cell by cell/block by block until we had a proforma.
The exercise continued by mapping competitors on the map. In each geographic location/micro-market we competed in we pretty much knew how much business was available (market size), how much volume the competitors were doing, and what our own opportunity set looked like.
There are 4 microeconomic truths that we always had to contend with when doing our store proformas.
1) The size of the total market in any given geography for groceries is finite.
2) There is only enough room for so much sales per square foot/so many stores per geography
3) If an area gets overserviced/overstored in the short-run all market participants will suffer.
4) In the long-run if an area gets overserviced/overstored the weakest market participants will fail.
Pershing Square's diagrams in their presentation demonstrate the "rational" location of various McDonald's Restuarants in and around the Queens area. It is easy for investors to imagine the trade area that surrounds each of these locations. Presumably, there are enough customers who desire to eat fast food on a daily basis to make each one of these locations economically viable for both the franchisor and franchisee. What we don't see from the image is evidence of location overlap. It appears, visually, that each McDonald's franchisee enjoys some level of territorial exclusivity. At the margin, each store competes with the other. As customers cross over from one franchisees trade area into another's, perhaps they see some cannibalization of their customer traffic. However, there is an apparent calculus to the approach. Specifically, McDonald's appears to limit the number of franchises it grants contingent on the viability of each location.
Now, contrast the locations of the McDonald's sites to the Herbalife locations. The map tells a very different story.
1) It is immediately apparent that the Herbalife locations cluster in a concentrated way. Why would it be that Formula 1 would be interesting and compelling to certain residents of Queens but yet of no interest to people who live merely a few blocks away? Is obesity not an epidemic?
2) If Formula 1 is, indeed, the miracle cure for obesity, why do we not see coverage analogous to McDonald's in the Queens, NY geography?
3) What evidence to do we see visually that Herbalife makes any efforts whatsoever to limit distributorships by territory?
4) Does Herbalife's marketing plan seem to encourage over-saturation or not?
5) What is the likely economic outcome for a distributor trying to compete in a geography that is over-stored/over-saturated?
6) If you had the license to Formula 1 as a strong and prosperous brand analogous to McDonald's would you be inclined to sell distributorships ad nauseum for $59 or to limit them by geography and sell them for a much higher value like a franchise?
What does common sense tell you?
Pyramid Schemes are business opportunity frauds because they recruit an endless chain of participants which, when taken to their logical end-state leave the last guy in the door holding the bag.
One needn't look further than the maps provided by Pershing Square of the business activity in Queens, NY as direct and obvious evidence that:
a) Herbalife makes no efforts to protect its distributors from hyper-competition
b) That over-storing, over-saturating geographies with a finite opportunity set leads to economic harm for most participants.
c) That the promise of infinite profits for the marginal participant in any given geography is a ruse.
eg. Logically, what does the Herbalife opportunity look like for the marginal entrant in Queens, NY. What does it look like for the marginal McDonald's franchisee?
d) If McDonald's limits its number of stores based upon bottom-up analysis of viability, why wouldn't Herbalife do the same?
e) If Formula 1 was the greatest weight-loss solution since Weight Watchers (WTW), wouldn't we expect to see fewer distributorships on the map and not more?
Successful business partnerships/relationships work because everyone in the value chain is able to earn a reasonable return on economic capital. In the franchise model, the franchisee pays a fee to the franchisor for territorial exclusivity and the license to use trademarks, business processes, etc. The franchisor also offers training support, advertising, etc. The reason these relationships work is because the franchisor looks out for the interests of the franchisee. Effectively, their interests run with some degree of tension but if there is enough business to be had in a given geography, everyone makes money. Everybody wins.
Herbalife's business model, in contrast, is absurd. Herbalife's business model/Marketing Plan is not designed to provide support to individual entrepreneurs. Rather, the model is designed to deceive people - especially the marginal recruit. Herbalife distributors over-recruit people who act in good faith until the point when there are so many distributors in a given geography that it becomes impossible for anyone to make money other than the company.
Investors point to the results of the public company as evidence that the business model works. The company's own churn data reveals that the reason the model works is simple. The company is endlessly recruiting new victims all of the time. And, the ruse is always the same.
- Have I got an opportunity for you?
- Boy can you get rich quick!
- Look how much I made?
- You can do it too!
Herbalife makes faith healers look benevolent by comparison.
Bill Ackman's presentation on Friday showed us some pictures. These pictures tell the story loud and clear. Herbalife's Marketing Plan is designed to endlessly recruit and to saturate geographies to the point of economic extinction for its unsuspecting business partners. Why? Because its Marketing Plan is a pyramid scheme.
Individuals who assert that HLF is not a pyramid scheme can't seem to be able to answer the following questions:
1) Why can't the company show any evidence of actual retail sales?
2) If Formula 1 is truly a miraculous weight-loss product, why does the business model give away distributorships like candy to anyone with a heartbeat?
3) If Michael Johnson was a genius marketer why would he support a Marketing Plan that undermines the chance of economic success for his distributors/encourages failure and churn?
4) Why so much emphasis on the economic success stories of Doran Andry, Leslie Stanford, John Tartol, etc. Shouldn't the product sell itself?
5) Why does a company with such a great product and huge profits see such high turnover in its salesforce each and every single year it operates? How often does the guy who owns a McDonald's throw in the towel by comparison?
Queens, NY is but one Latino micro-market that has been targeted by Herbalife.
Q. What do Mr. Ackman's pictures tell you?
Do pictures of Queens appear to show evidence of over-saturation or not?
You be the judge.
Herbalife is a pyramid scheme. The sooner the SEC shuts it down the better. Mr. Bill Stiritz has risked hundreds of millions of dollars investing in a business that mistreats its distributors with a rebel salesforce and a multitude of deceptions.
Unsuspecting entrepreneurs continue every day to risk their financial, intellectual and human capital in pursuit of "The Dream" that is unscrupulously marketed by Herbalife and its gang of disciples. The Dream quickly becomes a nightmare for most while the faith healers continue to hive-off the spoils.
Don't believe me?
Imagine you invented the cure for cancer tomorrow. How would you sell it?
Every Picture is Worth 1,000 Words. Revisit Slides 50-52. What do you see? Looks like a pyramid scheme to me.
Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.
from SeekingAlpha.com: Home Page http://seekingalpha.com/article/1860081-ackmans-pictures-tell-the-story-herbalife-oversaturates?source=feed
Aucun commentaire:
Enregistrer un commentaire