Why the Herbalife short was doomed

There's an alternative (Tupperware-based) model for the diet shake seller. But, at present, there is simply no reason for it to change.

By Jim Cramer Aug 13, 2013 9:50AM
thestreet logoThe Herbalife Ltd. corporate headquarters stand in Torrance, California.Could Herbalife (HLF) sell its product like Tupperware (TUP) does? Could it shift out of the recruit model -- which entails simply trying to pile on hosts -- to a model that involves new, best-in-class kitchenware that seems to be loved the world over? Could Herbalife become a retailer of product via parties?

On Monday night, as I talked with Rick Goings, the terrific CEO of Tupperware, I was conscious of the differences and similarities between the two companies (TheStreet). First, Tupperware is a great business. Several million women are hosting parties for the product, one every second and a half around the globe, and the products are constrained in supply. Tupperware's offerings are proprietary, and innovation has kept the company ahead of the game. In Turkey, Indonesia, China and Mexico -- wherever emerging markets are -- there are women selling these products to earn a little extra money or just to be the breadwinner.


Herbalife has parties, too. It has new product. But this is a recruitment company that is graded by its own point system and not its actual end-market sales -- although it has data showing that most of the product does go to end markets.


It is true that an unscrupulous Tupperware salesperson could try to bury an unsuspecting individual with product in order to get sales done, but I haven't heard that charge being made. But getting more salespeople in each country is a priority in the same way that opening new stores is a priority for any retailer, and you just have to consider this method a handy way to open new stores.


I think Herbalife could emulate the Tupperware model, but I think its earnings would proceed to be much lower short-term. Still, if the product is as good as Herbalife claims, it would likely have nothing to worry about were it to adopt Tupperware's strategies.


Here's the issue, though. Why bother? Herbalife has terrific cash flow and lots of good expansion plans, and its model is working for shareholders. It's just not working for short sellers and failed recruiters. Imagine if, tomorrow, Michael Johnson said, "OK, that's it. We are going Tupperware's way." The sales would fall dramatically, the company would miss estimates and the stock would take a severe hit -- and Bill Ackman would make a ton of money.


In fact, if Ackman had demanded that Johnson go the Goings way. If he had gotten a government agency to endorse it, to the point at which it would threaten to shut down Herbalife if the company didn't comply -- then he would have won this battle. Here's the hilarious thing: Ackman would merely have needed to buy enough shares to get himself elected to the board, and then demand Johnson clean up the company by adopting a Tupperware model.

But, of course, a Tupperware model would mean fewer sales -- so, in this case, he would be electing to hurt his investors. Instead, he is campaigning to help his investors by getting Johnson to try to switch to a Tupperware model -- which wouldn't make as much money as a Herbalife model for Herbalife product. Remember, despite what Mr. Going to Zero says about Herbalife, no government agency is going to try to pull an Arthur Andersen on this company. Instead, that agency would recommend that Herbelife "reform" its practices by going toward Tupperware's methods.


In the end, the two companies aren't really in the same business. One sells product, while the other sells franchises. The product that Tupperware sells could easily sell in retail, but it wouldn't do as well because it would then be missing that connection that women make with other women. The product Herbalife sells wouldn't cut it in a world where GNC (GNC) dukes it out against Vitamin Shoppe (VSI). Both could make money, but neither would be as profitable.


In the end, though, you can see why the Herbalife short was doomed. There's an alternative model to Herbalife, and this was the best hope for Ackman -- but, without an agency pressuring the company, there's no reason for it to change. With that lack of change comes more recruits and a higher profit -- because, just as Tupperware is good at hosting parties, Herbalife is darned good at getting more recruits.

Herbalife's business is not a business I would want to be in myself -- but it is a business, and unless someone outlaws a business that recruits others to sell product, however undifferentiated, the short just seems an errant one. The long side, on the other hand, makes a ton of sense, given the small amount of capital required to recruit or to make a relatively undifferentiated product.

In the end, Herbalife product is simply a MacGuffin at this point. There's nothing sinister about the MacGuffin. It's just unimportant to the drama, regardless of how important Ackman has tried to make it seem. My conclusion? He should go watch some Hitchcock movies and cover his short.


Oh, and this may be totally gratuitous, but he should blow out of J.C. Penney (JCP) while he is at it -- because, guess what? The company he's betting with is selling as undifferentiated product, too -- as undifferentiated as that of the company he's betting against. He's got a chance now that he's off the board. He ought to take it. Maybe that's just what he's doing.




Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.  



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Aug 13, 2013 10:07AM

Tupperware?  Herbalife?  who cares? 


tupperware is a product.  herbalife is a pyramid scheme that simply skirts the definition of "pyramid" scheme. 

Aug 13, 2013 10:36AM
The Herbalife Short was doomed from the start simply because Regulations on the Books haven't been enforced for Years. Ponzi styled companies are allowed to exist until they Run out of other people's Money. Then all of sudden, everyone want's justice. Greed leads to farce companies like Herbalife. Jimmy can't even go into the Business Model and justify it. He just states nothing sinister about it when of course, clearly it is. More proof that Jimmy is Out of Control. Yet he is front and Center on Cnbc.

Aug 13, 2013 12:05PM
So VL hates my generation and says we inherited everything.........
Inherited position?  Ya my dad changed tires and fixed tractor trailers for a living (still does actually) and my Mom is still a nurse.  WTF did I inherit?  I paid 50% of my college bills myself, had a part time job in a crappy pallet factory from age 16 until I graduated college.  Been in construction management ever since, been jacked around by a few employers (they were/are baby boomers) but do I go around saying all boomers should die?  No, because my parents are boomers and are good people as are the parents of my friends. 
Question:  what happened to you in your career being a lender for you to hate so much?  You say VL is veteran lender, which to me is a desk job but you hate button pushers and hate on banks.  Something tells me you were pushed out of your job towards the end of your career, perhaps slow to learn new tech and lending practices, wanting to stick to what you know?  Now you hate button pushers as you blame them for "pushing you out"?  
Well just so you know you can hate me and wish eternal pain on me and my family, but I don't return the sentiment, feel sorry for you spending your last years ranting and hating like a douche.  Enjoy the concrete walls of your bunker.
Aug 13, 2013 11:39AM

Now you have done it....You just know that fat son-of-bitch is going to come out of his box, over on the 101...

And you forgot about his bag-lady friend Ms. Bambi from the other side of the Bridge.

Aug 13, 2013 11:59AM
Herbalife?  Never used their products and probably never will.

Tupperware?  Our freezer is full of the stuff.  I make a couple of huge batches of gumbo every year, and most of it is stored in tupperware in the deep freeze.

Aug 13, 2013 10:32AM
Yes, really Jim.  We are getting out on the edges of economic practicality now.  These Business models are kinda like women.  Some you can trust and some you shouldn't.  Herbalife is one  you  wouldn't even want to have lunch with.  And these two characters are like two women that hate each and are manipulating for attention. At some point money can have a nasty taste.
Aug 13, 2013 3:53PM

V_L seems to hate a lot of things, some of which, makes a little sense...

When it comes to all the Generational stuff, he might even hate his own...??

Who really knows why..? Maybe only himself.


We are what would be considered "very early boomers."

We were taught not to take anything for granted.

We were taught mostly to respect others, for the most part...Everyone knows a few a-holes.

We were taught life wasn't easy from our perspectives..

So we went out into the World and earned what we have.

We worked hard, we deserve it; And no one is going to make us feel guilty about having it.

Aug 13, 2013 11:21AM

Maybe I can preempt Fat Cat....


As always Jim is correct and a great American. No advice will work for the board morons they were born to live in misery. Bernie and Cramer should run on the GOP ticket for president. Now I must leave you morons because I need Mr Brucey to polish my gold bar a while.


Har har har !

Aug 13, 2013 10:10AM

Lets see if I can preempt V_L today.


No Cramer you're doomed... you and your whole phony business platforms that have no basis in reality. Die boomers! Die! Die G-Xer! Die! Die GenYers! Die! Nothing but grubbers every where we look. Grubbers and inheritors. Die!

Aug 13, 2013 10:53AM

An observation: pretty sure I'm not the only one who HATES the Thomson Reuters and AP pre-bell yellow journalism spew on pumper mornings. "Small businesses hope for more sales-- when don't they. Markets up on hopes Cow jumps over Moon-- or some drug induced speculation. Sales GAUGE says sales were up but oops... retail investor quits Board." Who CAN'T figure out that we are headed for the cliff with our wings clipped and concrete strapped to our legs?

What do you THINK is happening in America? People are getting their insurance statement billings and looking at a budget that doesn't cover enough living and life right now. I don't care HOW BIG your lobby is, losers... if the majority stop sending you money... and your cartel only functions on other people's money... you go down. So... WHO goes down? You tell me... name a publicly traded business platform that has genuine random sales for actual money outrunning the cost of their overpriced administration? Any... bet you haven't studied their financials close enough. No business actually IS in business, it's in Bernanke.  

Aug 13, 2013 10:35AM
I do not like them in a box, I do not like  them with my sox, I do not like them  at my home, i do not like them on my dome ......

Thank you for this gobbledegook Dr Seuss ..........
Aug 13, 2013 10:47AM
I think Miss Lilly is a gold digger.
Aug 13, 2013 3:25PM

Well, well, well, we have a Rally.....Who would have thunk it...??


Our rally consisted of the 3 trades yesterday, everything else okay or so-so.

One of the trades was upgraded this A.M. (in another article)...We know where that went.

Another one is climbing, because in a couple short weeks it goes ex-dividend.

And the last one is losing money today, which was probably expected...


But I'm not too confident, and EXPECT an un-nerving correction within the next 6 weeks or so.

Many others do also, along with experts or people that should have more knowledge.

Decisions, decisions, decisions. 

Aug 13, 2013 10:51AM
Higher retail sales point to a strengthening economy? More BULL "S" from the spin masters and the presstitutes ! The economy is about to go OFF THE CLIFF !  But the SHEEP will continue to believe they will be saved !
Aug 13, 2013 11:05AM

When News, the Media or (yellow) Journalism; Bothers you so much, maybe you should try getting out old Christmas Cards...To make you feel better..

Maybe even a model car collection or something...


Try putting Rum or Whiskey in your morning coffee, everything looks better.

Aug 13, 2013 4:37PM
We were able to keep all 3 indexes in the green....Scumbags gave it a push the last hour but we are glad we stayed positive....Manipulators will never give up, never forget that.   The more they bring the markets down the more money they steal, or make, if you want to put it that way....They are cheating scumbags. Period.
Aug 13, 2013 11:33AM

I kind of think of Wall St. and investing as Hobby, a Hobby that pays us rewards..

I don't really make any money off of Golfing or Fishing and Boating that I was into..


Cars, are okay for enjoyment and exciting, but down the road they can become more of a liability .

Miss Lilly and I are discussing, getting rid of her Hi-liner; We don't drive it enough anymore.

Wanted to just give it to the Dau-in-law (like a daughter) but know it would piss off the whole family.

Bought it as an investment about 20 some years ago...Now just hope to get even money for it.


Farming/ranching has went by the wayside also and we are too old to screw with it; Had a lot of fun years past, met a lot of people and some traveling....Raised, Bred and showed mainly Horses.

Some cattle or cows and hogs even chickens...We had some good and hardworking times.

Now just content with dogs, cats and G-kids...


Do the Garden and investment thing to keep my mine sharp, and stay active...Also a little Community service (don't get involved in the politics anymore).

Life is what you make it or prepare for....And we got LUCKY.  


Aug 13, 2013 1:05PM
A rally started about 30 minutes ago and we are in the green now; don't get too confident though; the question is: Will it hold? Not a whole lot has changed down here, could very well be another sucker's rally...We shall find out soon enough.
Aug 13, 2013 10:58AM

WTH is a MacGuffin ??


Looks like CGT has gone off in the deep end...

We filled 3 orders yesterday...

One buy is up about .85 cents.

One is up about nickel.

The sell is down .40 cents.

It was a good day yesterday, and a good day today...

We paid for the trades plus some...

Ah, the power of "positive thinking."

Aug 13, 2013 10:45AM

DLH....Good job, you took the wind right out of his sails, nothing more to add.


Steve....You let CGT, beat you to the punch ??

Yes, we owned Herbalife about 15 years ago, Broker talked me into it...

My bro-in-law, subscribe/bought  the stuff...But I never understood the investment either.

It grew or appreciated a little...Then I had him sell it.

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