Herbalife: A Nutrition Leader in Transition

By Sean Moloughney, Editor | January 3, 2017

The company remains committed to high-quality products that support consumers’ wellness goals.

With net sales of $4.5 billion in 2015, representing 4.7% growth from the previous year, Herbalife International is one of the largest public companies in the dietary supplement industry in terms of sales, and it’s undergoing some significant changes.

Established in 1980, Herbalife’s nutrition, weight management, energy/fitness and personal care products are available exclusively to and through dedicated, independent Herbalife distributors in more than 90 countries.

“We are committed to fighting the worldwide problems of poor nutrition and obesity by offering high-quality products, one-on-one coaching with an Herbalife Nutrition Distributor and a community that inspires customers to live a healthy, active life,” said David Pezzullo, executive vice president, worldwide operations, Herbalife International, Los Angeles, CA.

Since 2009, Herbalife Nutrition has invested $250 million in vertical manufacturing and quality control laboratories and infrastructure. In 2016 the company opened its fifth Herbalife Nutrition Innovation and Manufacturing (H.I.M.) facility in Nanjing, China, making finished products for the Chinese market.

“Worldwide we currently produce up to 65% of all our inner-nutrition products in-house,” said Mr. Pezzullo. “Also, for many years Herbalife Nutrition has been an industry leader in quality control, particularly in the area of botanical identification. We continue to lead the way as we expand and continually improve our program to include new advances in science such as DNA technology into our quality control capabilities.”

Focus On Quality & Transparency
The dietary supplement industry continues to grow as more consumers understand the role a healthy diet and regular exercise play in attaining and maintaining wellness.

“As people become more educated—and I believe our independent distributors play a major role in this education—they also become more aware of the gaps in their typical diets that can be filled or supplemented by nutraceuticals,” said Mr. Pezzullo.

Unfortunately, he added, quality continues to be an issue for certain companies in the dietary supplement market that fail to meet basic federal requirements, such as Good Manufacturing Practices (GMPs) in the U.S. “While there are a number of top-tier companies committed to quality like Herbalife Nutrition, there are many that are not,” said Mr. Pezzullo, “and these companies have succeeded in eroding consumer confidence in the industry, leaving it open to easy attacks by media and governmental agencies. While our science team has real concerns with some of these enforcement actions on the basis of the questionable science used, we applaud and support the effort to increase transparency and compliance in the industry that these enforcement actions represent.”

Herbalife has been leading the charge for increased transparency, and has partnered with industry trade groups to help provide “commonality, tools, training and education to those who may have the desire, but not the knowledge or financial wherewithal to ensure they have the highest quality product possible,” he added.

For example, Herbalife has been one of the major drivers and supporters of the dietary supplement product registry, or Supplement OWL (Online Wellness Library) spearheaded by the Council for Responsible Nutrition (CRN).

Herbalife has also been a vocal and visible proponent of the proper use of DNA technology for botanical identification, noted Mr. Pezzullo.

Product Innovation
At its roots, Herbalife started with just three products: Formula 1 Nutritional Shake Mix, Formula 2 Multivitamin Complex and N-R-G (Nature’s Raw Guarana) Tea. “Over the years, we have grown and have expanded our product line to continue to help people improve their wellness,” said Mr. Pezzullo. “This includes our omega-3 Herbalife line, Ocular Defense Formula and CoQ10 plus.”

Herbalife’s scientific leadership has developed many of the company’s supplement lines. For example, Lou Ignarro, PhD, a Nobel Laureate in Medicine, developed Niteworks, formulated with L-arginine and L-citrulline to help the body create more nitric oxide, exclusively for Herbalife. John Heiss, PhD, a scientist and an endurance athlete created the Herbalife24 sports performance line, which was designed to support professional and amateur athletes. “By keeping as much of our product development in-house as possible, we are able to maintain a high level of quality,” noted Mr. Pezzullo.

Meanwhile, the company continues to explore new options for innovation. “Our main platform of products includes protein-based meal replacement shakes and bars, teas, liquid aloe drinks and hundreds of other supplements,” he continued. “We continue to explore and launch new flavors and improved versions of existing products.”

As a nutritional company, Herbalife continues to look for areas that will improve the well-being of its customers. “Lately, we have been focusing on developing shakes using alternate proteins, like pea and quinoa, and digestive health products with pre- and probiotics. We have also been introducing additional outer-nutrition products that promote and protect healthy skin.”

Leadership in Transition
As it continues to focus on quality products that meet consumer needs, Herbalife will be undergoing some significant changes from the top-down. Michael Johnson, CEO since 2003 and chairman since 2007, will transition to the role of executive chairman in June 2017. At that time current COO Richard Goudis will take the reigns as chief executive.

During his 13-year tenure, Mr. Johnson led the company through a period of significant expansion, quadrupling annual net sales from $1.1 billion to $4.5 billion. The company expanded its operations significantly under Mr. Johnson’s leadership, and now does business in 94 countries around the world. Herbalife Nutrition’s product portfolio also increased considerably, as did the R&D function, which has grown to include more than 300 scientists and PhDs.

Stepping in as the next CEO, Mr. Goudis has spent more than 18 years in the nutrition industry, including leadership roles at Rexall Sundown and GNC, and has been an integral part of Herbalife’s management team for 12 years. He was CFO from 2004 to 2009 and has been COO since 2010. Mr. Goudis has been responsible for worldwide manufacturing operations, product development, quality, supply chain, human resources, information technology, security and regional finance and operations functions. During this time, the company expanded its Herbalife Innovation and Manufacturing (H.I.M.) facilities to five locations around the world and now manufactures most of its products in-house. Under Mr. Goudis’ management, Herbalife Nutrition also grew its employee base to more than 8,000 people worldwide.

Herbalife has also encountered its share of controversy and criticism. This past July the company reached a settlement with the FTC, agreeing to restructure its compensation structure and pay $200 million for consumer redress. The terms of the settlement only apply to the company’s sales in the U.S., which comprise approximately 20% of total net sales.

At the time of the announcement, Mr. Johnson stated: “The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms.”

Meanwhile, hedge fund manager Bill Ackman, founder and CEO of Pershing Square Capital Management, has maintained his long-standing and highly public short position in Herbalife’s stock.

Future Outlook
In the company’s 2015 annual report, Mr. Johnson said Herbalife continues to strengthen and drive innovation in its product portfolio to ensure it meets the demands of today’s consumers. “Offering quality, accessibility, affordability and choice is key. And while we believe we are already well-positioned for the future, we continue to look to expand the choices we offer consumers within each of our product categories as well as identify new trends and growth segments.”

In 2015, Herbalife launched 13 new product lines in over 45 markets appealing to local taste and preference. “These new products included our first Formula 1 Meal Soup in Brazil, opening up new ‘consumption occasions’ for our members and customers,” Mr. Johnson continued. “Our new sports hydration drink, CR7 Drive, is now available in over 25 markets. In Mexico, we launched a powdered form of our calcium supplement Xtra-Cal, which further supports the daily consumption business models of our members by enabling the personalization of our shakes with such targeted nutrition boosters.”

This focus on products is particularly important as the company looks to strengthen its proposition of personalized nutrition as a solution to the growing demands of consumers around the world.

“People are getting older and, as they actively search for answers on how to maintain their health through aging, our members are there with education and targeted nutrition products to meet their needs,” the company’s report stated. “As governments and corporations look for ways to reduce spiraling obesity-led healthcare costs, our members are there providing consumers with products, education and support to help such consumers make healthier choices.”

The company has also expanded its sponsorship of sports teams, events and athletes, such as global soccer star Cristiano Ronaldo. “We remain focused on building a global brand that is synonymous with good nutrition and a healthy, active life,” Mr. Johnson said in the annual report. “We strive to make a positive impact in communities around the world. And we continue to focus on building Herbalife for sustained growth and to create long-term value for our shareholders, members, customers, and employees.”

For the future, Mr. Pezzullo believes Herbalife is in a unique position to benefit public health. “We are at the intersection in time of a number of megatrends that will make Herbalife Nutrition an even more important leader in the nutraceutical and food industries. The obesity epidemic, the increasing public health focus, the rise in entrepreneurship and a rapidly aging population create an environment where the need for informed and inspired Herbalife distributors has never been greater. We continue to invest in our quality control, research and development and distributor tools and education infrastructure so that we can continue to be the leader in nutrition.”