Mr. Les Clements, who describes himself as a Court recognized expert on Network Marketing, has written a response to the Fraud Discovery Institute's report on USANA.
Mr. Clements response to the FDI report can be read here, and Mr. Minkow's rebuttal is here.
Clements makes a number of points, but I wish to concentrate on what is the main issue, which is a two-parter. The FDI claims, in essence, that since USANA's products are too expensive, a distributor cannot make money by selling vitamins retail and can only make money by recruiting others, who have to recruit others, etc. Eventually, according to the FDI, the recruitment must fail for most individuals as a matter of cold hard mathematics.
Clements takes issue with this argument. With respect to the second premise, Clements claims that:
"Eighty-five percent of distributors lose money because 85% of distributors don’t do what they’re suppose to do to make money!
People who spent $1,000,000 for a Taco Bell franchise typically take their business pretty seriously. People who spend $20 for a distributor kit do not. People usually spend 4-8 years and tens-of-thousands of dollars preparing for their career. For those who join a network marketing venture to eventually earn a living income (92%) this would essentially be a career choice. Yet, most will make this decision based on nothing more than a compelling “opportunity call” or a jazzy online flash presentation. Sure, a few really do their due-diligence, work hard and give it their best shot and still fail, as is true in any business. But the vast majority of those who enroll as an MLM distributor do little more than tell a couple friends about it, who decline, and they’re done. Many don’t even do that much. Some may even give it a good effort for a month or two, then not understanding the commitment level necessary to succeed they either drop out, or more likely hop from one “better” MLM program to another. Over and over and over. Much like a marathon runner who repeatedly stops at the one mile marker and returns to the starting line, then stands their scratching her head wondering why she can’t “succeed”. Then finally, as most ex-MLMers do, they walk away disgusted, blaming their failure on their shoes, the course, the race officials, the weather – everything but themselves." (my emphasis)
Clements is at odds with the official USANA explanation, most "distributors' join in order to access discounts on vitamins. While, I don't doubt the veracity of Mr. Clements description of what the average MLM does when they encounter failure, this is not an explanation for the failure. Mr. Clements description of the what the average MLM recruit does is complete consistent with the FDI claim that MLM recruitment must fail, as a matter of design.
The critical question is not whether 85% of distributors don't do what they are supposed to do to make money, the question is whether the USANA products can be sold in highly competitive retail marketplace. If the products are not being sold, then a distributor cannot be buying them with the intent to retailing them, and therefore is buying them primarily to keep his or her recruitment income in place -or at least that is how I understand the FDI argument.
So who has got the better argument against retail? Clements argues:
"Most network marketing companies extol the benefits of this bypassing of the middleman as a means to afford greater commissions to their sales reps. This, and the dramatically reduced advertising costs, allow for a much larger chunk of the margin to go towards distributor rewards and compensation than those that are sold via conventional channels (since the distributors themselves are essentially the ‘middleman’ and their advertising mechanism). And that’s exactly what Usana is doing here. Note the slide above exclaims “Receive a generous percentage of the profits,” not “Receive a generous discount on the products,” let alone a 75% discount."
The FDI's response is:
"If what you are saying is correct, then I would expect the financial information disclosed by Usana to include something to the effect that distributors receive “a generous percentage of the profits.” Yet as we have seen, the 2006 associate earnings information released by Usana shows that more than 94,000 North American distributors never earned a dime in commissions (that’s of the 142,000 that are counted). It also shows that 72% of the compensation paid went to 2.6% of the distributors. These facts can’t be spun. So much for the newcomers to Usana receiving part of that 75% of profits! And beyond that, you clearly missed the point in the report: that the products are so hopelessly overpriced that very little actual retailing of the
products occurs and that no such 75% is pulled out at all! If it were the commissions going to distributors and the current retail price for Usana products would be a ‘push’ but instead even with the “75% being saved and passed on to the distributor commissions’ the prices for these
products post that calculation are still hopelessly overpriced dooming distributors to failure because they cannot retail."
Well, who has the better argument, on the numbers, here? It is hard to understand Clements since an upline by definition is a middleman, stuck between the consumer and USANA. If there was a single level of distributors, then the standard marketing company's line about a 75% saving might make some sense.
On the other hand, the FDI is making a different point, on disclosure of the amount of commissions paid to how many distributors.
What about those preferred customers, surely those are retails sales? Clements raises this very point.
Here is FDI's take on the preferred customers.
"76,000 Usana Preferred Customers purchased $52.3 million in products during 2006. You use this statement to debunk our assertion that little to no
retail sales are occurring at Usana.
Initially, your numbers appear impressive, until one does the math on direct sales and the number of associates and preferred customers. For example, Usana reported 142,841 “average distributors” and 70,000 “active” preferred customers in North America in 2006. Total direct sales in North America for 2006 were $246.5 million. This averages to about $89 every four weeks, per associate or preferred customer. (And the amount purchased per associate or preferred customer is actually lower than $89, as the associate and preferred customer numbers released by Usana only included “average” and “active,” and not all participants throughout the year.)
What does $89 every four weeks get an associate or preferred customer? About 84% of a 28 day supply of the HealthPak 100. If you want proof that products are not being retailed, the discussion is over. Distributors and preferred customers themselves are not even purchasing one full HealthPak 100 every four weeks, one of the company’s best selling products.
Okay Mr. Clements, maybe the 2005 Usana numbers are more favorable? Not much. Usana reported 101,361 “average distributors” and 63,000 “active” preferred customers in North America in 2006. Total direct sales in North America for 2006 were $209.4 million. This averages to about $98 in wholesale purchases every four weeks, per associate or preferred customer. That’s still not enough money to buy even one four-week pack of the now famously overpriced HealthPak 100." (my emphasis)
The overall calculation appears correct, and the preferred customers on average don't appear to even be ordering a four-week pack. But they could be ordering something else, other product. How many products are the preferred customers ordering before they find them too expensive, if they do? Neither side hit a home run here, but I think that the FDI hit at least a double, and probably a triple.
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