Make money now, ask me how!

Was Herbalife founder Mark Hughes a showy swindler or a dot-com deity?

By Alec Foege

Published June 19, 2000 7:00PM (EDT)

From his blow-dried good looks to his prodigal California lifestyle, the late Mark Reynolds Hughes was the envy of entrepreneurs everywhere -- particularly those fond of cheesy get-rich-quick schemes. But in what appears to be a fittingly bizarre case of revisionist history, the true legacy of Herbalife International -- the infamous nutritional supplement company -- may be the cutting-edge online marketing strategy of its wealthy but tacky founder.

In his 1980s heyday, Hughes -- who died last month of a just-confirmed overdose at his $27 million oceanfront mansion in Malibu -- was known to sport a diamond-encrusted gold ring and Cartier watch and dress in $1,500 suits; he could often be found motoring around Los Angeles in his Mercedes or in one of his Rolls Royces. By May 21, the day Hughes, 44, was found dead, he had become both wildly rich and internationally famous for building a garden-variety pyramid operation into a public corporation with $1.79 billion in sales.

Creating a high-profile brand seems to have been the key. For the few remaining humans who don't know, Herbalife sells health and dietary supplements primarily through distributors who pitch their friends and neighbors, much in the same way Mary Kay sells cosmetics.

But unlike Amway, the privately held titan in the field commonly known as multilevel marketing, Herbalife is accountable to shareholders and had a highly recognizable figure at its helm. "The growth of the sales force was cultic," says William Crookston, a professor of entrepreneurship at the University of Southern California's Marshall School of Business Administration. "It became very charismatic and grew very quickly." As in other pyramids, Herbalife customers have incentive to become distributors, which allows them to take advantage of additional discounts offered by the company.

The story of its flamboyant leader was the flypaper that helped attract new business. Not surprisingly, Hughes cast the creation of Herbalife as nothing less than a spiritual awakening. A product of divorce who dropped out of school in ninth grade in Los Angeles, he turned to drugs in his early teens. By 16, he was sent to Cedu, a residential school for delinquent youth in Running Springs, Calif. Here, he apparently discovered his gift while selling hundreds of raffle tickets to raise money for the school.

When Hughes was 19, his mother died. He claimed she ingested a toxic drug meant to reduce her weight.

Sparked by a quest to discover safe, herbal dieting aids for others, he began selling various brands out of his car trunk. In 1980, at age 23, he devised his own line.

By 1985, the company reportedly took in $500 million per year. Distributors wore buttons reading "Lose weight now, ask me how."

Along with wildfire success, Herbalife courted its share of regulatory nightmares. Some health experts questioned the effectiveness of the company's nutritional supplements; Herbalife claimed to increase energy and cure a range of illnesses from venereal disease to bee stings. California's state health department determined that Herbalife's self-professed "natural lift" was deceiving. The reason: "Defendants misleadingly fail to disclose that one of the product's active ingredients is caffeine."

Hughes also defended himself in front of a panel of U.S. senators. The fledgling mogul cited an unusual strategy. "If they're such experts," he said, "then why are they so fat? I've lost 16 pounds in the last few years."

In 1986, Herbalife settled with the state of California, paying $850,000 in fines and agreeing to remove two products from the market: Tang Quei Plus for menstrual cramps, and K-8, which was said to relieve stress. That very same year -- in a feat that may have been far more miraculous than any of his products -- Hughes successfully took his company public.

The move had two benefits. For distributors, who are galvanized at giant rallies that resemble fundamentalist tent shows, Herbalife's NASDAQ posting gave a much-needed stamp of legitimacy. Ironically, the tactic also sweetened the pot for investors.

"Everybody criticized Mark Hughes because of his showy lifestyle," says Richard Todaro, a portfolio manager at Kennedy Capital in St. Louis. "But from a distributor standpoint, that's what motivated them."

In other words, the more Herbalife came to resemble a creepy cult with a garish Shaun Cassidy look-alike at its helm, the larger its revenues grew. At the time, its sales force was estimated to have 700,000 members in the United States, Canada, Britain and Australia.

More surprisingly, Hughes' guru-like status also provided additional financial stability. Multilevel marketing ventures, by their very nature, are fragile structures; they depended heavily on woefully human sales teams. Hughes' visibility insured a steady supply of new converts. He was the Martha Stewart of herbal dieting.

And when the Internet emerged, Hughes' messianic luster sparkled amid infinite bits in a way no banner ad could. Though Herbalife's distributors continued to sell their wares the old-fashioned way (by foisting the stuff on their friends and neighbors), Web customers could go to the company's new site, enter their distributor's PIN number and make purchases on their own.

Unleashed by the Web, Herbalife quickly developed a foolproof way to track commissions and reduce advertising costs. The company's online selling method has other benefits: Since buyers have the option to pay distributors directly, it provides an online buying experience for customers afraid to release their credit card information over the Web. Herbalife also instituted a fairly innovative program of customer-service chat rooms, post-sales service and sales follow-up.

In the wake of its founder's death, Herbalife remains something of a Web success story. "This company is very advanced in its use of electronic commerce," says professor Crookston.

"They recognized that, even on the Internet, you're not going to get rid of human contact," explains Crookston.

Clearly multilevel marketing, whether online or street-level brick-and-mortar, is not for everyone. Some will always consider Mark Hughes -- who at the time of his death was fighting neighbors over his plans to build a 45,000-square-foot Mediterranean villa in Benedict Canyon -- the punch line to a bad joke about natural laxatives. (A joke, by the way, I've yet to hear.)

Still, there is a nutritious lesson in Herbalife's transition to the Web: Traditional marketing methods will not necessarily rule online. A glutted new medium demands fresh ways of getting customers' attention.

Two of Mark Hughes' tenets seem particularly relevant to the Internet: 1) Know your audience, and 2) First impressions are everything.

It's worth noting that even in recent months, as Hughes tried to prop up his company's ailing stock with a $510 million buyout offer, net sales for the 2000 first quarter (after distributor allowances) increased 7.8 percent to $244 million from $226 million in the same quarter a year ago. After it failed in April, some analysts were recommending Herbalife stock as a good, cheap buy. At Friday's market close, it was listed at 8 3/8.

Herbalife seems to understand that as long as it presents a confident face to its main audience -- its distributors -- it can weather plenty of risks, even ongoing legal troubles. Attorney Thomas Littler of the Phoenix firm Warnicke & Littler, who successfully sued Herbalife in 1998 on behalf of a former distributor for breach of contract, says he has three other lawsuits pending against the company. "I can only address the facts," says Littler. "I have to be very cautious because the company has shown themselves to be very aggressive in litigation."

Herbalife officials were unavailable for comment, according to a company representative.

Alec Foege

Alec Foege, a writer in New York, is the author of The Empire God Built: Inside Pat Robertson's Media Machine.

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