the battle, aka the "fraud thesis," that has engulfed Herbalife (
) and, collaterally, other "multi-level marketing" -MLM-
enterprises, such as Nu Skin (
) and Usana (
), devaluing their stocks and raising the specter of new government
regulation. Avon entered this war zone by
from the Direct Selling Association (DSA). Avon co-founded the DSA,
the official voice and chief lobbyist of "direct selling." But
today's DSA bears little resemblance to the DSA of Avon's history.
It is now a cauldron of controversy, not credibility. It is
dominated by enterprises like Herbalife and Nu Skin that never
operated as conventional direct sellers. Avon appears to be
distancing itself from the legally-challenged MLM-world of
"unlimited" incomes, cult persuasion, and "infinite" downlines, the
raw material of consumer complaints of "unfair and deceptive."
Is Avon really different from Herbalife? Or, is the public
resignation from DSA another example of "re-direction" that MLMs
are famous for, in this case to distract consumers and investors
from looking closely at
, as they are now scrutinizing Herbalife and its DSA
For those who don't connect the "fraud thesis" to Avon, it is
important to know that the recent charges against Herbalife are
only the latest chapter in a 3-decades long struggle by consumers
against "multi-level marketing," the model Avon employs. The charge
that MLM is
"unfair and deceptive" has roiled Main Street but, until recently,
was blithely ignored by Wall Street. Without the official status of
a consumer protection movement, the defensive war against MLM has
been fought privately among friends, within families and at
workplaces where MLMs insinuated and recruited; it flared in class
action lawsuits in the 90s and 2000s and was publicly validated in
SEC and FTC prosecutions stretching back to the mid-70s. Books were
written. MLM exposé websites appeared. Some news media
investigations were aired. Still, Wall Street ignored it. Then, in
December 2012, Pershing Capital brought a megaphone to the
controversy the likes of which had never been seen, a billion
dollar short against Herbalife. This time Wall Street took note,
and MLM gained new attention.
In October 2013, the
International Coalition of Consumer Advocates
, an informal network of academics, ex-regulators, writers,
consumer-victims, consumer activists, whistle-blowers, and
attorneys from various countries, published a comprehensive
document making the case of pervasive MLM deception and unfairness
and the need for the FTC to investigate and regulate "MLM."
Avon largely escaped this widening controversy. But no more.
Seeing the advancing inquiries, Avon has broken ranks with hundreds
of DSA-MLMs, including Herbalife and Amway, citing disagreements
over the DSA's "code of ethics," supposedly the Book of Mormon for
MLMs. Avon appears to be distancing itself on principles and issues
that are the red meat of government regulation.
Avon Goes MLM
From my perspective as a consumer educator and advocate that has
been studying and writing about multi-level marketing since the
late 1990s, I can attest to the - previously - exalted and exempted
status Avon occupied. During my early studies, I separated Avon
from inquiries about MLM's fundamental deception. Avon's history as
a true direct selling business long pre-dates the rise of MLM.
Herbalife, on the other hand, hatched out of its egg as an MLM, as
did Nu Skin and Usana.
But, in 2005, as its sales were lagging, investor unrest was
mounting, and while MLMs were booming, Avon "went MLM," at least
partially. As part of a broad turn-around strategy, Avon announced
a new "Sales Leadership" program, described as "
a multi-level compensation program which gives Representatives
the opportunity to obtain earnings from commissions based on sales
made by Representatives they have recruited and trained, as well as
from their own…"
Within a few years, the hallmark MLM emphasis on financially
rewarding salespeople to recruit still more salespeople,
, was full blown at Avon. In the largest ad buy in Avon's history
and delivered to the largest American television audience of the
year, Avon's 2009 Super Bowl television commercial featured, not
its cosmetics, but its MLM
. "To find out more about the "opportunity" the Avon ad advised,
"contact an Avon representative."
In the midst of the Great Recession, while the cosmetics
industry was contracting along with national job opportunities, and
while Avon's own revenue was declining, Avon used the Super Bowl to
claim it could solve consumers'
problems. Avon had truly entered the world of Amway, which for
years had been claiming to offer "the greatest income opportunity
in the world" that was "recession proof." That Amway "opportunity"
turns out to be the opportunity to recruit recruiters who gain the
opportunity to recruit recruiters, etc., with money flowing from
last to first.
Q-1 2009 earnings press release
, Avon CEO Andrea Jung who had masterminded the new MLM strategy
"We are also aggressively promoting our Representative earnings
opportunity to a wider audience. The early strength of this new
recruiting effort reflects the growing relevance of the Avon
She reported an advertising expense of $78 million in the first
with a shift toward Representative recruitment advertising from
" In 2009, Avon also
to lure sales reps, aired on the Food Network, Hallmark, ABC and
From Retailing to Recruiting
Attracting little scrutiny or even notice from Wall Street, Avon
appeared to have officially shifted from reliance on
retail market-driven revenue
to sales-rep recruiting. Analysts apparently saw no contradiction
in Avon's adding new salespeople and selling them inventory, even
while the overall market for Avon products was shrinking.
A 2009 article in USA Today
, chronicled the new Avon strategy, ""Right now, our direct-selling
opportunity is really the No. 1 product that we have to sell," says
Geralyn Breig, president of Avon North America. With that in mind,
Avon this year launched its most ambitious recruitment campaign and
saw its U.S. sales force grow to more than 680,000 through March,
its largest ever, Breig says."
At the end of 2009 in its 10-K, Avon reported, "
Total revenue for 2009 was negatively impacted by the continued
recessionary pressure, as a lower average order received from
Representatives more than offset an increase in Active
It's important to pause here and note that Avon announced to the
world that its "No. 1 product" was no longer lipstick. It was an
. And, Avon candidly informed shareholders that it intended to
compensate for losses from its old "No. 1 product," cosmetics, by
selling more of its new "No. 1 product," a business opportunity,
which involved advertising and marketing to
consumers to become Avon salespeople
. The strategy was helping, Avon reported, except that the new
investors in the business opportunity were not buying or selling
enough of the
#1, per capita, in response to Avon solicitations for the
#1. In 2009, the number of active representatives at the end of
2009 was 3% more in the USA than the year before while revenue was
Wall Street apparently saw no problem with Avon's making up for
lagging demand for its product by recruiting more salespeople.
Imagine car companies announcing the selling of many new franchise
dealerships during the Recession, and informing investors that more
dealers will magically increase sales - despite the economy and car
market. This is because every new dealer will buy some cars and
maybe sell some too! In MLM the salespeople (dealers) can be
counted on to
buy the goods themselves
as part of the "business opportunity." And, because the Avon
"dealers" are independent contractors, whatever losses they might
incur after investing in Avon's shrinking market are off Avon's
books while the revenue they generate remains.
No special scrutiny followed, despite the fundamental shift and
despite Avon's lack of experience in executing MLM. Most telling,
no discussion at all occurred about the financial plight of
hundreds of thousands of women who were recruited to "offset" the
sagging market demand.
MLM Avon - Incompetent, Declining, but Legal and
earlier Seeking Alpha article
, I recounted some of Avon's business model history and addressed
the increasingly obvious fact, that though Avon converted to the
MLM faith in 2005 at a time of corporate crisis, Avon does not
MLM religiously. It is lax and it is failing. The article described
Avon's disastrous acquisition and then sell-off of the jewelry
product MLM, Silpada. It noted Avon's ruinous experience in China,
routed by Amway, which had cleverly obtained the endorsement of
Harvard University to build credibility in China, while Avon faced
disgrace in bribery charges. On top of all that, Avon's MLM sales
overall since its 2005 adoption of the MLM recruiting model, though
it did show a short spike at the deepest point of the
Now, Avon is publicly posturing that it is a
model MLM company
(better than unnamed others), even if its economic performance is
flagging. Avon's DSA resignation letter plainly asserts that its
version of the MLM model is legal and ethical, while implying
others may not be. In particular it refers to its limit of
three-levels of downline-based income in contrast to others that
offer the illusion of "unlimited" income based on the myth of an
"infinite" recruiting downline.
Herbalife Now, Avon Next?
current crisis related to its MLM structure and practices, it is
appropriate now to question whether Avon's MLM methods are
different and if so, how? With a withering attack being waged
against Herbalife and other MLMs, Avon shareholders ought to ask
whether Avon could be next.
The main claims against Herbalife include:
business model, existentially dependent on a constant infusion of
capital from new recruits, rather than from sustainable
market-based end-user sales (pyramid).
income claims that lure unwitting consumers into a business that
is not viable, without pyramid recruiting.
"business opportunity" solicitation campaign that benefits the
company and top recruiters but results in virtually all others
Targeting minority populations
and inflicting harm on the more vulnerable.
There are also charges regarding the use of cultism leading to
greater losses to believers and orchestrating bogus affiliated
schemes, e.g., sales leads and nutrition clubs, causing still
greater losses to the participants.
Unethical Industry Code of Ethics
Citing loss of faith in the DSA "code of ethics," Avon's
resignation indicates a major change of mind. In joining with
fellow members of the DSA to oppose the FTC's plan to require more
disclosures from MLM companies,
Avon wrote to the FTC in 2006
"Avon fully complies with the DSA Code of Ethics and will take
appropriate measures if any Representative violates the DSA Code.
The DSA Code provides a self-regulatory standard, higher than that
required by law and of non-DSA member companies, and as such, it
clearly and unequivocally distinguishes the DSA member
In the 2014 resignation letter, Avon does not cite specifically
objects to the Code, though the Code has been challenged by others
for its evasive definition of a pyramid scheme. In June 2013,
I myself wrote directly to the DSA
regarding the code's wording and meaning after the DSA cited the
"code of ethics" to defend DSA member, Herbalife, against pyramid
allegations. I referred specifically to the Code's Section 6,
"Pyramid Schemes," which reads:
For the purpose of this Code, pyramid or endless chain
schemes shall be considered consumer transactions actionable
under this Code. The Code Administrator shall determine whether
such pyramid or endless chain schemes constitute a violation of
this Code in accordance with applicable federal, state and/or
local law or regulation.
In other words, the DSA does not, apparently, define a pyramid
or endless chain scheme, as an
unfair and deceptive trade practice but merely a "consumer
transaction" of which the DSA's internal "Code Administrator" would
judge its legality.
At the time of my writing in 2013, the code also further
elaborated on the definition of a pyramid scheme this way:
"The definition of an "illegal pyramid" is based upon
existing standards of law as reflected in In the matter of
Amway, 93 FTC 618 (1979) and the anti-pyramid laws of Kentucky,
Louisiana, Montana, Oklahoma, and Texas. In accordance with
these laws, member companies shall remunerate direct sellers
primarily on the basis of sales of products, including
services, purchased by any person for actual use or
consumption. Such remuneration may include compensation based
on sales to individual direct sellers for their own actual use
I pointed out that, according to the Code, the DSA arbitrarily
which state laws
its members need to comply with, notably five states that changed
their laws to comply with the DSA lobbying. (
The DSA website's recently published version has deleted the
names of the five states
). By extension, the Code condones or ignores violation of other
states' laws, such as the "endless chain" statute of California,
from and much stricter than the laws in the DSA-named states.
Similarly, the Code ignores the definition of a pyramid scheme used
by the Federal Trade Commission. Those state laws, federal court
decisions and FTC prosecutions define retail sales as those sourced
the closed recruitment chain.
(click to enlarge)
The Code adopts its own
definition of a pyramid scheme, contradicting some state laws and
the definition of a pyramid scheme used by the FTC. Note the DSA's
take on "where the money comes from" for recruiter rewards. DSA
says it can come just from inside the chain, the closed network of
new recruits. FTC says it must come from the open, external
marketplace - end-users. Here's the definition the FTC used in its
prosecution of the DSA member, Equinox.
"Pyramid scheme" means a sales scheme, Ponzi scheme, chain
marketing scheme, or other marketing plan or program in which
participants pay money or valuable consideration to the company
in return for which they receive: (1) the right to sell a
product or service; and (2) the right to receive in return for
recruiting other participants into the program rewards which
are unrelated to sale of products or services to ultimate
users. For the purposes of this definition, "sale of products
or services to ultimate users" does not include sales to other
participants or recruits in the multi-level marketing program
or to participants' own accounts.
Avon's decision to leave the DSA on ethics grounds and to nail
its complaints on DSA's front door might have been affected by this
conflict between the DSA and the FTC about the very meaning and
definition of a pyramid scheme. It might also have been driven by
several DSA member companies such as Trek Alliance and Equinox
being prosecuted as pyramid frauds by the FTC. The action against
the Code might be explained by the DSA-member MLM, Your Travel
Biz.com, (YTB) having been prosecuted as a
"gigantic pyramid scheme" by the California AG
, under that state's anti-"endless chain" statute, which the DSA
Code did not include.
Or it might also be related to the recent winner of the DSA
"Partnership Award," attorney Kevin Grimes, who was
awarded by the DSA
for his work in advising and defending DSA members and other
multi-level marketing companies against the FTC. Grimes and his law
now being sued
by a federal court-appointed Receiver for their
publicized support of Zeek Rewards
, which was shut down by the SEC as a large-scale Ponzi scheme.
DSA's "ethics code" may be a hypocritical sham - its wording and
the actions of some DSA members show that it is - yet the question
remains whether Avon itself operates at a higher standard.
Disclosures, Transparency and Due Diligence.
The DSA Code includes a requirement that earnings
representations be based on a substantiated record. What about
For the consumer or the shareholder who might want to know the
historical income averages of the millions of women who have
invested in Avon's Business Opportunity, here is all they have
available in the public record, and this is not readily found on
the Avon website,
The 2013 Earnings of a typical Avon Leadership Representative
after one year, including commissions, bonuses and profit on
personal sales are: 48% earn $0-$7,999, 11% earn $8,000-$9,999,
19.2% earn $10,000-$14,999, 16.5% earn $15,000-$29,999, 5.4% earn
$30,000 and above."
Does this meet the standard of a representations based on a
substantiated record? Note that it does not offer a median or a
mean average, but only a wide range such as 0 to about $7,999. How
many earned zero? Note also that it limits the data to those "after
one year." What about all those who did not last a full year? At
Herbalife, that group constituted 80% of the entire sales force,
according to its 2005 10-K.
The most glaring omission is the one that ignited the Herbalife
bonfire. Avon offers no data at all on the income of the
, the great majority of the sales force. How much are they making,
on average? How long do they remain with Avon, on average? How much
do they buy and how much of what they do buy is ever retailed?
These questions are central to the Herbalife fraud thesis. No one
from the financial community has yet raised them with Avon.
Payment Concentration/Money Transfer
Other telling omissions are breakouts of payment averages for
each of the four "Leadership" levels. At Herbalife, this
information is disclosed and its
shows that 66% of all commission payments
was transferred to the top 1% of the Leaders. This concentration is
one key factor that makes profitable income for the bottom 99%
virtually impossible. At Nu Skin, it's 82%! How much are Avon's
payments to "Leaders" concentrated at the top? And, how long does
the average Leaders remain with Avon, on average? At Herbalife over
half disappear within a year. Without this information, how do
shareholders assess Avon's success at selling what it now calls its
"No. 1 product"? How does Avon verify it is offering an economic
benefit to the millions of women it is soliciting to invest?
Churning and Saturation
For Wall Street investors and prospective consumer investors in
Avon's "business opportunity," a crucial factor of consideration is
saturation/churn rates. How many consumers - cumulatively - have
been enrolled, the key factor affecting
It turns out that, for providing recruiting and other channel
information to shareholders and consumers, Avon is
than some MLMs are that are under the gun right now for secrecy,
opaqueness or obfuscation. Avon's omissions may or may not indicate
ethics or legality violations, but they clearly inhibit due
diligence for shareholders and consumers, and they raise the
prospect that a day of reckoning for more disclosure by Avon is
Recruiters and Reps
Herbalife first found itself in the spotlight when it was
pointed out that it had ceased disclosing the sectors of its
"non-Leaders" according to their sales orientation - discount
buyer, small retailer, or potential Supervisor. It had also stopped
disclosing the "turnover" rate of its non-Leaders, last reported in
2005 at 90%.
Avon, on the other hand, has
disclosed the relative sizes of its Leadership (recruiter) sectors
and its non-Leaders (non-recruiting Sales Representatives). It has
never disclosed how much of total revenue each of the two sectors,
the Recruiters and the Reps, accounts for. It has never revealed
how much is "self-consumed" and how much is retailed, the questions
that are causing Herbalife's very legality and future existence to
Avon has even stopped disclosing how large its USA sales force
The last hard number disclosed of end-of-year "active" distributors
in the USA was in the 2008 10-K. After that, Avon only offered a
percentage of annual "change," positive or negative, from the year
before, for "North America" without providing an actual number.
Using earlier disclosures of the USA sales force and then computing
the percentages of increases or decreases, in the eight years since
Avon converted to MLM, North American revenue has dropped 43% while
its USA sales force has declined 24%. The data seem to show Avon's
market-based decline with intensified recruiting has been
effective. If recruiting had dropped as much as revenue has, the
losses would have likely been much greater. Good for Avon, but what
about the countless sales Reps that were churned during those
Income Opportunity, or Not?
The question facing
is what about the economic fate of those consumers investing in its
"business opportunity"? Is Herbalife profiting at their expense?
The same question can be posed to
regarding consumers it is using as "offsets" to lagging demand. Did
they join with enough information to make a valid investment
decision? Was the business proposition fair? Was income deception
employed to bring them in? And, once they are in, does the
compensation plan give them a fighting chance? How many have ever
made a net profit? Most important, how many were recruited
during those last 8 years and how many quit?
Astute readers may have noticed that the 2009 total of active
Avon distributors is 471,000, but Geralyn Breig, president of Avon
North America at that time, told
that Avon's U.S. sales force grew to more than 680,000 through
March of that year. How to account for the huge discrepancy? It may
be that Ms. Breig (who no longer works for Avon) was counting
recruits, those active and non-active, or did 207,000 quit or get
terminated by year-end? The wide variance reveals how important
about recruiting figures is, if selling the "business opportunity"
really is the "No. 1 product." The market for Avon sales reps is
clearly more limited than the market for cosmetics is, and if
millions of women already tried and failed at Avon's "business
opportunity," the market is further diminished for each new
Endless Chains and Exponential Expansion
Avon has touted its three-level downline plan, as a beacon of
legality and ethics, however, unlike Herbalife's, Avon's plan has
not been subjected to a close review. A few points are worth
considering for both consumers and shareholders.
Policies and Procedures
shows payment bonus overrides based on purchases and sales of a
maximum of three generations of recruits and the plan offers
escalating rewards to four levels of ascending Leadership roles,
Senior Executive Unit Leader, Executive Unit Leaders, Advance Unit
Leaders, Unit Leaders. Below those four levels are the non-Leader
Representatives who are single-level direct sellers.
The depth of each new recruit's
downline may be limited, as Avon has publicized, but
sales chain is unbounded by time or physical space. Each
authorized and incentivized to extend the chain,
sales chain is
Policies and Procedures
explains that each new "Leader" is authorized to extend the chain
without regard for diminishing markets, the number of existing or
previous Representatives in any area. Avon itself sits at the
absolute top of a chain that never stops "extending." Every dollar
from the "last ones in" flows directly to Avon.
Does the latest recruit really have the same chance as those
from the start? Does the market "opportunity"
diminish no matter how many Representative join up?
Without study, Avon's three-level structure would seem to mean
that a Leader (only Leaders can recruit) can recruit another Leader
(1st generation) who recruits another one (2nd generation) who
recruits one more (3rd generation). That's the end of the
"downline," for the first recruiter who gains overrides on sales
and purchases of all those three levels of recruits below her - a
linear and limited plan, simple and straightforward.
There are a few catches, however, and some
factors. To become a Leader requires an additional payment to Avon,
approximately $60. But, crucially, no Leaders in the above example
earn anything at all from any other Leaders until they themselves
have recruited 5 Representatives each. Each one has a maximum of
six months to find her five. If the five are not found, the Leader
status and any recruits the Leader did succeed in getting are taken
away. From Avon's
Policies and Procedures
"If a new Leadership Representative has less than 5 recruits
after the first 13 campaigns, she will be removed from the
Leadership Opportunity and will lose her Downline."
After the five are established, they must be maintained -
every two weeks
, which is the duration of a "campaign," - along with several
hundred in personal sales and over a thousand in group sales. To
ascend the Leadership ladder involves escalating
requirements including recruiting others who must themselves meet
recruiting requirements. If status is lost, benefits flow up the
chain. Avon has touted the feature that each level must maintain
personal sales quotas. Those sales requirements are additional to
To get a sense of the
injected into the three-generation system, a Senior Executive
Leader must have recruited at least
20 active Representatives
. Nine of them must be Unit Leaders, meaning they
each have at least 5 active recruits
in their own downlines. Of the nine Unit Leaders, 2 must be
Executive Leaders, who each must have
20 active recruits
, seven of whom must be Unit Leaders who must each have at least
5 active recruits
So, while Avon's plan appears linear and limited, in reality it
is explosively "leveraged" (5x5x5, etc.). Some of Avon's
are Leaders with
thousands of recruits
in their downlines. How many others could actually duplicate
new Avon Representatives are encouraged to invest in the recruiting
program as soon as they sign up as Leaders, putting them on a
treadmill of recruiting, yet, these consumer investments of time,
money and social capital, which always accrue to Avon, enjoy no
legal protection. As noted, failure to gain or to maintain the
required recruits in the required time frames can lead to total
loss with accrued equity transferred to the upper levels. The
entire distributorship itself is not protected by territory.
Accumulated good will, no matter how long it has been developed,
has no legal protection. As the Avon
Sales Rep Contract
"Either party may terminate this Contract, with or without
cause, at any time
Fairness, Deception and Minorities
Though the potential for income as an Avon Leader is
"exponential," just as it is in all other MLMs, unless some
historical data are disclosed on "churn" rates, the potential
"expansion" opportunity could be illusory. Currently the vital
factors of market limits and saturation, historical success rates
of Representatives or current average incomes remain undisclosed
and unavailable also to shareholders.
Herbalife holds itself out as an advocate for the
, which is now over 60% of Herbalife's sales force in the USA. Avon
publicly claims to be an advocate for
. Avon calls itself "
company for women." Women are likely near 100% of Avon's sales
force. On its website Avon tells of the
, a global philanthropy focused on breast cancer research and
domestic and gender violence.
Author and market researcher Christine Richard spent a year or
more examining Herbalife's claim to economically develop the
with Herbalife "nutrition clubs." She found Herbalife's economic
for Latinos to be a financial trap
. Aggregate hard data on Herbalife compensation show a 99% loss
rate. Meanwhile, Herbalife engages in much publicized charitable
giving in the Latino community.
Without diminishing Avon's charity programs, the time may be
near when Avon is asked to account for its
economic development claims
. How many women have gained financially? How many have lost? Does
the business opportunity offer a viable income opportunity, based
on sales, not just recruiting of recruiters? Is there data beyond
selected "testimonials" that could answer those questions?
Shareholders may one day ring Avon's doorbell to ask for the
same kinds of disclosures that Herbalife is now under pressure to
may also ask Avon, not for charity donations, but for a net
accounting of their own investments in Avon's MLM "business
The author has no positions in any stocks mentioned, and no plans
to initiate any positions within the next 72 hours. The author
wrote this article themselves, and it expresses their own opinions.
The author is not receiving compensation for it. The author has no
business relationship with any company whose stock is mentioned in
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