Herbalife SWOT Analysis

At the time of its founding in the early 1980s, Herbalife emerged in a highly opportunistic environment.  The general population was becoming more and more health-conscious, and dieting was becoming a commonplace activity.  Also, company founder Mark Hughes and his original group of distributors provided a strong internal base that factored into Herbalife’s explosive growth.  With the slogan “Lose Weight Now, Ask Me How,” Herbalife saved money on expensive advertising campaigns and used distributors that spread the news about Herbalife via word-of-mouth, selling products from the trunks of their cars.

Had a SWOT analysis of Herbalife been performed in the late 1980s, the overall results would reveal a healthy, vibrant company operating within a growing market.  However, much has changed since Herbalife’s early success.  The current SWOT analysis reveals a much bleaker picture for the company, as seen below:

STRENGTHS

The company has an extensive supply chain of Herbalife distributors.  The company has over 2.7 million independent distributors worldwide, and these distributors are currently operating in 88 different countries.  In addition, Herbalife’s cash flows have continued to increase year over year, from $259 million in 2011 to $334 million in 2012.  The company has also made large share repurchases of about $557 million, and it has increased the total dividends paid from $85 million in 2011 to $135 million in 2012.  Most companies would not increase their dividend payments unless they believe that they will be able to sustain these amounts in future periods.  Thus, an increase in dividend payments should be a positive signal for investors. 

Finally, the Herbalife brand name holds a lot of significance to customers.  Regardless of the negative publicity over the past year, the company’s loyal customers have continued to purchase Herbalife products, and they will not be easily convinced to switch to new brands.  Once customers are hooked on a certain brand of nutritional shakes, it is difficult to persuade them to try different brands. 

WEAKNESSES

The main weakness that Herbalife faces is the overwhelmingly negative publicity that it has received from its stock scandals.  Bill Ackman seems to be intent on ruining Herbalife’s reputation.  Also, the allegations that Herbalife is nothing more than a pyramid scheme have greatly demoralized their network of independent distributors.  These distributors are an essential part of their supply chain, but there has been a reduction in the number of new distributors during the past year.  There are less people interested in becoming an Herbalife distributor, and it is largely due to the negative publicity from Ackman’s major short last December.

OPPORTUNITIES

Nutritional shakes are now considered a commodity product, since many companies are competing on price for market share.  The industry has entered a shake-out phase, which has left many companies crippled and in need of financial support.  Thus, Herbalife can take advantage of these weaker companies, and begin further expansion by acquiring them.  Herbalife has a well maintained cash balance, so Herbalife has the means to acquire these weaker companies.

In addition, since the industry is highly fragmented, Herbalife faces less competition from other nutritional shake producers.  Herbalife has one of the strongest brand images in the industry, and the company can use that reputation to gain a leg up over competitors. 

THREATS

The threats that Herbalife faces are numerous.  A struggling economy has drained consumers of discretionary income, and nutritional shakes are not often a priority purchase.  In addition, Herbalife is still reeling from a recent product recall, after milk proteins were found in a line of shake mix labeled “non-dairy.”  Although their brand reputation is the strongest in the industry, trust in Herbalife is waning.

Also, the largest threat that the company currently deals with is that of a decreasing stock price.  Hedge fund investors such as Ackman and Einhorn have driven prices down from a high of $73 to a current price of $37.  Company executives have had to focus on coping with these fluctuations in stock price, rather than operations and expansion.  Thus, as long as the company is publically traded, there is still the threat of decreasing stock prices.

Overall, Herbalife faces a much harsher competitive environment than was the case several decades ago.  In addition, Herbalife’s reputation has fallen from grace due to the negative stock market publicity as well as their recent recall.  However, the company does have a healthy cash balance, which can be used to acquire other companies within the industry.  These acquisitions will help Herbalife grow and improve efficiency of operations, and expand their product offerings. All hope is not lost for Herbalife if they make the right decisions this next year!