
What Unsustainable Growth Looks Like: Herbalife, Groupon, and More - matm
http://data.heapanalytics.com/what-unsustainable-growth-looks-like-herbalife-groupon/
======
tapp
"One of the most important characteristics of a successful business is that
it's growing."

I hope this doesn't come across as nitpicking, but the lead sentence of the
article is incorrect. It should be:

One of the most important characteristics of a successful _STARTUP_ is that
it's growing.

Businesses which successfully serve their owners, employees, customers and
larger surrounding community, can easily be steady-state.

I realize HN is startup-focused, but I think in the interest of productive
conversation it's important to make the distinction and use precise terms.

~~~
jbooth
If your employees expect raises greater than inflation (like say 3%), or
you're giving out any kind of healthcare benefits (that cost grows 10%
annually on avg), or your rent goes up, etc etc, then you need to be growing
in order to be steady-state.

Costs always increase -- staying the same size costs more next year.

~~~
count
Costs for supplies should decrease, and why would employees expect raises
greater than inflation if the company is not growing or doing anything new?
Look at a McDonalds franchise, for a good example of steady state.

~~~
jbooth
I don't see why costs for supplies should decrease, necessarily, even in real
terms. I guess you can have consistent churn at a brick & mortar business to
keep paying minimum wage by replacing people with younger people as they
leave.

But that setup only applies if you're paying at the bottom of the scale and
not giving out benefits. Bennies have been increasing by much more than
inflation, and the type of jobs giving bennies typically expect a 4% raise,
minimum, if you're doing acceptably at it.

------
IvyMike
A little off-topic, but Rob Cockerham's investigation into Herbalife is one of
the best pieces of citizen journalism I've seen.

[http://www.cockeyed.com/workfromhome/workfromhome.html](http://www.cockeyed.com/workfromhome/workfromhome.html)

~~~
MartinCron
That was from 2002. Pretty heartbreaking to see that this has been going on
for so long.

~~~
carrotleads
Well a new one was recently started promising to give ordinary folks aka
Entrepreneurs, Facebook and Apple like "exits". Its imaginatively named
"neurs.com" .

After some research I had put my comments under this review of the neurs setup
and how it seems to work. [http://avoidonlinemarketingscams.com/what-is-neurs-
is-it-the...](http://avoidonlinemarketingscams.com/what-is-neurs-is-it-the-
next-big-money-maker-for-affiliates)

Now I play in the same space as my USP is to connect warm leads to companies
via incentives. Looking at their videos they claim to connect Entrepreneurs
with providers( leads in my world). So I did my research and found they have
atleast a few 100k's of pageviews in the past few months. I am trying to
decode their marketing tactics to figure out the do's and don'ts. Would like
to hear what others think about it.

------
jobu
The author's analogy to fried waffles reminded me of a real-world example from
10 years ago: Krispy Kreme Doughnuts
([http://www.nytimes.com/2004/11/23/business/23doughnut.html](http://www.nytimes.com/2004/11/23/business/23doughnut.html))

In the early 2000s I was living in Minnesota during the much-hyped arrival of
Krispy Kreme. There were long lines at new stores and lots of doughnuts in the
office every day. The hype prompted new franchises and an overabundance of
doughnut shops, but unfortunately the demand dropped as the novelty wore off,
and they ended up closing several stores and production facilities in the
area.

Obviously Krispy Kreme weathered its over-expansion and is doing well today. I
think the question for Groupon and Herbalife is if they have a business plan
(and the financial reserves) to make the shift from exponential growth to more
measured success.

~~~
Einstalbert
There is actually a local chain in Southern California called Bruxie that
sells waffles after failing to impress high-end restaurants with their
product. It is very popular and placed strategically around hip places, e.g.
colleges. I was tied heavily with its inception and I know just how
unsustainable the owner wants it to be. At this point, he only makes money by
opening stores. He fully intends to Krispie Kreme his way through the state or
country, if he can, and then let it collapse. It happened to KK, it happened
to ToGos, it'll happen again.

~~~
kevinwang
Interesting... I always thought Bruxie was a pretty popular chain. Why do you
think the growth is unsustainable? Are the amount of customers decreasing at
each existing chain?

------
powera
I think it's worth noting this article in any discussion about Herbalife:
[http://www.nytimes.com/2014/03/10/business/staking-1-billion...](http://www.nytimes.com/2014/03/10/business/staking-1-billion-
that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html?_r=0)

(summary: lots of people have lots of money invested in whether Herbalife is a
pyramid scheme or not, and are lobbying hard on that.)

~~~
digitalengineer
Exactly. I'm no Herbalife fan but this reads like a 'let's write down the
stock' article.

------
paul_f
The article clearly makes the case that tracking churn is critical to
analyzing the overall health of a business.

And the reason why churn is so critical for cash-strapped startups is that new
customers are so expensive. In many cases it is an order of magnitude more
expensive to sell to new customers than existing customers.

------
berkay
I do appreciate the analysis and the message of the post that the total sales
can mask problems, however neither of the examples are failures. Herbalife may
expand to other products instead of additional companies. Amway, probably the
most successful implementer of Herbalife's multi level marketing scheme, is
over 50 years old and worth $11+ billion. Even the fictitious waffle shop can
adjust by selling other products. In short, creating a large distribution
chain and reaching to many customers is tremendously valuable. The company can
leverage that base and move to a sustainable model. If you're as successful as
Groupon, you'll have plenty of runway to try different things.

Even the ficticious waffel

------
stoev
This reminds me of FBs ad business - they keep introducing new ad spaces,
expanding their offering to more platforms, introducing logout ads, video ads,
scrollable install ads, an ad platform, etc. With all of that they are just
masking the fact that a large portion of their advertisers stop using them and
that most of their products start losing popularity relatively quickly.

~~~
jonnathanson
_"...a large portion of their advertisers stop using them and that most of
their products start losing popularity relatively quickly."_

Facebook recently posted a 72% year-over-year gain in Q1 revenue, is stealing
share of the online ad market from Google at a slow but increasing rate, and
is growing mobile ad revenue by 30% year-over-year.[1]

It's not doing that just by introducing new ad space and new ad formats. It's
not doing that by bleeding out existing advertisers. As much as we might not
want to admit it, Facebook is becoming a pretty compelling advertising
platform. This was not always the case. But the company's ad platform is
maturing significantly. It's got a long ways to go, and it's not perfect by
any means. But there's a lot of potential yet to be tapped, and by all
accounts, the company is making progress in tapping it.

News of Facebook's supposedly declining popularity is also premature and
exaggerated.

[1][http://online.wsj.com/news/articles/SB1000142405270230338000...](http://online.wsj.com/news/articles/SB10001424052702303380004579519623221180410?mg=reno64-wsj)

~~~
stoev
"It's not doing that just by introducing new ad space"

Maybe, but just a bit over a year ago they used to have two ads on the right
hand side of their desktop version. Now they have seven ads in the same space.
They also used to have one mobile ad in their news feed. Now they are sideways
scrollable (I think there are five in total). The fanpages' organic posts are
reaching fewer and fewer people in an attempt to make the owners pay for as
many promoted posts as possible.

A point I noticed in their last earnings report reminded me of the reasoning
in the OP's post: one of the signals of decelerating growth is the loss of
popularity of early products. Their desktop ad business accounts for less than
half of their revenue nowadays, despite the fact that there is a lot more ad
space available there.

~~~
mbesto
> _OP 's post: one of the signals of decelerating growth is the loss of
> popularity of early products._

Just because a blog says something, doesn't automatically make it true.

------
gwern
> Note: the graphs included in this article were sourced from Pershing Square
> Capital Management’s initial presentation on Herbalife, available here.

Bit of a submarine there, eh? Anyway, this doesn't make a case against
Herbalife. In fact, it suggests that their data is saying the opposite. Look
at the part where they talk about popping:

> Along with Japan and Israel, this same pattern shows up in Spain, France,
> Germany and several other countries that Herbalife has entered.

Now look at their chart of # of countries against revenue. Herbalife is
apparently up to almost _80_ countries. Even back in the '90s, they were in
20-50 countries. Let's be generous and say that 'several other' is 5 (I don't
have the patience to go through Ackman's propaganda), and note that this will
be an exhaustive list since it's being assembled by people with literally
hundreds of millions of dollars of incentive to make the picture look as ugly
as possible; that's 10 countries that 'popped'. Out of 80. If the other 70
have not popped, that does not seem like Herbalife will have problems in the
future.

(There's also the problem that if each country can only be soaked for a short
period before 'popping', revenue should not be regularly going up! It should
be flattish as Herbalife desperately opens up ever more countries to replace
disappearing revenue from the popping countries.)

~~~
maxprogram
I've found a good rule of thumb in business is that you can only be successful
in the long run if your value proposition is a win-win-win for you, your
suppliers, and your customers.

When a majority of your customers are being unknowingly screwed over as you
reap a huge amount of unnecessary producer surplus, it's a losing proposition
in the end. Companies like Herbalife can just do it on a scale where it takes
a long time to fizzle out.

~~~
hessenwolf
MR CHIMP; the standard list of equity valuation tools.

Management Quality: If you read the really long presentation linked to in the
article, they seem competent, but sketchy.

Retained Earnings: I have no idea.

Competition: Direct selling shitty looking health shakes? The seem to be
reasonably well established.

History: It's been applying the same trick all along. Not much to go on here.

Input Costs: Well under control. Good.

Market Differences: They seem to be quite good at entering into different
markets, so this goes well for them. It might be interesting if they could
diversify their product lines.

Product Quality: Problem here, as I don't see what distinguishes them other
than sales talent.

Quick PEST analysis:

Polictical: Problem. It's could be described as a pyramid scheme.

Economic: Economy seems to be picking up, and it does not strike me as a good
that swings too much with the economy. However, they could have problems
recruiting sales staff in a better economy.

Social: Health food is a trend that I think will continue.

Technological: Not really an issue.

------
netcan
I think Groupon is a slightly different case to Herbalife. Herbalife had/has a
pretty substantial pyramid scheme component to it.

Groupon, IMO was a trend. Trends have a ballistic trajectory. The reports of
hard selling and unhappy customers confuse the issue, but I think the heart of
the problem was that Groupon was popular for a while and now it's less
popular.

Our default business systems don't know how to deal with that kind of a thing.
A company with a 2 year half life. All our financial systems and our valuation
of companies are built around companies that are lang lived, practically
immortal (in the sense that impacts net present value). But, not everything is
like that. A film or a computer game is often produced by a firm that forms
and the disbands to create a single thing. It has all the things a normal
company has: employees (including some highly paid stars), investors, assets,
liabilities, etc. It only exists for a short time.

Crocs was like that too. A product that made a splash, sold a lot of brightly
colored shoes at a great margin and then contracted.

I think the problem with Groupon wasn't Groupon. The problem was the whole
system trying to treat it like Strabucks when it was more like Star Wars. Star
Wars wasn't a failure because it stopped making money.. ..wait. Bad example.
Exceptions prove the rule.

Financially, a company is the NPV of all its future cash flows. In practice,
the system assumes those cash flows will continue steadily forever, growing if
the company is healthy. If they try to swallow a company that will exist for
just 4, they choke.

I think we need to be on the lookout for things like this. The world is
getting fast paced. Maybe we need to be able to deal with 4 year companies.

------
callmeed
Interesting to see a YC company pick on other YC people (LikeALittle and
Andrew Mason), and I don't mean that in a bad way.

------
nslocum
Turntable suffered a similar fate. Fred Wilson recently stated as much.

It had high user turnover masked by a an even faster growing user base. At
least until the potential user base dried up.

[http://avc.com/2014/04/the-business-insider-
interview/](http://avc.com/2014/04/the-business-insider-interview/)

------
stu_k
In the retail space investors look at same store sales[0] (or comps) to see if
a company's growth is coming existing stores, or just from opening new ones.

[0]
[http://en.wikipedia.org/wiki/Same_store_sales](http://en.wikipedia.org/wiki/Same_store_sales)

------
jaybong
NPR's Planet Money had a great story on this:
[http://www.npr.org/blogs/money/2013/01/18/169719749/episode-...](http://www.npr.org/blogs/money/2013/01/18/169719749/episode-431-a-billion-
dollar-bet-against-weight-loss-shakes)

Agree though that there is a difference between a pyramid scheme (Herbalife
imo) and a fad (Groupon) though they have similar growth trajectories.

There are lots of startups that could arguably be considered fads e.g.
snapchat, it's yet to be seen whether or not it's a novelty or solving a basic
human interaction problem as Facebook did.

------
rjf1990
For startups, growth is important. Yet everyone downplays the true indicator
of a company's value: cash flow.

It makes sense, given that VCs are often betting on big buyouts. This is the
"castle in the air" theory. At some point, I think the pendulum will shift
into investing in companies, that while they may not have cashflow here and
now, at least have the potential to generate cash.

------
hownottowrite
Not judging Herbalife, but some data sources are less reliable than others.
(Pershing Square = Bill Ackerman = billion+ short on Hebalife)

[http://www.nytimes.com/2014/03/10/business/staking-1-billion...](http://www.nytimes.com/2014/03/10/business/staking-1-billion-
that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html)

~~~
6cxs2hd6
Yeah this was recently in the news in Massachusetts. It appears he persuaded a
Mass. Senator to ask for investigations, in order to hurt the stock price and
support Ackerman's short gamble:

> In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s
> office, which Mr. Ackman had lobbied himself and which had been provided
> with detailed information about Herbalife by Mr. Ackman’s team, sent letters
> to the S.E.C. and F.T.C., calling for investigations of the company. A
> little more than a half-hour after the stock began trading that day its
> value fell by 14 percent.

You could say that Ackerman sincerely believes the company is bad and is
pursuing this for the greater good. The $1 billion is just putting his money
where his mouth is. And his mouth just happens to be near a Senator's ear....

~~~
hownottowrite
Yes, he sure seems like a stand-up guy:

[http://www.cnbc.com/id/100953220](http://www.cnbc.com/id/100953220)

 _" Ackman was the primary engineer and architect of recruiting Ron Johnson to
the company, and he and Ron Johnson pulled off this strategy that has
fractured the company and ruined the lives of thousands of J.C. Penney
employees and fractured shareholder value," Howard Schultz, CEO and Founder of
Starbucks and JCP Board Member_

------
jacquesm
One way to get unsustainable growth is by spending more on marketing than you
are making back on your customer over their lifetime.

Given a large enough investment this could easily get you from series 'A' to
the next round with spectacular figures showing really nice graphs.

It can be quite a bit of work to figure out where the flaws are, and founders
are not always aware of issues like these.

------
mbesto
I love talking about business models (I run a bootcamp in SF helping people to
visualize them), so I figured I'd chime in here...

> _Eventually they’re going to run out of countries to enter, and that will be
> the end of Herbalife if they don’t figure out a more long-term, sustainable
> business model._

This statement is pure speculation. Why hasn't any of the same analysis been
done on Groupon? I'm not sure why the article conflated the two stories of
Groupon and Herbalife, when their data sets and underlying assumptions are
clearly very different.

> _You should be able to demonstrate sustained growth in a single market
> segment, whether it 's a geographic region, a certain type of customer, or
> something else._

Isn't this why diversification exists? Why companies like GE, P&G, and now
Google, have a massive portfolios of companies, as opposed to one single
product that drives all growth? I'm having a hard time understanding what the
takeaway is here...

------
programminggeek
Another great example: Blackberry.

They did the emerging markets growth strategy and it worked to help juice
their numbers for a few years until Android and iOS totally destroyed all but
their core customer base.

The real danger in this strategy is not that it grows an unsustainable
business, just that the sustainable portion is much smaller than the peak and
if you forecast up and to the right growth forever, it eventually doesn't
happen and you have budget shortfalls and layoffs.

Hyper growth is exciting and gets you headlines, but sustainable, steady
growth is probably a happier long term situation for moth businesses.

~~~
ams6110
I don't know if Blackberry is quite the same. They were more than a fad or a
novelty. Blackberry was the first mobile device that really solved problems
for business users: seamless integration with office email and documents
(caveat, I have never owned one, but that's my observation).

~~~
ssharp
You're right. Blackberry wasn't really a fad of novelty. I remember them
starting to get really popular around 2004. They were the only device that
made mobile email really simple by not overloading the phone with other stuff
and putting the focus of the phone connectivity on email.

My first smartphone was a Palm Treo and it didn't take me very long to switch
to a Blackberry.

It's hard to imagine if your only experience with smart phones is with iOS and
Android devices, but from 2004 until the iPhone in 2007 (and really, the
iPhone 3G in 2008), Blackberry was the industry standard for smart phones.
Even after the iPhone was released, it still took a few years before people
generally accepted touchscreen keyboards. If you look at the early responses
to the iPhone, you'll see that was one area where competitors tried to attack
-- Palm with their Pre that had both touch screen and a slide out keyboard,
and the very ill-advised Blackberry Storm that had a touchscreen you could
press in.

And actually, there are still loyal holdover users from Blackberry's prime
days who still swear by the Blackberry for it's ability to handle mobile
email. They all realize Blackberry's are inferior to iOS and Android devices
but the Blackberry's are still what they know and still fit well for what they
want to do.

------
arbuge
The Herbalife graphs seem to indicate that in the countries they enter there
definitely is an initial temporary pop but business doesn't go down all the
way to zero after that - it seems to settle down at a residual steady state.
That could be sustainable if the 2 graphs provided (Israel, Japan) are
representative of all the countries they enter. After they enter all available
markets, their revenue will settle down to the sum total of all those steady
states.

------
enginerd
I see a significance in that Herbalife, Groupon, and LikeAlittle seem to be
selling _sales_ vs. other businesses using salesmanship as a medium. It's a
fine line, but a distinct one nonetheless.

Does anyone have examples of similar businesses to the aforementioned? Curious
how much of a trend this actually is.

------
blueskin_
Not heard of Herbalife before, but there are several other pyramid scheme
companies in the UK. For example, Kleeneze
([https://en.wikipedia.org/wiki/Kleeneze](https://en.wikipedia.org/wiki/Kleeneze)).

------
speeder
Yet the numbers are impressive.

My startup is struggling to have profit (we have revenue, but no profits yet,
although we have growth of revenue), and many, many, many times we felt
tempted to pull that sort of stunt (pyramids, freemium abuse, shady ads,
etc...)

------
tudorconstantin
I would love to own a company that reaches 6 billions in revenue in an
"unsustainable" manner, as long as that doesn't cost me more than the profits
it produced

------
sfghaghhldg
Yet, they seem to have lots of users and customers....

------
ape4
GroupOn should die. I can think of nothing I would want less than a daily mail
with some "deal". To say nothing of the businesses that offer the deal losing
money.

~~~
rythie
GroupOn is trying to solve a two-sided problem.

1\. Businesses need more customers

2\. Customers want cheaper stuff

I'm just not sure that linking the two solves either problem. You've got
cheapskates taking up deals and never coming back.

~~~
zenbowman
Don't see why it is cheap to take a deal. I'm not a coupon addict, but my wife
is one. Since she discovered Groupon she refuses to buy anything not on sale.
I think its pretty smart, I'd do the same but it takes too much time and
dedication to shop that way.

~~~
pbhjpbhj
> _Since she discovered Groupon she refuses to buy anything not on sale._ //

I can't recall the exact figures but the way Groupon's deal worked when they
pitched me was a definite loss-maker. Groupon took their portion, the customer
was required to get a massive headliner discount to make the deal look
attractive. Effectively Groupon's proposition was for us to swallow a big loss
to send them revenue.

I like a bargain but if the "bargain" means that a third party profits whilst
I get to help send local businesses under then I can't take that offer. Sure
for some types of business Groupon can work but they don't [didn't] only
target those businesses.

Demanding unsustainable prices is "cheap" because it's not a proper saving.
You end up paying for [your share of] the social welfare payments for the
people that go out of business and the businesses no longer exist to serve
you.

------
codeboost
Bill Ackman was wrong about Herbalife. According to wikipedia, he lost between
$400 million to $500 million by shorting Herbalife last year. What that means
is that other investors disagree with his (and this article's) analysis of
Herbalife.

~~~
mrschwabe
No. Bill Ackman was right. Herbalife is a terrible business. For reasons
outlined in the OP link, it has seen growth - but is ultimately doomed.
Specifically: when there are no new markets to enter; when every dupe has been
duped.

Though, unfortunately, before it crashes entirely - those handful at the top
will have their next big sham ready to seed & perpetuate into the world; and a
significant number of the dupes who were duped before will be duped again.

And hence, the endless, relentless cycle of MLM. Despicable.

~~~
codeboost
You sound like a person who doesn't really know what he is talking about.

The data in this article shows some trend in two countries 10 years ago and
then draws some grand conclusions on the business model, which is absurd.

If you look at the business fundamentals, the picture is a bit different.

Herbalife sells high quality products, used happily by millions of permanent
customers worldwide.

They are leaders of one of the hottest industries - wellness. Looking at the
amount of unhealthy food sold in supermarkets today (almost all of it), it's
no wonder there are entire industries trying to fix people's health after
consuming the food sold to them. The other industry is Health Care.

Now the MLM thing.

All the 'those on top earn everything and new people earn very little' is both
true and fair. The fact is, no one has appointed anyone on 'top', everybody
starts out as a simple distributor and builds his/her business from the ground
up. It's a tough business and only the best (most motivated) move up and
others move on with their life. Just like any other business.

I have been there when my sister started in Herbalife 20 years ago. She
started from zero, as a simple distributor. Now she earns about $100k/month
plus bonuses, drives a Porsche and lives in an incredible house on top of a
mountain.

What's more, she made dozens of other people rich. I know them all personally,
they started from owning one set of clothes to driving expensive cars and
travelling all around the world.

And thousands upon thousands of customers who changed their lives after
loosing a significant amount of weight. These are the customers that don't go
away easily, not after they have been reborn. Anyone who has lost 20+
kilograms (like myself) knows what I'm talking about.

Bill Ackman is full of shit and a hypocrite when he states that he wants to
help millions of low income people from loosing money with Herbalife.

It's a personal and emotional war he's engaged in and so far he has been
loosing it, because his premises are wrong.

