When looking for the real scoop on MLMs, finding audited financials with Income Disclosure statements is ideal. Of course, privately-owned MLMs operating in the United States are not required to release such statements. So we look to Canada or the UK whenever possible, and the Income Disclosure statements filed there have been very revealing.
I have a friend involved in ViSalus, an MLM marketer of overpriced meal replacement shakes, who wants me to participate in her “Body by Vi” weight loss challenge. If she signs up 3 customers she gets her shakes for free. ViSalus has splashy presentations of their business “opportunity” with all the usual outrageous MLM claims. I'm a CPA; I want real numbers. ViSalus is privately owned, and operates wholly within the US, so refuting their claims with actual company results is not that easy. And without real numbers, my friend wants to believe that this MLM is somehow different from all the others.
But sometimes there is another source within US financial statements. I googled “ViSalus 10-K” and discovered that in 2010 ViSalus was 43.6%-owned subsidiary of Blyth, Inc. Blyth is publicly owned and files
audited financial statements with the SEC.
BOOM.
There’s still no Income Disclosure statement for ViSalus, but get a look at the notes in the current Blyth 10-K annual report:
ViSalus’ business is affected by extensive laws, governmental regulations and similar constraints, and their failure to comply with those constraints may have a material adverse effect on ViSalus’ financial condition and operating results. There can be no assurance that ViSalus or its distributors are in compliance with all of these regulations, and the failure by ViSalus or its distributors’ failure to comply with these regulations or new regulations could lead to the imposition of significant penalties or claims and could negatively impact ViSalus’ business.
Clearly the auditors don’t like MLMs. Wonder why?
ViSalus did not meet its predefined operating target for calendar year 2010.
ViSalus experienced a substantial decline in revenues and operating margins last year compared to its forecasts.
Sales at ViSalus increased $20.6 million or 157% from $13.1 million in fiscal 2010 to $33.7 million in fiscal 2011. This growth is a result of a 330% increase in distributors on a year-over-year basis.
Oh-ho! Wouldn’t you expect the increase in sales to mirror the increase in distributors? Surely such a fantastic business opportunity would show a one-for-one match: 3x the number of distributors means 3x the sales revenue, right?
Yet, while the number of ViSalus distributors more than tripled, sales grew only 1.5 times. Do the math. Average sales per individual distributor were DOWN by 40%! Another way of looking at it would be to assume that sales per existing distributor remained constant from the year before and just tally the amount of new revenue brought in by the new distributors. How does that look? For every new distributor added, sales only went up by a few cents.
The rate of increase in distributors was more than twice the rate of increase in sales. That's like saying, “We opened a lot of new Wal-Mart stores, but they’re all the size of Dollar General.”
In the second quarter of fiscal 2010, ViSalus revised downward its revenues forecast for the current fiscal year as a result of lower demand for its product reflecting lower consumer spending attributed to the domestic economic recession and a higher than anticipated attrition rate in its distributor base. These factors together required management to focus its efforts on stabilizing its distributor base and curtailing its international expansion plans. Accordingly, management reduced its current year and long-term forecasts in response to the weakening demand for its products. The impairment analysis performed indicated that the goodwill in ViSalus was fully impaired, as its fair value was less than its carrying value, including goodwill.
We determined that the recorded values of trade names, trademarks and customer relationships within ViSalus, in the Direct Selling segment, were impaired. As a result of these impairment analyses performed, the intangible assets were determined to be impaired, as their fair value was less than their carrying value.
“… a higher than anticipated attrition rate in its distributor base...” Mmm hmm. If the business opportunity is as good as they claim, why are the distributors bailing out? I thought MLMs thrived during a bad economy, so what's wrong with this one? And the value of the premium (the Goodwill) which Blythe paid for ViSalus has been written down to Zero. Now we know why the planned Canadian launch (with the mandatory Income Disclosure statements) was postponed.
Notwithstanding the above, a 157% overall increase in sales is still a 157% increase, despite the repercussions for individual ViSalus distributors. Therefore, in early 2011, Blyth exercised its option to purchase additional shares of ViSalus and increase its ownership percentage to 57.5%. Business is business, after all.