Wednesday, August 18, 2010

USANA Purchases BabyCare Ltd for its Direct Selling License in China for $62,716,000

USANA recently purchased a company based in Beijing China that has been unprofitable. However, this company had something USANA has not been able to obtain; a direct selling license in mainland China. USANA paid a whopping $62,716,000 for a company that only had $15,000,000 in annual net sales and $19,000,000 in total assets. The transaction took place in the Cayman Islands, so it is questionable whether or not either party had to pay any US or Chinese tax.

USANA Health Sciences, Inc. is successful for one reason, Multilevel Marketing (MLM). USANA distributors can recruit more distributors, and because any distributor who wants to participate must personally purchase over $100 worth of product every 28 days, there is no need to retail product. Commission is paid to upline distributors from those mandatory product purchases made by their downline. So in MLM, selling the dream of making money and recruiting new distributors is what makes 1% of distributors a lot of money and make USANA very profitable. However, mainland China does not allow MLM compensation plans!

Mainland China only allows single level marketing compensation plans. So the only means for a distributor to make any money would be to retail product to real customers, which is really what direct selling is suppose to be about. For USANA to bring their product into China, USANA must at least drop the price of their product line in half (or more). This would allow its distributors in mainland China to retail the product and make a “Profit Margin”. This profit margin in currently unheard of with USANA's products around the rest of the world because the distributors already pay a premium retail price for the product and cannot resell it for more than they paid. Also, USANA's preferred customers pay the same price as the distributors. USANA would also have to reward those Chinese Nationals that actually retail product unlike those around the rest of the world which are rewarded for recruiting more distributors instead of retailing product. In case this isn't clear, distributors in mainland China would not have a downline! These distributors would also only be recruited by USANA's corporate office (or BabyCare for now) and not by distributors inside or outside the country.

There are good reasons for USANA to make this move however. They will try to use it to encourage the rest of their markets to recruit like crazy. USANA can put in their promotional material that they are only 1 of 25 companies in the world that have a direct selling license in mainland China, which is now the second largest economy in the world. If USANA distributors thinks USANA will be able to grow a large distributor base in China and maintain those distributors, then those distributors are in for a surprise. Again, what incentive is there for Chinese Nationals to join a distributorship with BabyCare/USANA? Unlike MLM where distributors think they work as a team, single level marketing means that each distributor is a competitor to one another. So the more distributors in a single level marketing plan, the less each distributor has to potentially make. Because of this, the number of Chinese distributors not rise as much as some believe. If the numbers grow too big, Chinese distributors will not last very long and will drop out even quicker than MLM distributors do.

Goodluck to USANA though. If USANA brings their product line into mainland China, they'll be forced to drastically lower the price of their products. Then the Chinese National distributors will pay about $50 USD or less for a USANA HealthPak100 and resell it for about $70 USD and make a $20 profit from each box sold, unless USANA refuses to lower the price. Oh, and if you think the product sent to Chinese Nationals would only be resold in China, think again. USANA has been unable to police Ebay and other auction sites for USANA distributors who have been reselling massive amounts of product at half the price that it costs distributors to purchase; all for the sales volume points (MLM point game)! What would stop Chinese Nationals from using ebay to resell all their product world wide and do it for a real profit while still reselling it for a cheaper price than any other USANA distributor elsewhere in the world could even buy it for.

Bottom line, MLMs have not been successful in mainland China and that is because MLMs were never about retailing product. MLM's like USANA are in business to sell the opportunity to make money (the dream). China is smart because they know a pyramid scheme when they see one; MLM. Companies in mainland China with a direct selling license can only succeed if the product is very affordable and competitive against those on store shelves. With a LIMITED distributor base, the product line can make the company and its distributors a lot of money. But if the product is too expensive, customers will not buy, and distributors will leave.

Wednesday, August 11, 2010

USANA's Active Associate Per Territory, Evidence of Illegal Recruiting in Mainland China, and Misleading Philippines Associate Figures.

The following table shows the number of reported Active Associates for USANA Health Sciences, Inc. 2nd quarter financial results in 2007 and 2010. Also included is a ratio of the number of USANA active associates to the population for the given territory. The results of this chart reveal what I believe is strong evidence that supports the notion that illegal associate recruiting is taking place in mainland China. I've been saying this for quite a while now, but the SEC needs to investigate this matter.

Territory 06/30/07 07/03/10 USANA Associates Per Citizen
North American Region
United States 63,000 57,000 1 : 5,436
Canada 27,000 26,000 1 : 1,315
Mexico 14,000 12,000 1 : 9,268
SE Asia/Pacific Region
Australia-New Zealand 21,000 18,000 1 : 1,476
Singapore 8,000 5,000 1 : 998
Malaysia 11,000 14,000 1 : 2,022
Philippines 0 7,000 1 : 13,140
E Asia Region
Hong Kong 13,000 52,000 1 : 135
Taiwan 15,000 11,000 1 : 2,095
N Asia Region
Japan 4,000 4,000 1 : 35,855
South Korea 2,000 4,000 1 : 12,190

1. It is very interesting that over the past 3 years Hong Kong gained 39,000 active associates, which is a 300% increase. How is this possible when the rest of USANA's markets did so poorly? And to top it off, Hong Kong has 1 USANA associate for every 135 citizens! This is a huge red flag and should easily prompt an SEC investigation into the illegal recruiting of Chinese Nationals. USANA is forbidden to recruit associates from mainland China because China has banned MLM from operating in their country. Any recruiting of people from mainland China breaks foreign laws. USANA is fully aware of the associates they are recruiting from mainland China. In a leaked USANA internal document from October 2009, USANA admitted that a "large sum" of product ends up in mainland China. USANA has never disclosed this information to shareholders. Besides, according to a long time USANA distributor, over 5 years ago USANA already had some problems with about 1400 of their distributors that were all Chinese Nationals who joined illegally, so it isn't like this would be the first time.

2. Also revealed by this chart is the fact that after three years USANA is losing active associates in most of their territories. Are shareholders aware of just how saturated USANA's markets are? USANA only reports in their SEC filings the active associate results for each region (North American, E. Asia, N. Asia, SE Asia). Investors have no idea how bad each of USANA's markets are doing because they are grouped together as a whole. After three years, US down 6000, Canada down 1000, Mexico down 2000, Australia/New Zealand down 3000, Singapore down 3000, Taiwan down 4000. Japan remains the same. Malaysia went up 3000 and South Korea went up 2000. The Philippines have 7000, but didn't exist 3 years ago. And finally, Hong Kong went up 39,000! Red Flag???

I believe the massive recruiting situation in Hong Kong and this large sum of product that is being sent to mainland China are signs of fraudulent activity. It is also evident that USANA's management is fully aware of the situation since they acknowledge it in their internal document. Without this situation in Hong Kong, USANA's stock would be in the toilet.

3. Another thing to point out are the number of active associates in the Philippines. If stockholders followed USANA's press releases after the Philippines market opened, they would expect the number to be much higher!

USANA Q1-2009
"the addition of 5,000 Associates in the Company’s newest market, the Philippines"

USANA Q2-2009
"Additionally, the Company’s newest market, the Philippines, added 5,000 Associates during the quarter." 

USANA Q3-2009
"Additionally, the Company’s newest market, the Philippines, added 6,000 Associates."

USANA Q4-2009
"Additionally, the Company's newest market, the Philippines, added 4,000 Associates."

USANA quit reporting the Philippines numbers during Q1 and Q2 of 2010, and never mentions any increase or decrease in the Philippines market. So shareholders and distributors are left to believe USANA has at least 20,000 active associates in the Philippines. However, according to my chart above, USANA only has 7,000 active associates in that market! What kind of management runs a publicly traded company with such irregularities like this?

Why is USANA management trying to fool investors? Is it so the stock price will rise? What does the SEC think about all of this? Someone should ask them.

Tuesday, August 10, 2010

USANA's 10 Reasons Why You Should Join USANA and My 10 Responses To Them

USANA Health Sciences, Inc. has a section on their website that lists 10 reasons why to have a home-based business with USANA. I will list each one of them and explain why I believe they are not true.

1. Low Start-Up Costs
To start your own home-based USANA business, there is very little upfront investment and no qualifying volume or inventory requirements. The only required purchase is USANA’s Business Development System. For as little as $30 US, you get a tried and tested system for creating an income-generating business that can last a lifetime.
- New associates are also required to activate their business center(s) before they are considered “Active” and be eligible to collect commission. To activate a 1-Business Center plan, associates need to personally purchase about $180 worth of product. To activate a 3-Business Center plan, associates need to personally purchase about $540 worth of product. These Personal Sales Volume (PSV) purchases do not pay out any commission to the new associate even if resold to a retail customer, however the associate's upline will get paid a commission from your purchase.

- While USANA claims there are no inventory requirements, there are mandatory PSV purchases that associates must make every 28 days depending on the number of business centers they have. For a single business center, this is about $120 every 28 days that the associate must personally purchase. If the associate fails to make this purchase, the associate loses their "Active" status, is stripped of any Group Sales Volume (GSV) that has accumulated up to that point, and is not eligible to collect any commission from their preferred customers or downline associate's purchases. So yes, there is an inventory requirement. This is why it pays to recruit new associates instead of retailing product.

2. Simple Compensation Structure
No previous experience is necessary for you to be successful with USANA—just bring a willingness to learn and a passion for helping others improve their lives. It only takes your efforts and two individuals to do the same for you to start building a profitable downline organization. And, depending on your ambition and efforts, you can start earning commissions in your first week simply by sharing the products with others and ordering some for yourself.
- USANA's compensation plan is extremely complex, contains vast amounts of requirements that are difficult to follow and understand, and is designed to fail over 90% of participants no matter how hard they try.

- USANA's claim that you can start earning commissions in your first week "simply by sharing the products with others and ordering some for yourself" is not true. Sharing the products with others implies the associate is giving away samples or even selling product from the associate's own inventory purchases. Don't be fooled however! Associates are not paid any commission from the PSV purchases that USANA requires them to make every 28 days. If a new associate joins, activates a single business center by personally purchasing $180 worth of product, and shares these products with others, that associate will not be paid a dime in commission. In order to be paid a commission like USANA claims, you would have to recruit at least 2 new associates in your downline who spend over $250 each, or find about 5 preferred customers who each purchase $100 worth of product during your first week (Both scenarios will pay you $40 in commission). BTW, there are 1 active preferred customer for every 3 active associates. Good luck on the preferred customers because they have been on a downward spiral!

3. Incredible Earning Potential
Unlike a traditional job that gives you only one way to earn income, USANA’s award-winning compensation plan offers an incredible six ways to earn income, providing a realistic opportunity to leverage your downline’s efforts to earn an above-average commission check every week. To help you succeed, unpaid volume carries over every week, there are no group sales requirements, and you are not limited to levels. In addition, you could potentially save thousands of dollars with home-based business tax deductions*.
- 99% of USANA associates never make a profit. This incredible earning potential only applies to those who inact boiler room recruiting tactics, unethical doctors peddling USANA products to patients, and those who have gotten in very early on. Of course someone can join today and make a fortune by recruiting their church's congregation into their downline by placing undue pressure on the church members (See Operation Promise Land).

4. Your Business Fits Your Life
It’s your business. You work where, when, and how you want. Generally, if you put in a little bit of work, you’ll earn a little bit of income. If you put in more work, your earnings will increase. And, you’ll be free from the typical workweek irritations—no alarm clock, no schedule, no rush hour traffic, and no boss.
- It is not a business unless you are out retailing USANA's products. Unfortunately, very few associates do so. The real operation is to sell the business opportunity and recruit more and more associates into the scheme. You can be sure that all of USANA's big shot associates making hundreds of thousands of dollars are all doing so because they have a massive downline of associates in their business centers, not because they retail millions of dollars worth of product to customers. It's not about selling the product, it's about selling the dream of making money. You sell the dream of becoming rich and the products are purchased automatically because it is a requirement to purchase in order to participate!

5. You’re in Business for Yourself, Not by Yourself
USANA is behind you every step of the way. You will receive expert training and have access to a wealth of tools to make your life easier: a full Associate-only web site where you can get the latest news, training, free downloads, and business management services; frequent Web conferences; unforgettable events; eye-catching sales aids, professional multimedia productions; exciting publications; and much more. Our enthusiastic and experienced customer service team is available to help in six languages. And, with our Autoship program, you’ll never have to handle inventory—we’ll ship everything directly to you or your customers on a schedule that’s convenient for you.
- USANA is in front of you every step of the way. USANA associates must purchase overpriced product every 28 days in order to participate in the opportunity. Because the distributor's prices and the preferred customer's prices are the same, there is no profit margin that can be made on selling the product retail. Then USANA takes 45% of the money you just paid them and gives the vast majority of it to the 1% of associates that are at the top of the pyramid scheme. However, the bottom 99% of associates never make enough of see a profit. USANA's heading for this section would be more accurate if it read "You're in Business for Your Upline, Not for Yourself".

6. A World of Possibilities
If you’ve always wanted to travel the world, USANA is your ticket to a successful international business. USANA responsibly expands by choosing promising markets around the world in which to open for business. With our seamless compensation plan, you can build your organization in multiple countries without having to worry about different compensation plans or currency conversions. USANA takes care of everything while you work in exotic locations, discover exciting cultures, and make a world of new friends.

- New associates don't stand a chance at doing business internationally. This is because the big shot associates (top 1%) already have their feet planted firmly in new territories just prior to the official openings. What USANA really means by their statement here is that there are no territorial boundaries in which you can recruit preferred customers or new associates. In other words, everyone in your neighborhood could become an associate just like you, and if they are not in your downline, then you are pretty much out of luck. But consider this, if 25 different McDonalds restaraunts existed on a single block, would any of them make a profit? No, of course not. In fact, they would all go out of business except one. That last remaining McDonalds would then be able to profit and stay in business. This dilemma is known as over saturation. USANA wants to pretend as though saturation does not apply to their recruitment operation.

7. Growing Health & Wellness Industry
For many years, wellness-related businesses have been one of the fastest growing segments in direct selling. Renowned economist Paul Zane Pilzer identified wellness products and programs as the economy’s next trillion-dollar industry. As a large portion of the world population ages, they are looking for products that make them look and feel better, and younger generations are looking for ways to maintain their health and energy levels to meet the needs of their busy lives. USANA is poised to meet those needs.
- About 99% of the world cannot afford USANA's expensive products. If USANA did not force its associates to purchase over $100 worth of product every 28 days to participate in the compensation plan and be eligible for commission, then USANA would vanish because the people who would purchase the product would be those who actually want it. Associates who quit the business opportunity also quit purchasing USANA products. Over the past 18 years, USANA has had over one million associates. However, only 210,000 are considered "Active" as of July 2010. Most of these currently active associates joined within the past year. Thus, over 80% of USANA associates left the business opportunity and also stopped purchasing the product. This is indicative of the fact that the net sales for USANA change proportional to the number of currently active associates. USANA is NOT poised to meet the world's needs.

8. The Leader in Quality and Innovation
USANA’s quality products are formulated by a world-class scientific team based on cutting-edge, proven science and Dr. Myron Wentz’ expertise in keeping cells healthy through optimal nutrition. The company also collaborates closely on research with the Linus Pauling Institute and other notable institutions. Additionally, most products are manufactured and packaged in USANA’s own state-of-the art facility, allowing USANA to guarantee the quality and potency of every product.
- USANA spends less than 1% of net sales in Research and Development. Simply readjusting dosages in their products is not innovative. As far as quality goes, USANA claims to manufacure according to Pharmaceutical GMP. However, USANA refuses to allow any agency or organization to test USANA's facility according to Pharmaceutical GMP. Only the standard Food GMP has been tested at USANA's facility. Manufacturers like USANA can claim to manufacture according to drug standards, but never have to prove it because they are not required to. You cannot call yourself a leader in "Quality" when you refuse to allow testing of your products to the Pharmaceutical GMP quality like USANA claims. BTW, in order to be Pharmaceutical GMP like drugs have to be, USANA's ingredients would have to be exactly 100% to what they claim is in the pills. Not 10% over or 10% under. Can you imagine a prescription drug that calls for exactly 30 mg is slightly over or under the printed dosage

9. Worldwide Credibility
A member of the Direct Selling Association, USANA is a solid, publicly traded company that has attracted people of all ages, genders, and education levels from across the globe. World-class athletes, best-selling authors, respected scientific institutions, leading health and wellness experts, and experienced business professionals across the globe have all recognized USANA’s commitment to excellence.
- The Direct Selling Association has no credibility. The DSA board members consist of executives from Multilevel Marketing companies, not Direct Selling companies. The hijacking of the association has destroyed the credibility of network marketing by promoting product-based pyramid schemes called Multilevel Marketing. And just because individuals from all walks of life join USANA does not mean anything. Some people will do anything for a buck. Credible people also recommended and stood behind Enron, Worldcom, and Bernie Madoff's scheme.

10. Experience You Can Count On
Founded in 1992, USANA has years of experience in perfecting not only products that set the gold standard in the industry, but also a duplicable home-based business model that is stable in a good economic climate or bad. Under the direction of USANA’s solid and experienced management team, the company is positioned for a future of continued growth and success.
- Whether constantly changing dosages in their vitamins constitutes a perfecting of the product or whether it is done just so associates cannot return the product for a refund after 3 months (instead of 12 months as required), I guess USANA does have experience, but you don't want to count on it. The claim that USANA set the "Gold Standard" in the industry was given by Lyle Macwilliam's Comparative Guide to Nutritional Supplements. I have written much on this subject.

- Pyramid Schemes can sustain themselves as long as you can attract new participants. Pyramid Schemes are successful in both good and bad economical times. Probably more so in bad economical times because people are desperate and looking for ways to make some money. Currently, USANA is growing only in their Asian market, mainly their Hong Kong region. Over the past several years, USANA has NOT been able to grow in their United States Region, Canada Region, Mexico Region, New Zealand Region, Australian region, South Korea Region, Japan Region, Taiwan Region, or United Kingdom Region. So much for continued growth.

Saturday, August 7, 2010

USANA Doctors Peddling Product To Their Patients - Violation of Ethics

Many associates in USANA Health Sciences, Inc. try to recruit doctors into their downline. However, most doctors turn down the USANA distributor due to ethical reasons. Most doctors are familiar with something known as Code of Medical Ethics. So what ethical issue do doctors have with becoming a USANA distributor? They are the following:

The following links are from the American Medical Association's (AMA) Code of Medical Ethics:
- Opinion 8.063 - Sale of Health-Related Products From Physicians' Offices


- Opinion 8.06 - Prescribing and Dispensing Drugs and Devices

Here are a couple quotes from the Code of Medical Ethics:
"In-office sale of health-related products by physicians presents a financial conflict of interest, risks placing undue pressure on the patient, and threatens to erode patient trust and undermine the primary obligation of physicians to serve the interests of their patients before their own."

"Physicians may not accept any kind of payment or compensation from a drug company or device manufacturer for prescribing its products."

"Physicians should not urge patients to fill prescriptions from an establishment which has entered into a business or other preferential arrangement with the physician with respect to the filling of the physician’s prescriptions."

Doctors who choose to peddle USANA products to their patients break the Code of Medical Ethics. Because these doctors choose to put the interest of their personal business before the patient's own medical interest, it ruins the trust between the patient and the doctor. This becomes even a bigger violation of ethics when the doctor recruits their patients as distributors into their downline. It is all out of the financial interest of the doctor and not the interest of the patient.

How do doctors that sell USANA products to their patients keep their medical license?

Unless the doctor's patients file a complaint within their state, the practice of peddling will continue. Personally, if I go to a doctor for something and their recommended treatment is to purchase a specific brand of vitamins that the doctor is a distributor for, I would never go back to that doctor again. Would you? Most people would not go through the enormous hassle of filing a complaint. So the doctors peddling their own product never get in trouble. Ethical doctors do not place their own personal financial gain ahead of their patient's health.

Is there a way doctors can prescribe USANA products in an ethical manner?

Doctor's who want to recommend USANA product can do so ethically. This ethical option is for the doctor not to become a distributor, and to simply tell their patient to go to USANA's website and order the recommended product directly from USANA. By doing this, it removes the "conflict of interest" out of the equation. By doing this, it removes the "undue pressure" that would be placed on the patient. There are ethical ways for doctors to recommend USANA product, but the doctor cannot be financially connected, otherwise their would be a conflict of interest and violate the code of ethics.