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USA Multi Level marketing Industry Research 2018

This report is prepared by Maple Growth Partners, an investment research and strategic advisory firm.

We recently evaluated the US multi level marketing industry for our client, a US-based private investment firm. In this report, we provided a typical performance cycle of an MLM company; identified suitable KPIs to analyze and compare competitor firms; and commented on general MLM market dynamics.

We identified that ‘pop and drop’ is the typical performance curve for a MLM firm. Pop and drop can be defined as a paradigm when sales massively increase in the initial years and then subsequently experience a sharp drop right after hitting the peak level. Typically, drop in sales of the existing markets are usually covered by the gains in sales of new markets. This is pretty much a non-ending cycle of entering and exiting new markets.

Increasing number of people joined MLM industry during and post 2008-09 recession with the hope of additional/secondary income but sales dropped as it was difficult to sell (already inflated) products.
- Direct selling retail sales per person was the lowest in 2009, peak of recession
- As the number of people involved in direct selling is increasing, direct sales per person has been on a declining trend

We also included top 55 companies in the US and compared them using a standard template by populating data fields such as key products/services, compensation structure, sales method, geographies, financials, member churn rate, business entry fee, % of sales commission, etc.

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USA Multi Level marketing Industry Research 2018

  1. 1. 0 United States Multi Level Marketing Industry Research and Analysis Market Insights 2018 Maple Growth Partners While the full report is exclusively prepared for the said client, we have provided a gist of our overall analysis to showcase our research capabilities.
  2. 2. 1 Table of Contents 1. Typical Performance of an MLM Company 2. First Year Headcounts for Successful MLMs 3. Typical Financial Metric Points / KPIs of an MLM Business 4. Lifecycle of Most MLMs Teammates 5. US MLM / Direct Selling Market Overview 6. Competitive Landscape These topics are extensively covered in the full report. Here, we have just combined a few slides to present our relevant skill- sets.
  3. 3. 2 Primary Objective and Focus of the Document • We recently evaluated the US multi-level-marketing industry for our client, a US-based private investment firm. In this report, we provided a typical performance cycle of an MLM company; identified suitable KPIs to analyze and compare competitor firms; and commented on general MLM market dynamics • We identified that ‘pop and drop’ is the typical performance curve for a MLM firm. Typically, drop in sales of the existing markets are usually covered by the gains in sales of new markets. This is pretty much a non- ending cycle of entering and exiting new markets • Increasing number of people joined MLM industry in the US during and post 2008-09 recession with the hope of additional/secondary income but sales dropped as it was difficult to sell (already inflated) products • Direct selling retail sales per person was the lowest in 2009, peak of recession • As the number of people involved in direct selling is increasing, direct sales per person has been on a declining trend • We also included top 55 companies in the US and compared them using a standard template by populating data fields such as key products/services, compensation structure, sales method, key geographies, key financials, member churn rate, business entry fee, % of sales commission, etc.
  4. 4. 3 • As per Euromonitor and IBIS World, US Direct Sales industry revenue is projected to contract/grow at a CAGR of -1.0% and 0.2%, respectively between 2017 and 2022 • Direct selling is a blanket term that encompasses a variety of business forms premised on person-to-person selling in locations other than a retail establishment, such as social media platforms or the home of the salesperson or prospective customer. Direct selling consists of two main business models: • Single-level marketing in which a direct seller makes money by buying products from a parent organization and selling them directly to customers • Multi-level marketing (also known as network marketing or person-to-person marketing), in which the direct seller may earn money from both direct sales to customers and by sponsoring new direct sellers and potentially earning a commission from their efforts US Direct Selling Retail Sales ($ billion) and Year-on-Year % Change 26.7 28.7 29.6 29.7 30.5 30.6 30.8 29.6 28.3 28.6 29.9 31.6 32.7 34.5 36.1 35.5 7.5% 3.0% 0.6% 2.5% 0.5% 0.5% -3.9% -4.3% 0.8% 4.6% 5.9% 3.3% 5.5% 4.8% -1.6% -6% -4% -2% 0% 2% 4% 6% 8% 10% 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Y-o-Y%Change ($billion) Market Size ($ bn) Y-o-Y Growth US Direct Selling Industry Revenue was $35.5bn in 2016 and is Projected to Remain Flat With a Growth Rate of <1% Over the Next Five Years Source: Direct Selling Association Data Source 1 - DSA
  5. 5. 4 More People are Selling Less 12.2 13.0 13.3 13.6 14.1 14.6 15.0 15.1 16.1 15.8 15.6 15.9 16.8 18.2 20.2 20.5 2,188 2,207 2,222 2,186 2,161 2,105 2,053 1,960 1,760 1,808 1,915 1,989 1,945 1,894 1,788 1,734 1,600 1,700 1,800 1,900 2,000 2,100 2,200 2,300 10.0 12.0 14.0 16.0 18.0 20.0 22.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 USDirectSellingRetailSales/PeopleInvolved(indollars) PeopleInvolvedinDirectSellingintheUS(million) US People Involved in Direct Selling (million) US Direct Selling Retail Sales per Person (in USD) As the number of people involved in direct selling was increasing prior to recession, direct sales per person started declining More people joined during and post recession with the hope of additional income but sales dropped as it was difficult to sell (already inflated) products Since 2013, there has been a surge in the no. of people joining MLM in the US, however sales per person has been on a declining trend US People Involved in Direct Selling (million) and US Direct Selling Retail Sales per Person (in USD) US Direct Sales per Person has never touched the peak of 2003 again in the last 15 years Note: For this chart, we have considered US direct selling market size numbers from Direct Selling Association, to keep data consistency Source: Direct Selling Association Direct selling retail sales per person was the lowest in 2009, peak of recession
  6. 6. 5 MGP Observation: Lifecycle of a Member in an MLM Company – From Inception of Membership / Registration to Dropout / Attrition 1. Sales leader or supervisor will try to recruit distributors / downlines by the following approaches: Face-to-face / individual selling (at home, workplace, fair, exhibition, office / company point of sale centers / clubs); remote selling (phone, internet, email, mail, fax etc.); and group selling (party plan groups, community centers, etc.) 2. He finally convinces an individual and recruits him as his downline He tries to sell the inventory to his immediate friends and family and to other people by using the above similar marketing techniques. After a lot of persuasion, he is able to sell only a part of the (inflated priced) inventory and will now have to sell the rest at a loss since he is approaching the product expiration date. Health and wellness (including nutrition) products typically expire in 2 years and cosmetics and personal care MLM products expire in 3 years. During this period, he’s been also told that his commissions are directly linked to the product purchases, so he purchases a lot of inventory later to realize that he won’t be able to sell them. ** A member will likely be a part of an MLM from the inception of his membership till the time the expiration of the inventory he purchased – typically 2-3 years Registration 4. Continuous Efforts to Sell Inflated Priced Products Till Product Expiry and Hope to Recruit Downlines 3. New recruited buys the initial mandatory inventory from the company with two objectives: a) Buy at a discount (products which are already overpriced) and then sell at a high margin b) Recruit his downline members Hope and Sustainability 5. Book Losses Once the inventory is expired, the member will not renew his membership and be forced to dropout reporting losses occurred due to high operating expenses such as inventory purchases, advertising, supplies, printing and duplication, telephone / computer costs, postage and shipping, and travel. NOTE: Health and wellness, personal care and cosmetics have longer product expiry dates. This enables a member to be a part of the MLM for a longer time and make a lot of spending in the hope of earning more money. However, in the case of FOOD/BEEF MLM company, one can assume that a member participation will be relatively less as the product expiry will typically be around 6 months to a year. Suffer and Complain Source: Maple Growth Partners (MGP) Observation and Insights
  7. 7. 6 ‘Pop and Drop’ is the Typical Performance Curve Experienced by Almost Every MLM Company, Successful or Not (1/2) • Pop and drop can be defined as a paradigm when sales massively increase in the initial years and then subsequently experience a sharp drop right after hitting the peak level • Reasons for a Pop in Sales: When a MLM enters a new market, distributors begin recruiting to build downlines¹. This often results in a massive explosion in the sales force, each of which are either required to, or encouraged to, make large product purchases. New distributors recruit other distributors who then recruit other distributors • Each level of the endless chain makes a purchase. Sales increase sharply as more people are brought into the system • Reasons for a Drop in Sales: As distributors fail to resell product or recruit enough people to make meaningful income, they quit. Most MLM companies see around half of their distributor base churn out each year • The rise and fall in sales is largely dependent on the structure of the sales organization and the pushy schemes targeted on recruiting experience The following charts are the examples of Herbalife performance across all these six markets – Japan, Israel, Spain, France, Germany, and Russia Note: 1. Downline refers to the people one has recruited after joining a program and whose sales or own referrals generate income for them 2. Sales numbers for each of these countries were not separately reported by Herbalife after the last year in each of these respective charts Source: Pershing Square Capital Management 2012 Presentation on Herbalife; MGP Research and Analysis Herbalife Retail Sales ($ mn) in Japan: 1993 – 2005 Herbalife Retail Sales ($ mn) in Israel: 1991 – 2001
  8. 8. 7 Herbalife Retail Sales ($ mn) in Spain: 1990 – 2001 Herbalife Retail Sales ($ mn) in France: 1990 – 2001 Herbalife Retail Sales ($ mn) in Germany: 1991 – 2001 Herbalife Retail Sales ($ mn) in Russia: 1995 – 2001 ‘Pop and Drop’ is the Typical Performance Curve Experienced by Almost Every MLM Company, Successful or Not (2/2) Note: 1. Downline refers to the people one has recruited after joining a program and whose sales or own referrals generate income for them 2. Sales numbers for each of these countries were not separately reported by Herbalife after the last year in each of these respective charts Source: Pershing Square Capital Management 2012 Presentation on Herbalife; MGP Research
  9. 9. 8 Drops in Mature Markets are Masked by the Pops of New Markets (1/2) Avon Products Historical Growth Strategies – Entering and Exiting Countries Since 1895 There was a spike in the number of markets entered by Avon Products in the 1990s and 2000s primarily due to the liberalization policies / opening up of economies in the Asian and African markets Source: Avon Products Inc. Investor Day Presentation January 2016
  10. 10. 9 Drops in Mature Markets are Masked by the Pops of New Markets (2/2) Herbalife – Number of Listed Contries vs Total Retail Sales Drop in sales of the existing markets are usually covered by the gains in sales of new markets. This is pretty much a non-ending cycle of entering and exiting new markets. However, China¹ is the only market where an MLM company can sustain for a longer time due to the abundance of human capital, a primary driver of chain marketing. In other words, there is continuous supply of people for the replacement of outgoing members. Not surprisingly, Herbalife’s sales growth is mainly driven by China and other EMEA markets. Note 1. India is also coming up as a big market for MLM companies, however, regulations can be challenging here Source: Pershing Square Capital Management 2012 Presentation on Herbalife; MGP Research and Analysis
  11. 11. 10 At the Company Level, MLM Member Attrition Rate is ~50%, However, There is a Constant Flow of New Recruits Filling Up This Decline Indicating a Net Zero Effect • Based on the previous 10 years data of Herbalife (shown in the chart below), one can interpret that ~% of members dropout of the membership each year, however, almost same number of members are again added into the distributor base resulting in a zero sum situation • With high attrition rate, constant recruitment is necessary to replace dropouts. This re-pyramiding and constant churning of new recruits is necessary to prevent total market saturation and collapse by entering new markets and introducing new product divisions • In effect, collapse is continuous, with losses being born by new recruits. Meanwhile, instead of collapsing, the company continues to grow, as long as it can continue aggressively recycling new recruits through its system • Out of 10,000 participating Amway IBOs (or Independent Business Owner), only 414 remained in the business after the 5th renewal. That’s a 95.9% dropout rate in only five years for the largest of all MLMs • Over a five-year period, at least 95% typically have left the MLM company; and usually after ten years, nearly all except for those at or near the top of their respective pyramids will have dropped out. At the very least, one can assume that 90% of participants will terminate within five years, and at least 95% within ten years Herbalife – Total Members and New Members Added Per Year (in million) 0.8 0.8 0.8 1.0 1.2 1.5 1.9 1.9 2.1 2.1 1.1 1.2 1.3 1.7 2.0 2.2 2.1 2.1 1.9 1.9 1.9 2.0 2.1 2.7 3.2 3.7 4.0 4.0 4.0 4.060% 58% 63% 62% 61% 59% 53% 52% 48% 47% 0.0% 15.0% 30.0% 45.0% 60.0% 75.0% 0.0 1.0 2.0 3.0 4.0 5.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ChurnRate% HerbalifeMembers(inmillion) Members Retained New Members Added Churn Rate Broadly, churn rate has declined from ~60% to ~50%. However, it is to be noted that the company keeps on changing the reporting format or tweaks the numbers to make it look appealing. Source: Multi-level Marketing Unmasked – A Complete and Compelling Case against MLM as an Unfair and Deceptive Practice By Jon M. Taylor, 2016; Herbalife Filings
  12. 12. 11 1. Volume Points per Capita Penetration (Basically, Total Sales / Population for a Given Area) Each Herbalife product has a Volume Point value assigned to it that is equal in all countries. To put it simply, 1 VP = $1 Retail Sale 1.6 1.8 2.3 2.5 2.5 2.9 3.2 3.7 4.0 3.9 3.6 3.9 3.4 0.3 0.4 0.4 0.4 0.4 0.5 0.6 0.7 0.7 0.8 0.7 0.7 0.7 0.0 1.0 2.0 3.0 4.0 5.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Volume Point per Capita (North America Volume Point / US Population) Volume Point per Capita (Total Volume Point / World Population) • Volume point per capita penetration for a given country is typically sales per capita • Higher the volume point per capita, higher the penetration in the market and likely higher saturation to grow. • To provide a reference, Herbalife volume point per capita in Korea and Mexico is ~9.5 and ~7.5, respectively • North America (mostly US) volume point per capita increased from 2005 to 2013, but since then has shown a declining trend 2. Sales per Volume Point – North America and Global 3. Volume Points / Average Sales Leaders with VP 0.78 0.77 0.80 0.85 0.82 0.85 0.88 0.86 0.90 0.91 0.84 0.80 0.82 0.65 0.65 0.64 0.66 0.68 0.69 0.71 0.73 0.73 0.74 0.76 0.77 0.76 0.6 0.7 0.7 0.8 0.8 0.9 0.9 1.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Sales / Volume Point North America Sales / Volume Point 18.4 18.0 18.0 17.4 17.5 17.3 16.3 15.1 15.917.0 17.0 17.4 17.3 17.0 16.7 15.7 14.6 14.8 14 15 16 17 18 19 2008 2009 2010 2011 2012 2013 2014 2015 2016 US Total Herbalife This increase is most likely due to a change in reporting format, excluding preferred members from avg sales leaders Volume points per average sales leader with VP has been on a declining trend since 2008 for both the US and total company level 10 KPIs / Financial Metrics to Look Into While Analyzing an MLM Company: Using Herbalife Numbers (1/3) Source: Herbalife Filings and MGP Analysis
  13. 13. 12 Direct Selling Sales per Capita in the US (US$ Bought per Year per Inhabitant) US Direct Selling Sales Force as % of the Total Population $93.6 $99.7 $101.8 $101.5 $103.0 $102.6 $102.1 $97.2 $92.3 $92.5 $95.8 $100.7 $103.3 $108.2 $112.5 $109.9 $0.0 $20.0 $40.0 $60.0 $80.0 $100.0 $120.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 US Direct Selling Sales per Capita and Salesforce as a % of Total Population have been Increasing, Particularly Post the 2008-10 Recession 4.3% 4.5% 4.6% 4.6% 4.8% 4.9% 5.0% 5.0% 5.2% 5.1% 5.0% 5.1% 5.3% 5.7% 6.3% 6.3% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 CAGR 2009 – 2016: 2.5% Source: Direct Selling Association
  14. 14. 13 Person-to-Person/Individual Selling is Being Increasingly Used as a Sales Strategy; Rising Share of Full-Time Engagement in Recent Years 90.1% 91.1% 92.5% 91.1% 88.8% 88.9% 93.9% 84.9% 9.9% 8.9% 7.5% 8.9% 11.2% 11.1% 6.1% 15.1% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 2007 2008 2009 2010 2011 2012 2013 2016 Part-time (0-29 hours per week) Full-time US People Involved in Direct Selling - Percentage by Sales Strategy US Proportion of Direct Sellers by Time Worked (Part-time and Full-time) 64.5% 66.3% 64.3% 63.5% 64.9% 68.3% 70.2% 71.5% 71.0% 72.0% 27.7% 25.7% 25.4% 27.9% 30.9% 27.1% 22.5% 22.4% 20.4% 21.0% 7.8% 8.0% 10.3% 8.6% 4.2% 4.6% 7.3% 6.1% 8.6% 7.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Individual / Person-to-Person Party Plan Others 5.3 million are building independent businesses as direct sellers in the US – 800k of these people are full-time and 4.5mn are part time Source: Direct Selling Association
  15. 15. 14 Wellness Segment Share of the Overall US Direct Selling Industry has More Than Doubled Between 2003 and 2014 US Direct Selling Market – Percent of Sales by Major Product Group¹ Note: 1. Before 2008, ‘clothing & accessories’ was grouped in ‘Personal Care’ category Source: Direct Selling Association 33.5% 30.5% 26.8% 26.7% 25.6% 25.4% 23.9% 24.4% 22.6% 21.2% 19.6% 17.5% 16.6% 16.6% 15.4% 16.1% 19.1% 20.3% 21.4% 22.7% 22.8% 23.0% 24.1% 26.6% 28.5% 30.1% 33.8% 34.6% 28.2% 30.8% 33.6% 33.7% 32.8% 21.5% 21.3% 19.4% 18.2% 17.1% 16.3% 16.6% 17.2% 16.6% 10.4% 10.3% 11.0% 12.3% 11.9% 10.8% 10.3% 8.3% 7.6% 15.5% 14.3% 15.5% 15.1% 16.2% 16.6% 18.4% 19.2% 20.7% 21.2% 22.9% 23.1% 22.2% 22.0% 7.4% 8.3% 5.0% 4.2% 4.0% 3.4% 3.3% 3.0% 2.1% 2.0% 1.9% 2.4% 1.9% 2.5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Home & family care/home durables Wellness Personal care Clothing & accessories Services & other Leisure & educational
  16. 16. 15 Sr no. 1 2 3 4 5 Example MLM/NM Amway Avon Products Herbalife Mary Kay Nu Skin Main Product Category Health, Beauty, and Home Care Cosmetics; Personal Care Health Supplements Cosmetics; Personal Care Cosmetics; Personal Care; Wellness Products / Services Appliances; Cosmetics; Food and Beverage; Home care; Home decor; Kitchenware; Personal Care; Wellness Cosmetics, skin care, jewelry, fashion and fragrances Cosmetics; Food and Beverage; Personal Care; Wellness Skin care, cosmetics and fragrances Skin care, personal care, and dietary supplements / nutrition products Compensation Structure Multi-Level Multi-Level Multi-Level Multi-Level Multi-Level Sales Method Person To Person Person To Person Person-to-Person Party Plan Person To Person Markets / Geographies 100 70 94 40 50 Primary Market United States, Mexico; China; India; Japan; Korea; Malaysia; Taiwan; Thailand Brazil China and United States The Americas China Year Founded 1959 1886 1980 1963 1984 Listed? Private AVP—NYSE Yes (HLF—NYSE) Private NUS—NYSE HQ Country USA UK USA USA USA HQ City Ada, MI Northamptonshire, England Los Angeles, CA Dallas, TX Provo, UT Employees 17,000 28,300 8,300 5,000 1,500 Key Executive(s) Steve Van Andel and Doug DeVos Jan Zijderveld Rich Goudis David Holl Ritch Wood Est. Members/Salespeople 3 million 6 million 625,000 3.5 million 81,900 Total Revenue $8.6bn $5.7bn $4.4bn $3.25bn $2.28bn Gross Margin - 61.5% 52.50% - 78.0% SG&A Margin - 55.6% 39.70% - 65.9% EBITDA Margin - 7.3% 16.20% - 15.2% Operating Margin - 5.8% 13.90% - 12.0% Forward PE - 10.04x 19.03x - 19.64x Qtrly Earnings Growth - N/M -31.4% - 21.2% Business Entry Fee <$100 - $15-$35 $100 - Ininital Inventory Purchase Required - $10 $989.00 $200 - % Commission on Sales ~5-6% - 3.2% ~4% ~4-5% Ratio of Members in Top X Levels - - 64% - 7.1% Member Churn Rate - - 26% - ~58% Website www.amway.com www.avon.uk.com www.herbalife.com www.marykay.com www.nuskin.com Top 55 US MLM / Direct Selling / Network Marketing Companies (1/11) Source: Latest available data. Direct Selling News; Capital IQ; MGP Research
  17. 17. 16 • This document has been compiled by Maple Growth Partners (MGP) from sources believed to be reliable, but no representation or warranty, express or implied, is made by MGP, its affiliates or any other person as to its accuracy, completeness or correctness. Such information may be incomplete or condensed and/or may not have been independently validated by MGP. MGP expressly disclaims liability for any direct or consequential loss arising from any use or reliance upon this material or the information contained herein. • Certain of the information contained herein represents or is based upon forward-looking statements or information, which may include descriptions of anticipated market conditions and changes, and expectations of future industry activity. Maple Growth Partners believes that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements and information are inherently uncertain and actual events or results may differ from those projected. Therefore, undue reliance should not be placed on such forward-looking statements and information. Disclaimer MAPLE GROWTH PARTNERS +91 9930-206-207 niraj.singhvi@maplegrowthpartners.com

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