Read Len Clements Thoughtful Response to FDI

Len Clements recently posted a point-by-point white paper anyone interested in USANA and FDI should read. In that response Len said:

"I am the founder and CEO of MarketWave, Inc.2, a research, education and consulting firm exclusively serving the network marketing industry, and the author of the book “Inside Network Marketing”. I have worked full time over the past 17 years studying and analyzing the MLM industry and have worked to expose the frauds and pyramid schemes that often try to disguise themselves as legitimate MLM operations. As one of only five court-certified experts in multilevel marketing in the United States, I am acutely aware of the difference."

Read the entire article on his website: www.marketwaveinc.com...

INSIDER SELLING AT USANA

So, why have so many USANA insiders sold their stock -- and how can they make so much money? Let's start with a bit of history.

Those around in 1999 and 2000, will remember that USANA's management team was one of the lowest paid group of executives -- many of today's big earners were being paid less than $100K then and their stock options were under water (meaning the exercise price was above the stock price)-- they were worthless pieces of paper. Executives were frustrated because their stock options were expiring -- and the company was performing well -- but Wall Street didn't seem to care.

When Dave Wentz took over as EVP -- soon to be President-- he worked with the board to sure up the management team (which had produced relatively good results -- consistent results -- but had not seen steady stock growth). He granted a relatively modest amount of stock options to the management team at the then bargain price of less than a dollar per share. It worked -- the management team stayed together and it didn't cost the company a lot of cash as Dave used stock rather than salary increases to engage the company's executives.

This was a fat time in America -- prior to the Internet Bubble -- stock options were the darling of Wall Street. Everyone wanted executive compensation to be tied to the stock price and USANA was late, but it finally followed the wisdom of the time and issued stock options that provide the executives an opportunity to benefit if they could turn the company around and create value for the shareholders.

Things didn't improve immediately, and some would argue that things got worse. But the management team stuck together, and eventually the company turned the corner and the stock slowly began to increase in value.

As the executive's options began to vest -- they executives began to sell. Did they know something that others should know? "NO!"

They were scared they would lose it all -- the company's stock had fallen before even though sales and profits were growing. The management team had learned how to grow sales but they had no idea how to affect the stock price.

This management team had been paid lower than their peers for several years -- they did not want to 'miss out' on the chance to cash in on their success. This team knew that there were too many variables outside of their control -- and you can't spend stock options -- you have to convert it to cash.

Put yourselves in their shoes -- none of the management team (other than Dave Wentz) comes from a family with money. They are all first generation success stories. They aren't making $500K or $1 million in salary like many executives at public companies, and this stock represents their 'only' chance of acquiring significant wealth.

This is a hard working management team, who took a risk -- accepted a lower salary in hopes that some day their work would be rewarded by Wall Street. NONE OF THE EXECUTIVES COULD HAVE GUESSED THE STOCK WOULD APPRECIATE AS IT HAS! They have worked hard, they have all fought through some tough years and they got a bit lucky.

Some think that there is something 'fishy' going on. I would argue that management focused on delivering value to shareholders and they all have learned first hand that the American Dream is alive and well.

More about the 'buy back' strategy in another post.

Show Me The Money!!!

This is admittedly a side to my monologue of the past few days, but I have one question for FDI: "Who are you being funded by?"

Look at the Google Ads on this page; clearly FDI is paying big bucks to actually advertise to generate interest in this story. Who is paying for the ads, and who is paying for the video and the research? Something smells bad....

Clear the Smear: A tribute to Fuller, Wood and Waitley

For me, the toughest part of watching the Minkow attacks on USANA have been the personal attacks aimed at Gil Fuller (see my previous mention of him in my archives), Dr. Tim Wood and Dr. Denis Waitley.

These three men have had long and successful careers and have distinguished themselves by their actions. In a world that seems to recognize and reward rhetoric rather than behavior -- these three men walk their talk. I have found each to be honorable, honest and respectful individuals.

Minkow has smeared all three of these men to the point that the uninformed would believe that they are evil and conniving men just out to make a buck. A careful examination of their personal lives and their business careers would reveal that these three individuals are good men.

I hope this campaign does not permanently scar the otherwise praise worthy careers that Gil, Tim and Denis have enjoyed.

For what its worth -- I think the greatest challenge facing USANA is the prospect that some day each of these three individuals will retire or move on to other opportunities and will leave a huge hole that will be near impossible to fill.

Does USANA have products with consumer value?

If an alien visited Mill Creek Junior High to watch its (the alien's) first and only basketball game, the alien might conclude "ALL BASKETBALL PLAYERS ON EARTH ARE SHORT AND WHITE." That headline would get a chuckle out of those of us on earth who have experienced March Madness.

Well, Minkow (who is somewhat of an alien to direct selling) visited USANA and somehow got fixated on one or two products and has conveniently forgotten the dozens of other products in USANA's line. His headlines reflect the small sample size of his study, and his conclusions have left those of us on earth chuckling a bit. Fortunately, I actually spent a year of my life studying this is exact issue (at USANA no less), and here are the facts:

1) The USANA HealthPak 100 -- delivers convenience -- not necessarily the lowest price. Believe it or not, it is expensive to package the vitamins in daily dosages and USANA charges a premium for the convenience of the pack. USANA's HealthPak 100 was never designed to be a retail product (in other words it was not designed to be resold), but rather to be purchased direct from the company. Fortunately, USANA has a Preferred Customer program which allows those who would otherwise be 'retail' customers to place their order from the company, be serviced by the company, and still allow their friend or family member to earn commissions on their purchases. Welcome to network marketing in the 21st Century.

2) USANA actually spent tens of thousands of dollars to conduct a pricing study. They acted on the information they collected (from current, previous and non-customers) and dropped their prices considerably in the spring of 2000. It was called the "Price Value Initiative" and it was a painful era for the company (by the way -- it was a calculated pain pill the company took and I believe it has paid off in the long run). For those who want to build a retail business and mark up the products, you would choose to use one of a dozen products packaged in bottles and made available at much lower prices than the HealthPak 100 and with plenty of room for a retail mark-up.

3) Pricing is a positioning tool, not just a measure of value. The world is full of brands for which consumers are willing to pay a premium. USANA has made an effort to get out of the commodity pricing of nutritional supplements by increasing quality and packaging services around the supplements. So even if its costs were lower than its competitors, it would use its price to establish in the minds of consumers the quality of its brand (and the brand includes the bundle of services that accompany what some might call the commodity in the package -- this bundle includes educated sales associates, personal selling, 800 call center, customer service and support, conferences and workshops, quality control, etc., etc...). USANA is not looking for the customer who wants to buy their vitamins at Wal-Mart for the best possible price -- they appeal to the discriminating consumer who is willing to pay for panache -- and there are hundreds of successful, profitable, companies who have built a business in other channels, with different commodities.

Is USANA perfect -- I don't know, I haven't been engaged for a few years and I'm not able to say whether or not they have remained vigilant in their pricing research, or if they have invested in the 'bundle' of services that strengthens their brand.

The GOOD NEWS: USANA has tons of research and significant consumer feedback to prove to any analyst, any judge, any regulator, or any customer that they care about delivering value and made difficult business decisions to respond to customer pricing concerns.

The BAD NEWS: I know of many direct selling companies who have not been so sensitive. This is an opportunity for improvement for the industry, and I invite all companies to engage in a rigorous analysis of their pricing to make sure that there is a legitimate consumer value proposition.

Direct sellers must constantly balance the value they are able to deliver to the end consumer with the business costs entrepreneurs must incur each month to qualify as a legitimate 'distributor' of the company's products.

Minkow's USANA Attack: Why The Industry Should Take Note

In November of 2004, I was invited to leave USANA Health Sciences after serving as the VP of Marketing since April 1, 1999. Because of my intimate knowledge of the company, I have had several phone calls about the company and several asking for my opinion on the current dispute between USANA (www.usanahealthsciences.com) and Mr. Minkow from the Fraud Discovery Institute (www.frauddiscovery.net). In response to the inquires, I'll take the next few posts to outline my opinions and to invite others to provide me with their insight and perspective.

WHY DIRECT SELLERS FROM ALL COMPANIES SHOULD BE CONCERNED

During a recent call with a Wall Street Analyst, I was asked, "Why do you think Minkow is doing this? How is he profiting if he has shorted only a few hundred USANA shares?" My answer is "I have no idea," but if I were investigating this I would see how many other direct selling companies Minkow has shorted. In other words, if I am Minkow, I know that everyone will ask "how many USANA shares are you shorting?" BUT, would they ask me, "How many Mannatech shares, NuSkin Enterprises shares, Reliv shares or shares of Nature's Sunshine are you shorting?" -- probably not.

You see, investors who are putting money in this industry are often watching the reports and activities of the whole industry to get clues as to the direction their investment might be heading. Reports of delays in China from one company, usually causes analysts following that company's competitors to reassess their projections based on the likelihood that their company may also experience the same delays.

USANA is one of a handful of the publicly-traded network marking companies with significant good will among institutional investors on Wall Street (if you don't believe me look how many of the analysts have stuck with the company through these charges ) In fact, I have personally spoken with analysts about the company and know first hand how they view USANA. Therefore, an attack on USANA is likely to impact all of the network marketing public stocks.

Indeed, Minkow's attack on USANA should be a concern to all network marketing companies (public or private) for the following reasons:

1) If Minkow convinces the FTC to take a closer look at network marketing practices, the industry could lose significant ground gained from years of good behavior and consistent education led by the Direct Selling Association (www.dsa.org). No matter the industry, significant changes in government rules and regulations have an negative impact -- that impact is magnified in this industry with so many independent agents who lack the comfort of a corporate legal team.

2) USANA has one of the industry's best reputations for ethics and truthfulness -- if Minkow convinces Wall Street that USANA has systematically withheld the truth, I believe that Wall Street is likely to lose confidence in the broader industry which could lead to the loss of billions of dollars of institutional capital currently invested in network marketing companies. This capital has also been available to private companies and has funded the acquisitions of several companies (Herbalife, Body Wise, Arbonne International,etc.).

3) There is no reason to believe Minkow will stop at USANA -- it seems apparent that he has partnered with individuals who have an issue with the whole industry. Any network marketing company could be the next to receive virtually the same set of complaints and attacks as Minkow has leveled against USANA.

4) FDI's claims create uncertainty for potential distributors. While some will interpret this as a USANA specific issues, others will view the claims as an indictment on the whole industry and all direct sellers will be forced to begin anew to recreate the credibility earned over more than 10 years of notable ethics improvements.

WHAT SHOULD YOU DO IF YOU ARE A DIRECT SELLER?

Direct Selling is characterized by companies and individuals who have always been willing to share information, but have rarely actively defended a company called into question. While USANA must stand alone in answering questions about the company's representations -- all of us can actively engage in educating our distributors, regulators, and the general public about the misrepresentations Minkow is using to describe the network marketing distribution channel.

AND we can all do our part to continue to improve. We know there are misrepresentations (often innocently made under the stress of being in front of a public crowd) and we need to continue to make sure we insist on complete honesty.

We need to continue to push for more retail sales, and greater number of consumer sales. Our products should deliver true value to the end consumer and we should have customers in our portfolio who purchase the products because they want them -- not because they want to earn a commission. All of us should be actively engaged in monitoring the market, and in making sure our products are priced according to competitive benchmarks.

I will take time over the next few days to do my part to bring some clarity to the issues highlighted in this dispute and I invite you to give me your comments as well.