Committed to becoming more vertically integrated, securing its supply chain from “seed to feed,” Los Angeles, CA-based nutrition and dietary supplement company Herbalife International is undergoing a strategic “transformation.”

“We’ve undertaken a major commitment to become more vertically integrated,” said Dr. Andrew Shao, vice president of global product science and safety.

To that end, the company recently completed construction of a campus in China that includes a facility dedicated to extracting locally sourced botanicals. “It helps us have much better control over our supply chain, which is a real area of controversy for this industry, particularly when it comes to botanicals,” noted Dr. Shao.

In the U.S., the company acquired a facility in Winston-Salem, NC, late last year. That 580,000-square-foot facility is expected to begin manufacturing products by mid 2014.

In an effort to gain more control over the supply chain, manufacturing and quality control of finished products, the company will look to build or acquire additional facilities, ultimately relying less on contract manufacturers, the company said.

Herbalife intends to bring 65% of its product manufacturing in-house by 2015, according to Julian Cacchioli, vice president of corporate communications. “It’s a significant investment,” he said. “If you roll in the Winston-Salem plant, you’re looking at about a $200 million investment in vertical manufacturing over the last few years. It’s a commitment on our part to really take ownership of that whole process.”

Motivations & Strategies
The company’s commitment to vertical integration has been prompted in part by rapidly evolving regulations around the world.

Herbalife does business in about 88 countries. Dr. Shao estimated that regulations for dietary/health supplements or their equivalents are changing/evolving on some level in about 70 of those 88 countries.

“Even in emerging markets, they’re trying to establish regulations where there previously wasn’t. It’s really rapidly evolving. So part of this initiative is aimed at keeping ahead of those evolving regulations.”

Another piece involves increased demand for transparency and quality among consumers. “They want to know where their products are coming from, that they’re well made, that they can trust them. So a convergence of these factors has stimulated this investment on the part of Herbalife to stay ahead of that curve.”

In order to support increased product manufacturing in-house, the company has reorganized its research and development team under the leadership of Pradip Mukerji, PhD, senior vice president of worldwide research and development, who recently joined the company from Abbott Nutrition.

Most recently, Steven Dentali, PhD, joined the company in the newly created role of vice president, botanical sciences. He will be responsible for all activities related to botanicals, including the identification, documentation and validation of the appropriate botanical ingredients, formulations and processes that meet standards and requirements for product quality, efficacy, safety and regulatory acceptability. He will report to Dr. Vasilios (Bill) Frankos, senior vice president, global product science, safety and compliance, (and former director of FDA’s dietary supplements division), who is building a world class science, safety and compliance organization, based upon his understanding of DSHEA and FDA.

Dr. Dentali was most recently the chief science officer at the American Herbal Products Association (AHPA), where he helped to set quality standards for the botanical products industry and provide guidance and advice to AHPA member companies, related organizations, government agencies, scientific publications and the media. 

Another shift for the company has involved the way it innovates. “We’ve decentralized the ideation process to bring in more ideas from local markets,” said Dr. Shao.

Historically, the company focused on developing concepts/products for the U.S. market and then rolled them out worldwide. “The obvious drawback to that approach,” Dr. Shao noted, “is that what suits the U.S. market from a regulatory standpoint, and also a consumer market preference, doesn’t always fit other markets.”

So now the company is collecting more intelligence from staff in local markets who understand the regions and regulations more intimately. “We have folks on the ground in every major market in the world to help better understand the regulatory requirements for market entry,” Dr. Shao said. “We’re instituting better communication processes to collect ideas from our regional and country specific marketing colleagues. And we’re putting them through processes here at the home office to properly screen and vet them. That has really improved the efficiency of the product development process.”

For example, the company’s Formula 1 meal replacement shake is its global best, noted Dr. Shao. “We’ve gone and developed unique flavor profiles for different Formula 1 shakes around the world that meet local taste desires. That happened as a result of collecting feedback and using our sensory group in our R&D department to travel to different places around the world.”

On the product development front, the company recently launched its Herbalife24 line of sports nutrition products, which Mr. Cacchioli said is attracting a whole new group of fitness enthusiasts and health conscious consumers. In June, Herbalife also became the official nutrition sponsor of international football player Cristiano Ronaldo, reflecting its focus on this market.

“Sports nutrition is a hot trend,” Mr. Cacchioli added. “More and more people are recognizing there is value in the right products to support fitness programs and sports activities.” The need for a targeted sports nutrition range has been reflected in sales and customer interest, he said.

MLM Controversy & Performance
As a multi-level marketing (MLM) company, Herbalife has faced its share of critics who claim the MLM business model is akin to a pyramid scheme.

Mr. Cacchioli responded saying often times the criticism isn’t based on fact. “The fundamental thing we keep coming back to is that MLM is an established and well recognized route to market. It’s a legal route to market. And the distinction between a pyramid scheme and MLM is fundamental. A pyramid scheme is an operation where people are rewarded purely for recruiting new people into that scheme. We pay zero dollars for recruiting. All the money that’s paid to our distributors is related to the sale of products.”

Herbalife has been a very active member of dietary supplement associations around the world, he added. “We were very active in helping establish rules around MLM and preventing the pyramid scheme situation. All we can do as a company is continue to hold the highest standards of ethical performance, which we’ll continue to do. We’ll work with regulators to ensure that we help promote the positive side of MLM.”

Despite the controversy surround the MLM business model, Herbalife reported first quarter net sales of $1.1 billion for 2013, reflecting an increase of 17% compared to the same time period in 2012 on volume point growth of 13%.

In its earning statement in April, Michael Johnson, Herbalife’s chairman and CEO stated, “We continue to deliver record results in sales and profitability as our independent distributors successfully execute numerous growth strategies that enable deeper market penetration, developing customers using our weight management and targeted nutrition products every day. Obesity and poor nutrition are global public health problems. Our distributors are proud to be part of the solution.”

In June, Herbalife also released results of a study (conducted by Nielsen) on distributors and end users in the U.S., which found 3.3% of U.S. adults, or 7.9 million people, have purchased Herbalife products for personal use within the past three months.

Herbalife customers would include their distributor network, which totaled approximately 550,000 in the U.S. as of the end of the first quarter 2013.

Weight Management is the most commonly purchased type of Herbalife product for personal use, with 95% of past three month Herbalife purchasers claiming to have bought this type of product, according to the study.

Conducted online during April and May of 2013, the survey was completed without intervention from Herbalife and the company’s sponsorship was not disclosed. With a sample size of 10,525 consumers, the survey had a margin of error of +/- 0.96%.