Herbalife Cuts Out Middle Men as It Moves Toward Vertical Integration

August 18, 2009

Herbalife has entered into an agreement with Micelle Laboratories to acquire the company’s Lake Forest, California-based manufacturing facility. Micelle has periodically manufactured supplements for Herbalife since 1985. This marks the first time in Herbalife’s 29-year history that the company will manufacture its own products in the United States. Herbalife currently owns a manufacturing facility in China, where it produces 100% of its Chinese products, but the company does not export from that location. The network-marketing company has historically worked primarily with contract manufacturers such as Micelle for the production of its U.S. products. Herbalife will continue to partner with contract manufacturers, though it intends to handle more of its manufacturing operations in-house than it had in years past.

Herbalife has been serious about moving to a more vertically integrated business model for the past several years, Chief Financial Officer Rich Goudis told Nutrition Business Journal. “We’ve spoken to several of our larger partners and we looked at some businesses that were in bankruptcy, and we found Micelle, who we had been doing business with all along,” said Goudis. “What we found inside the factory is that it was well suited from a capability standpoint. Powders and liquids represent about 50 percent of our business and from a process standpoint; [Micelle] understood that business very well. They also do tablets and encapsulation. They had the capability, now we bring our expertise and bring more business to the facility.”

In addition to having a team of industry veterans in place internally, Goudis noted four main strategic advantages that motivated Herbalife to move forward with the agreement: Better control over current good manufacturing practices (GMPs) on a global basis, mitigation of commodity cost pressures, more protection of the company’s intellectual property, and an accelerated speed to market for products. “Our plan is to make incremental investments in capacity and start to bring in production being done outside where it makes sense to support as much of our global business as we feel necessary,” said Goudis.

The move can also be viewed as a defensive strategy for Herbalife, which does not want to put its business at risk by working with unscrupulous contract manufacturers. “GMPs continue to tighten and those hurdles will be raised in the next ten years. Not every contract manufacturer will be able to leap those hurdles,” Goudis told NBJ.

Micelle Laboratories will now become the manufacturing arm of Herbalife. All 72 full-time and 20 part-time employees will have the opportunity to become Herbalife employees once the deal is finalized, which is expected to be done within 60 days. The company is on track to produce its second most profitable year in company history, according to Goudis. Herbalife shares opened at $32.47 on August 18.

Related NBJ Links:
Herbalife Experiencing Stellar Sales Despite Slumping Economy
Herbalife Responds to Contaminated Supplement Claims
2009 Direct-to-Consumer / Non-Retail Industry Sales Report

Related Functional Ingredients Magazine links:
Top tips for working with a contract manufacturer

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