One of the criticisms leveled against Usana Health Sciences in Fraud Discovery Institute’s original report on the company is the lack of retail sales.

Usana acknowledges the importance of retail sales in its 2005 10-k, on page 16 (bold added by me):

Network Marketing Regulation. Laws and regulations in each country in which we operate prevent the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with legitimate direct selling and network marketing activities. These laws include anti-pyramiding, securities, lottery, referral selling, anti-fraud and business opportunity statutes, regulations, and court cases. Illegal schemes, typically referred to as “pyramid,” “chain distribution,” or “endless chain” schemes, compensate participants primarily or solely for the introduction or enrollment of additional participants into the scheme. Often these schemes are characterized by large up-front entry or sign-up fees, over-priced products of low value, little or no emphasis on the sale or use of products, high-pressure recruiting tactics, and claims of huge and quick financial rewards requiring little or no effort. Generally these laws are directed at ensuring that product sales ultimately are made to consumers and that advancement within sales organizations is based on sales of the enterprise’s products, rather than investments in the organizations or other non-retail sales related criteria or activity. Where required by law, we obtain regulatory approval of our network marketing system, or, where approval is not required or available, the favorable opinion of local counsel as to regulatory compliance.

While there may not be a law on the books defining what actually constitutes retail sales, the standard used in one case was cited in the original Fraud Discovery Institute report:

In applying the retail revenue standard, the FTC required that at least 51% of commissions paid to recruiting distributors and all other basic business costs must be sourced from retail revenue (sales to consumers who are not part of the chain). If less than 51% of the commissions come from retail revenue, the MLM scheme is treated as primarily based on revenue from the endless chain of recruits. The commission payments to recruiters are then treated as, de facto, payments for having recruited new distributors. Most of the commission money comes, ultimately, from the people recruited. They, in turn, recoup their investments and earn a profit from the funds – fees and purchases – paid in by the people they recruit, in a Ponzi?style endless chain.

What does this mean? In this case, the payment of commissions purely on orders made by downline members is not appropriate unless at least 51% of those commissions can be tied to actual retail sales.

So how does one define an actual retail sale with Usana? One measure could be the sales made to “preferred customers” of Usana, which are about 14% of all sales Usana makes. But what about the sales to associates, who are supposedly in the business to sell vitamins and make a profit? FDI contends that the majority of purchases made to associates are not actually sold to a retail customer.

Usana’s defense? The associates are themselves customers. If they use the vitamins, then a “retail sale” has been made and the burden fulfilled.

Yet in 1998, a company executive explicitly said that a sale to an associate is does not count as a retail sale. At Usana’s 1998 convention, Dallin Larsen, Vice President of Sales gave an address on changes to the company’s policies and compensation plan. Here is part of what he said (bold added by me):

USANA’s policy states five retail sales per month. Are you meeting this requirement? What constitutes a retail sale? It’s the sale of product to an individual who isn’t participating in the compensation structure of the Company. The policy doesn’t say that the product has to be sold for the retail price, although we encourage you to do so. It says that you need customers who are buying the products who aren’t participating in the compensation plan.

What’s the solution to meeting the retail sales requirement? It’s the Preferred Customer program. At the end of March, we had 12,000 Preferred Customers who were purchasing our products each and every month. Isn’t that fantastic! These people are considered retail customers and count towards meeting the retail sales requirement even though they’re purchasing at wholesale. Congratulations to those of you who are introducing Preferred Customers to USANA.

Fulfilling the Retail Sales Requirement
Your five sales can come from retail customers who you’re selling the products to, Preferred Customers who are placed first level to any of your own Business Centers, or a combination of Retail and Preferred Customers. To me, enrolling your five Preferred Customers is the easiest way to meet this requirement.

The next logical question is, “Will USANA continue sending me my commission checks?” The answer, of course, is yes. We will continue sending checks each week just as we’ve done without fail since September of 1992. However, we’ve been advised that we need to become more active in verifying that products are in fact being sold, so the USANA Compliance Department will randomly send out a few letters each month to Distributors who are earning commissions. If and when you receive a letter from USANA, asking for proof of retail sales, you’ll have to provide the information. If you can’t show proof of retail sales for the month in question, commissions will be withheld until you can show proof that you have five customers who are purchasing products. At that time, you will once again become eligible to begin earning commissions. But again, these can be Preferred Customers, retail customers or a combination.

Let me say that it’s not the intention of the Compliance Department to harass anyone. They have a thankless, but important, job to ensure that we are staying in compliance with the regulations established for our industry. Companies that don’t have some sort of verification program put themselves and their Distributors at risk. It’s clear that simply having a Retail Policy in place is not enough. Steps to verify the actual sale of products is what regulators require. Please ensure that you take the steps necessary to establish your customers if you haven’t done so already. We have Distributors who are sponsoring new Preferred Customers each week. The courts have ruled against the notion that Distributors in your downline count as customers. I don’t agree with these rulings personally, but nonetheless, that’s the current position. USANA, as a member of the Direct Selling Association, supports the DSA’s current effort to introduce legislation that would permit Distributors, who use the products, to also be considered customers. If and when anything changes in this regard, we’ll let you know.

Note again that preferred customers of Usana are only accounting for 14% of Usana’s sales. Actual retail sales by associates to end users have not been revealed by Usana, and I doubt they would be able to provide documention of such.

So who’s really buying the vitamins?

Note: Research for this post done by TerminatedRamp, of Yahoo message board fame.