UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.
Earlier this year, Barry Minkow and Fraud Discovery Institute railed on Medifast, a company with a weight-loss plan being marketed with a multi-level marketing plan. The company was built primarily through marketing of the weight loss program through physicians. The Medifast executives realized that the MLM structure was their golden opportunity.
Why is multi-level marketing such a cash cow for the owners and executives of companies like these? Because product and service sales become largely irrelevant. The company instead markets the “opportunity” for making extra money and achieving financial freedom. (Almost no one is able to actually achieve either of these when they sign up to sell MLM junk, but that’s beside the point. Get people to believe it’s possible, and you’re golden.) Recruit people into the MLM, require “minimum purchases” from each to continue to “qualify” in the pyramid, and you are likely going to have exponential growth for the company.
Once Medifast realized there was a chance to make gobs of money via the multilevel marketing model, they focused on that and the company’s earnings have reflected this successful strategy.
With the help of MLM expert Robert FitzPatrick, Barry Minkow demonstrated how a pyramid scheme like Medifast’s Take Shape For Life program works. (And this company isn’t alone with this method of marketing. Plenty of other companies use it. One such company is YTB, which got nailed by regulators for being a pyramid scheme.)
Another financial expert is criticizing Medifast for promoting their alleged pyramid scheme. David Phillips at BNET has written two articles on Medifast and Take Shape For Life (TSFL). The second really focuses on the pyramid scheme aspect.
He raises some excellent points. The weight loss industry as a whole has suffered greatly thanks to the economy. Big declines in revenue are hitting companies like Weight Watchers International and Nutrisystem. How then, can Medifast be doing so well? For the six months ended June 30, 2009 Medifast reported revenue of $74.4 million, an increase of 41% over the prior year, according to the company’s earnings release.
The answer could be that the company’s program is much better than others. There’s no objective data that supports that contention however.
There are zillions of diet pills, programs, and meal plans out there. Why is Medifast so successful of late? The growth isn’t coming from the physicians who promote the program or the weight loss centers that offer products and service. The success is in the Take Shape For Life unit (the MLM arm of the company), which accounted for 58% of revenue in 2009. In contrast, this part of the company contributed only 33% of the revenue in 2008. TSFL alone had a 96% increase in revenue in 2009 over the prior year.
But maybe the MLM part of the company is so successful because it works so well for the “coaches” recruited into the program? We’ll never know for sure, as Medifast doesn’t disclose how much money the coaches are making, how much they spend on expenses of the business, what their attrition rates are, or how many recruits are actively selling or recruiting.
Take Shape For Life, however, makes it clear that to make real money, you have to recruit new people into the plan. This is where the allegations of being a pyramid scheme come in. Like all other MLMs that I’ve looked at, the product or service isn’t really the focus. It’s simply the bait to get someone in and make the company look legitimate. The real focus, however, is the recruiting of new marks into the scheme.
So the company’s products haven’t been proven to be stellar. The traditional outlets for the products are not doing well. And the MLM portion of the company is booming, even though there’s no evidence that the products themselves are actually selling well. Everything points to the real deal being endless chain recruitment into a pyramid scheme.
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I am a TSFL client. As far as it being a fraud well, I’ve tried other weight loss programs and this is the best by far (free or cost). The first awesome thing about it is the coaching system. It is so great to have someone who actually cares about my progress and encourages me to stay the course as often as I need them. I don’t pay for their services just the food. The second thing I love about it is the food. I am so busy a busy mom of 6 so having my daily proteins, carbs, and AND daily vitamens already prepackaged for me takes a load off. I just add water and microwave or turn on the blender. If I’m away I have bars or shakes that I can take with me. Third it’s a simple system that’s honest to the client. They forewarned me that the first 3-5 days was hard. Yes the food is a bit more then I would normally spend but I think I’m worth the investment. Also as I transition (coach guided) off the diet I purchase less food. Until I am eating mostly regular food, but smaller portions 6 times a day of healthy food. As far as the coaches getting more people into the program I think that’s awesome! Most of our country is fat and out of shape, and so many have diabetes or heart disease which the food was actually designed for. People with diabetes/heart disease live healthier lives when on the program. My opinion? If someone can lose weight, be healthy, and help others to be healthy why shouldn’t they be compensated? Are you telling me every doctor, lawyer, or accountant got into their field simply for to help people. Of course that’s not true or these people would drastically lower their fees. Health coaches in Beverly Hills, New York, and Hollywood charge huge fees for their services. TSFL Coaches need to be rewarded for their time and effort. I don’t compensate my coach for his services TSFL does…and I’m glad!
As far as our economy, people are still spending money on what they want. Think goodness they want to be healthy.
Lauren – I don’t think anyone has suggested the products are bad or don’t work. And no one has suggested that people shouldn’t get paid for selling the products. QUITE THE CONTRARY. The people making the “real” money (and there are very, very few of those) aren’t making money from selling the products. They’re making money by recruiting people with the promise of riches. That’s the problem.
Hi Tracy,
The word “opportunity’ is not the same as the word “promise’. Do you have anything that TSFL has written or said stating that they promise whoever coaches will get rich? If you do I’d like to get the link. I honestly think that so many people are looking for an easy way out, get quick rich scheme. That they see the upside of something and just think it’s going to happen overnight. ,As you obviously know success requires hard work and may take years to obtain. There are so many who just aren’t willing to sacrifice that much work, train themselves, wait, or how about this one….change. We can know that because those at the top are few and those at the bottom unfortunately are many. Human nature is like water, it takes the path of least resistance. I wonder how many people go into anything hoping for a quick turn over and when it doesn’t happen they get disgusted and quit. I saw it in college, the military, and, my goodness, even Walmart and my neighborhood grocery has a high turn over rate.
I’ve been scammed before (at 22 yrs) by real pyramid schemes and it doesn’t feel good. But I’ve learned to ask questions and discipline my self that anything worth doing is going to cost me . I’ve learned if something sounds to good to be true then get away from it. But I’ve also learned there are possibilities out there that may pay off and then again they may not. Hince the California gold Rush…few got rich but hey the country expanded.That’s just life but if you don’t have to sell your first born to try something go for it. Just being alive is a risk.
Have a great day!
Hi Tracy: Your comment, “They’re making money by recruiting people with the promise of riches” is not accurate. I worked as a Health Coach for a year and the money came from selling food NOT recruiting people. As a Health Coach, you make very little from the people below you and you make nothing from signing people up. I had 13 coaches below me and they generated very little money for me or anyone above me. We all made a pretty good amount 20%-30% on the food we sold, just like any sales job. Here is link to the compensasion plan right from the website: http://www.tsfl.com/pdfs/TSFL_CompensationPlan.pdf There is nothing to hide. I hope this helps you understand the business model. Ben
Ben – I understand the business model just fine, and you actually proved my point. They recruit with PROMISES of riches, but almost no one makes a living wage in TSFL. You couldn’t possibly sell enough of those meals to make a living. And you made almost nothing from recruiting, although that’s not what you’ll be told when you’re recruited.
MLMs are NOT just like any sales job. They’re presented that way, but it’s just not how it is. Imagine if grocery stores had sales people who went out and tried to sell food person-to-person. Could the salesperson make a living doing that? Of course not. That’s why having YOU retail food is just idiotic.
The bottom line is that Medifast is making money hand over fist from these recruiting activities, but the people being recruited are making next to nothing.
Tracy,
I have to but in on this conversation. I am a client of TSFL my family has lost a total of 200 lbs in less than 3 months. We have tried many programs and have never had this success. This being said, no one has ever approached me or my family members to get rich and become a coach. There is no pressure to sell anything or join anything. My doctors office has been signing up their patients to obtain optimal weight. Who cares who is making the money, it is a program that is very easy to follow and is saving peoples lives from a lifetime of obesity and unhealthiness. I have been on every program out, and this is by far is the only one I can say my family will follow for the rest of our lives. I have also been involved in many mlm companies. TSFL doesn’t have to promise financial rewards the program speaks for itself. I am going to become a coach to help my friends and family become healthy. By no means did anyone promise me financial success of freedom. I will keep my job and this will be my contribution to a very unhealthy, overweight community. There will always be those individuals who join one mlm after another, make a killing and move on. This is one mlm that should be for individuals who really care about people not money. You will always find the few opportunists that will promise anything to make a buck. They hit pay dirt because the program sells itself without any promises. It is just plain simple it is a great plan that really works and can become a leader in weight control.
Hi Tracy – my wife and have lost 110 lbs between us in 6 months. I have gone from a size 40 waist to a size 34 in those 6 months. No promise to get rich was made and only a curserary mention of “oh by the way, if you are interested you can get income by being a coach and helping other people.” No heavy handed recruiting. So now my wife is a coach. What’s wrong this this? Isn’t this how businesses are supposed to work in a free country? Additionally, the cost of the product without the coaching is exactly the same as the cost of the product with the coaching…because Medifast knows that “with coaching,” the success rate of the diet goes up dramatically. After having tried South Beach, Akins and a host of other diets…this one worked! Your article makes TSFL sound like a Bernie Madoff scheme where greedy little men in penthouses are taking money from unsuspecting dupes who, in the end, are left bankrupt. Those onlything TSFL took from me is 53 lbs and 6 inches. And I am happy to pay them for that.
[…] and undisclosed legally mandated reporting requirements.” Again, I said no such thing. In the blog posting Medifast referenced, I actually said: “We’ll never know for sure, as Medifast doesn’t disclose how much money […]
[…] the company was criticized for the fact that its financial growth was due almost completely to the recruitment of new “coaches” into its Take Shape for Life (TSFL) division. A month ago, the most recent report on Medifast’s recruitment business was published by […]
[…] to a mid-2009 report issued by FitzPatrick. The full text of the current report is found here. And here is my analysis of Medifast and Take Shape For Life from last year. Related […]
[…] FDI produced several press releases on the findings about Medifast, and I reproduced and quoted some of those releases and reports, as well as wrote my own analysis of the company… questioning whether TSFL could be considered a pyramid scheme. […]
[…] on my blog, I stated that TSFL health coaches “are required to put up their own money.” A simple reading of the article they reference shows that no such statement was ever made by […]
[…] Earlier this year, Medifast (NYSE: MED) filed a $270 million lawsuit against Barry Minkow, me, and several other defendants for what it has alleged are false statements and a conspiracy to damage the stock price of the company. This lawsuit is nothing more than the typical big company suing a critic to shut her up. Medifast has far more resources than any of the defendants, and the company was hoping that by suing us, we’d shut up about the company’s multi-level marketing division Take Shape For Life (TSFL). […]
[…] c. A statement of opinion protected under the First Amendment of the United States Constitution. […]
[…] Posted on January 18th, 2011 Nearly a year ago, Medifast Inc. (NYSE:MED) filed suit against me and several others, for what it claimed was defamation of its Take Shape For Life division (TSFL). My client initiated an investigation of Medifast more than year prior to the filing of the lawsuit, and published several reports on the company. I was retained as a consultant to do a small bit of analysis. Some of my work was included in reports published by the client, parts of which were reproduced on this blog, along with some of my own analysis of Medifast and TSFL. […]
[…] We criticized the company and its MLM business model. We expressed negative opinions about the disclosures Medifast makes about this “business opportunity.” I dared to suggest that Medifast might be a weight loss pyramid scheme. […]
[…] For Life (TSFL). I first became aware of Medifast via a small project for a client, but became interested in the company and how it was achieving extraordinarily good financial […]
[…] Yet when I questioned whether Medifast and TSFL might be a pyramid scheme, the company saw fit to litigate me to death. I gave the following opinion on the company: Take Shape For Life, however, makes it clear that to make real money, you have to recruit new people into the plan. This is where the allegations of being a pyramid scheme come in. Like all other MLMs that I’ve looked at, the product or service isn’t really the focus. It’s simply the bait to get someone in and make the company look legitimate. The real focus, however, is the recruiting of new marks into the scheme. […]