Summary
USANA’s business model and internal controls are so weak that the company may not be able to monitor or prevent the illegal sale of its products or business opportunity in China.
Analysis
USANA continues to use the fact that Barry Minkow was convicted of and served time in prison for stock fraud in the 1980’s as its primary defense against his exposure of the company’s activities. However, rather than trying to defraud USANA, Minkow seeks to expose the weakness in USANA’s business model, which, if not addressed, will impact the company’s future.
It is conceivable that anyone anywhere in the world with access to USANA’s products could be selling its products and recruiting distributors without USANA’s knowledge. That is one of the major weaknesses in the company’s business model and operations.
The laws that apply to network marketing companies wanting to do business in China are very strict and they must obtain a specific business license. USANA was aware of the rules and noted that it was necessary to adjust its compensation and selling model in order to operate in China. Although the company may not be involved in a conspiracy to violate the law, due to the inadequacies in its business model and operations USANA may not be aware of or be able to prevent violations.
USANA needs to adjust its business model in all of its markets, not just in China. The business model has so many holes and the company has such weak financial and administrative controls, if customers are violating Chinese law, it is possible that the company does not know. For an analysis of USANA’s business model, see “USANA Should Rebound in the Long Term.”
USANA has not announced any changes to its business model or procedures, holding fast to its assertion it is not operating a pyramid scheme but that its customers are "end users" who are more interested in buying USANA's products at wholesale prices and less in making money. This is contrary to the tenets of a successful network marketing business model.
The SEC investigation and the law suit are still pending. The company’s year-to-date legal and PR pretax expenses amount to approximately $1.0 million per quarter, and this expense is expected to exist indefinitely.
Nevertheless, the fact that USANA has some of the best supplements and natural personal care products in their sectors will continue to drive sales while its faulty business model and poor administrative controls, as well as its legal “distractions” can be expected to continue to hurt business performance.
