http://www.time.com/time/magazine/article/0,9171,1541294,00.html
State of Reliefs
By JEFFREY RESSNER / SALT LAKE CITY
Posted Oct. 01, 2006 Looking for a great business opportunity? Step right up, ladies and gentlemen, and join the XanGo team. Pronounced zang-go, this powerful elixir comes from the mangosteen, a fruit grown in the jungles of Thailand. The juice is anti-inflammatory! Antidepressant! Antitumor! Now you too can be a distributor of this incredible formula for a one-time fee of just $35 plus $100 for the first four bottles. Not one of those claims has been conclusively proved, but similarly worded pitches--made in e-mails or other direct solicitations to independent marketers have helped XanGo pass $200 million in sales in 2005. The four-year-old company is just the latest big player in the country's $23.5 billion dietary-supplement trade--much of it based here in an arid stretch of Utah called the Wasatch Front.
More than 100 supplement companies dot the terrain alongside I-15 snaking through Salt Lake City, Utah, generating $4 billion in annual sales--four times the revenue of the state's more famous ski trade. The herbal health business is so prevalent in this area that it has been nicknamed Cellulose Valley, after the primary component of green plants.
Why Utah? For one thing, the dry air is ideal for storing precious powders. For another, politicians like Senator Orrin Hatch have helped create a fertile regulatory climate. Then there's the long-standing environment of support for the products. Many Utah supplement companies are owned or operated by members of the Church of Jesus Christ of Latter-day Saints (LDS). In the 1800s, LDS founder Joseph Smith blamed traditional medicine for his brother's death and his own traumatic leg surgery. Early Mormon writings praised the "plants and roots, which God had prepared to remove the cause of diseases." In the 1940s, Mormon herbalist John Christopher preached about natural healing. A few decades later, three Utah companies--Nature's Herbs, Nature's Way and Nature's Sunshine--began selling his formulas.
But it's Utah's entrepreneurial attitude that perhaps accounts most of all for the boom. A large portion of supplements is sold through multilevel marketing, commonly known as MLM--or person-to-person sales. The trade publication Nutrition Business Journal estimates that $7.7 billion in supplements was sold in U.S. vitamin stores last year, $6 billion by food markets and big-box outlets and $4.2 billion via MLM distribution. "It's a substantial figure," says journal editor Grant Ferrier. "Roughly 20% of all sales come from MLM, and Utah is the stronghold."
One reason for Utah's MLM success seems again to stem from the church. Nature's Sunshine became the first to go that route back in 1975, and Mormons--trained in door-to-door evangelism through compulsory missions--proved natural salespeople. "The church provides a network--a real plus factor for MLM companies," says Rory Mahony, general manager of Nature's Way, which sells through health-food and vitamin shops. Under direct-sales plans, independent reps earn commissions for items they sell but also receive payouts by recruiting others to become distributors. The bigger one's network, the better.
The MLM model has been upgraded with sophisticated tracking software, video blogs and other high-tech means to tell the story of the product's value, which distributors say is the key to clinching sales. Utah companies like XanGo reach far beyond state boundaries with evangelists like Francine Blain, a single mother and former contract attorney from Santa Monica, Calif. Blain signed on two years ago as a XanGo distributor. When not tending to her 5-year-old son, she's immersed in all things XanGo--tinkering with her eponymous website, talking to the "upline" sponsor who signed her, recruiting more "downline" distributors, listening to motivational training sessions and using an automated dialing system to cold-call strangers who have expressed interest in supplements or owning a home business.
Blain is a manic, mouthy merchant of mangosteen. "No commute. No dress code. I never have to leave the house. I've found my dream job," she says. She envisions XanGo paying for her son's education, homes in Manhattan and Paris and "the freedom to pursue my artistic side." As for XanGo's health benefits, Blain is a believer. "My friend's father had pancreatic cancer," she says. "After XanGo, he had much more energy."
Gung-ho marketers like Blain have helped propel XanGo to the fore of the business. The privately held company aims to hit sales of $1 billion by decade's end. "We're ahead of projections on our fourth year," says co-founder Gordon Morton at his orange-hued headquarters in Lehi, Utah. "We're very bullish we'll hit our goal." (Some publicly traded supplement firms also use MLM sales, among them Usana and Nu Skin, with fiscal 2005 revenues of $328 million and $1.2 billion, respectively.)
Though wildly successful, the MLM business model has opened supplement companies to a persistent complaint: the stuff doesn't work as claimed. Because independent marketers are not scrutinized by the Food and Drug Administration (FDA), the business has long been criticized for pushing unwarranted claims through its network of sellers. "While you have the FDA breathing down your neck about what your company can legally say, distributors like Bob and Mary can tell their friends whatever they want," says Dan Hurley, author of the forthcoming exposÈ Natural Causes. He writes that aside from fish oil, vitamin D and a handful of other vitamins and minerals, "the vast majority of supplements taken by Americans have been proven to be unsafe, ineffective or both."
In the case of XanGo, "no published clinical trials [show] evidence that either the fruit or its juice is an effective treatment for arthritis, cancer or any other disorder in humans," writes Dr. Brent Bauer, the Mayo Clinic's alternative-medicine specialist. Mangosteens contain antioxidants called xanthones that have been shown to stop certain bacteria and fungi in lab tests. Yet independent-distributor sites claim the juice helps everything from Alzheimer's disease to kidney stones. XanGo's Morton concedes that wild claims are being made. "With 600,000 distributors, some stuff gets past our compliance [measures]," he says. "Overpromising and underdelivering is a problem in any company, from painting houses to selling cars."
Sure. But promising a nice paint job isn't the same as claiming to cure cancer. In 1997, Utah-based Nu Skin paid $1.5 million to the Federal Trade Commission, which monitors advertising claims, for five products it said could reduce fat and build muscle. Before that, the company was accused of making unsubstantiated claims about a baldness treatment and a wrinkle lotion. Packaging for many Nu Skin products (and those from sister company Pharmanex) now carries an array of disclaimer asterisks.
Any major regulatory oversight would be a new hurdle for the supplement business, thanks to some old friends in Washington. Senator Hatch co-sponsored the Dietary Supplement Health and Education Act of 1994, which released manufacturers from demonstrating that products were safe before being sold. Hatch has invested in a Utah company called Pharmics, and other supplement companies contribute regularly to his campaigns. XanGo recently became Hatch's top contributor, with executives donating $46,200.
Not even Hatch could halt the industry's dose of bad press, though, over ephedra. The FDA received more than 800 reports of adverse effects from the Chinese weight-loss herb before it proposed limiting doses in 1997. A subsequent study tied 155 deaths to various ephedra products, but uncontrolled sales weren't banned until 2004. Utah company Neutraceutical Corp. is still arguing that lower doses are safe, but in August the firm was overruled by an appeals court.
Another concern: supplement companies may soon have to rethink their MLM models in order to go global. In July, Nu Skin received word that China's Ministry of Commerce has approved the company's proposal to begin direct sales in that country early next year. (So far, Avon is the only other such U.S. company allowed there.) Nu Skin has poured $100 million into manufacturing plants and opened 150 retail shops in China. But it won't be business as usual. Under the license, Chinese distributors earn commissions on products sold outside stores but won't be paid to recruit other sellers. "The government was not inclined to allow multilevel or tiered compensation," says CEO Truman Hunt.
With much of Asia already supplement crazy, U.S. companies believe that China is a natural market for their goods, many of which are derived, after all, from Asian herbs and plants. Consider the buzz in holistic-healing circles around Himalayan goji berries, used in Tibet for nearly 2,000 years to treat kidney problems, allergies, diabetes and tuberculosis. At least that's according to the marketing materials of Timpanogos Nursery, a farm growing goji berries--in Utah. The mangosteen may have met its match.
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