"Stupid" Investment of the Week
A distributorship for XanGo Juice
The promises start with a healthy immune system and pain-free joints, move through a cleaner intestine and an improved respiratory system...
The promises start with a healthy immune system and pain-free joints, move through a cleaner intestine and an improved respiratory system, and then escalate to where you can make a fortune.
And that's when it becomes obvious that going into business selling XanGo Juice — a nutritional supplement made from an antioxidant rich fruit called the mangosteen — is a Stupid Investment of the Week.
XanGo Juice is one of countless health products sold through what supporters call "direct marketing," but what critics label "multilevel marketing." No matter what you call it, it's quickly clear that you're swallowing more than just juice if you expect this to lead to a successful home-based business.
Stupid Investment of the Week showcases the conditions and characteristics that make an investment less than ideal for the average consumer, and is written in the hope that spotlighting danger in one situation will make it easier to avoid trouble elsewhere.
A XanGo Juice distributorship is hardly the traditional "investment," and in fact does not necessarily cost the buyer much money. For the purposes of this column, however, it represents the outlay of capital with an expectation of a return — the new business — so it qualifies.
It is equally important to recognize that picking on the business aspects of XanGo Juice is a far cry from ripping the product. The mangosteen is rich in xanthones, a "super antioxidant," — the brand name combines xanthones and the mangosteen — but it is also a dietary supplement, meaning it is a food product and does not require approval of the Food & Drug Administration. (Judging from a competing product purchased at my local natural-health store, mangosteen juice is tasty.)
The value of super antioxidants is not in question; the value of a XanGo distributorship is.
Aaron Patula of Atlanta heard radio commercials advertising the "3-Step Plan Home Business Building System," and followed those instructions to a Web site www.3stepplan.com that never describes the actual business. He was disappointed to learn that the promised turnkey business was multilevel marketing.
"It's all over the radio, sounding like a real chance to invest in a home-based business," said Patula, who is looking for an entrepreneurial opportunity. "But what they really want in multilevel marketing is for you to buy the product yourself."
A request for information on the 3-Step Plan brought a call from a XanGo distributor, which is where the business claims got goofy.
According to the voice-mail for John Olivari, the "private franchise coordinator with XanGo" who contacted me about the business, XanGo sold $50 million of products during its first full year (2003) and $150 million a year later, and the company expects $1 billion in revenues within seven years. He noted that XanGo sold more in its first year than Pepsi-Cola did in its 34th year.
"How would you like to have invested in McDonald's when they started out?" Olivari asks in the message.
It sounds great until you dig deeper. For starters, Utah-based XanGo is a private company and has never released its sales figures, according to company spokesman Bob Freeze. "That's conjecture from the distributor," Freeze said. We have never disclosed our financial results to distributors, to media, or to any outside parties."
The $50 million in immediate sales seems dubious, if only because the company would have had to sell nearly 500,000 cases of XanGo Juice to get there, an awful lot when the company was early in the process of "creating the category" of mangosteen juice.
The Pepsi claim is suspect, too. For starters, the first Pepsi-Cola Co. was formed in 1902, so its 34th year was 1936, hardly a valid comparison for any 21st-century business; by the time that 34th year rolled around, Pepsi had been declared bankrupt twice (although a company history shows that it made a $2.1 million profit in 1936).
Olivari used prepared materials to explain the business program, and they did not make outrageous sales claims. But the first move in the three-step plan was to "Drink XanGo Juice." The next step involved introducing others to the benefit of the drink, getting them to sign up for distributorships and then taking your cut of the profits when they buy the product. A 25-ounce bottle of XanGoJuice sells for $25; distributors buy them by the four-bottle case, and the company recommends the purchase of one or two cases per month (users typically drink one to three ounces per day).
Because this is multilevel marketing, you get a commission when the distributors you sign up, in turn, find new customers. The Federal Trade Commission has warned consumers that multilevel marketing has been used for scams in the past, and has produced an alert suggesting that consumers "beware of plans that ask new distributors to purchase expensive inventory."
XanGo Juice is not particularly pricey, but that also holds down the potential for the multilevel commissions to generate life-changing sales. (Multilevel marketing is common with nutritional supplements and vitamins, where it can deliver customers more quickly than costly ad campaigns.)
New XanGo distributors pay a $35 membership fee, and may also pay costs to an advertising cooperative or for marketing, seminars and other ways to find new distributors.
Freeze said that XanGo now has about 700,000 distributors worldwide, and acknowledged that 70 percent of them don't care about the business end, simply using their status to buy the juice at the discounted membership price (the non-member price is $37.50 per bottle, according to XanGo's Web site). For the 30 percent trying to use the juice as a business opportunity, Freeze said that nine out of 10 "have income exceeding their expenses."
"You can't even incorporate for $35 to start a real business," Freeze said, "and here you are getting a legitimate business opportunity with real support, where people have been successful."
Still, Thomas Von Ohlen, a clinical nutritionist in Cape Coral, Fla., whose business includes the sale of supplement products, notes: "There are a lot of MLM products that are great products, but not great businesses that can make someone financially independent. ... The percentage of people who have memberships who are making six-figure incomes, it's not even a half a percent."
"Someone will get wealthy selling this stuff, but it's probably not going to be the next person who signs up for a distributorship."
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe's Stupid Investment of the Week or a comment about this week's column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.
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