By Terrence McCoy
By Scott Fishman
By Deirdra Funcheon
By Allie Conti
By New Times Staff
By Ryan Pfeffer
By Deirdra Funcheon
By Kyle Swenson
Chevalier closed by assuring everyone that RSI distributors are not required to invest more than $49.50 for a distribution starter kit. He later told New Times, however, that new distributors, particularly affluent professionals like doctors, are encouraged to buy $4000 in products to qualify immediately for a 5percent commission on sales by their downline distributors.
But there was very little talk at the meeting about the RSI products, which were arrayed in the front of the room. That's not as surprising as it seems, because Chevalier and other distributors, as well as the company's promotional audiotapes, say that's not where the real money is made. According to a handout Chevalier uses in training his downliners, distributors' long-term incomes from RSI are based primarily on personal consumption of products by their downliners and by the products these distributors sell to others. None of the eight RSI distributors interviewed by New Times put much emphasis on selling pills to people who are not downline distributors.
What distinguishes a "legitimate" MLM business from a pyramid scheme is that the former focuses on selling viable goods or services to retail customers, while the latter concentrates on recruiting as many distributors as possible and siphoning money from them, says Jim Lyons, a Tampa-based investigator for the Florida Attorney General's Office. According to federal and state case laws, MLM distributors must sell at least 70 percent of their products to retail customers who are not distributors. This is to protect unwary distributors from getting stuck with a garage full of inventory they were required to buy to qualify for commissions. Through the years the Attorney General's Office has taken action against 48 MLM companies that ran afoul of anti-pyramid rules, including major alternative-health firms such as Herbalife International and Nu Skin International.
But Robert FitzPatrick, coauthor of False Profits, says virtually all network-marketing programs are pyramid schemes, because recruiting, not retail sales, is the true goal. It's statistically impossible, however, for more than a tiny percentage of distributors to enlist enough downliners to succeed financially. "What people don't seem to think about is that because there are a finite number of people in the world, the people at the bottom rung can't find enough customers to make a profit," says Les Garringer, Florida's assistant deputy attorney general in charge of economic crimes.
One reason potential distributors don't grasp this concept is because MLM companies generally don't -- and are not legally required to -- disclose the average income of distributors, how many drop out within a year, or how many make the six- and seven-figure incomes with which the companies tantalize them. Downliners often end up losing the thousands of dollars they invested in distributorships and, even worse, alienating friends and relatives they tried to recruit, FitzPatrick says. The beneficiaries are the program's founders and first distributors, who often get rich off those below them in the chain. Gold said that Rexall Showcase does not provide information on the average income of its distributors or the length of time that they remain in the network.
Here's why Rexall distributors concentrate on recruiting rather than selling. According to a chart in Chevalier's handout, if a distributor starts with three customers, and if he and they each buy $100 of RSI products a month, the distributor collects only $15 a month in commission. But the returns are exponentially greater if those customers become distributors and recruit other people. The person at the top of this chain gets up to 10percent of all downliner sales. If the first distributor ends up having five active distributors under him, each of whom has three customers, and each person in this network buys $100 a month of products, the original distributor pockets almost $11,000 a month. That soars to $50,000 a month if each downline distributor adds just one more customer.
Given the incentives, Chevalier and other serious distributors understandably put almost all their efforts into signing up downliners. They say most products are sold to people in the distribution chain, who use the stuff themselves. "The only people who sell to retail customers are the doctors," Chevalier said in an interview. "People like myself never sell. Five percent of what Rexall sells on a monthly basis is sold at retail prices to real retail customers. Ninety-fivepercent is sold wholesale to people like me and the rest of the people in my downline for our own consumption. It's a wholesale buying club like Costco."
In interviews, several doctor-distributors said they don't sell to retail customers either. "I'm not in the business of retailing products," explained David Kane, a Miami family physician. "I tell people about the products when I introduce the business to them." "I don't ask people if they'd like to buy products," echoed Harold Glatzer, a Miami podiatrist. "I create interest in the idea of capturing market share or acquiring distribution rights."
Chevalier and Glatzer even tried to recruit this reporter. "If there comes a point in time where you are interested in looking at this from a personal point of view, let me know," Glatzer said, hopefully.
The company has clearly benefited from its distributors' focus on signing up new distributors. In its 10K report, Rexall Sundown said the primary reason for RSI's 51percent revenue growth last year was a 30percent expansion in the number of distributors.