Grupo Omnilife S.A. de C.V.

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Grupo Omnilife S.A. de C.V.

Avenida Paseo de la Prada 387
Zapopan, Jalisco 45129
Mexico
Telephone: (52 33) 3648-3636
Fax: (52 33) 3648-3668
Web site: http://www.omnilife.com

Private Company
Incorporated: 1991 as Omnitrion de México, S.A.
Employees: 3,500
Sales: $1.2 billion (2005 est.)
NAIC: 312111 Soft Drinks Manufacturing; 325411 Medicinal and Botanical Manufacturing; 325620 Toilet Preparation Manufacturing; 424210 Drugs and Druggists’ Sundries Merchant Wholesalers; 511120 Periodical Publishers; 512110 Motion Picture and Video Production; 551112 Offices of Other Holding Companies; 712111 Sports Teams and Clubs

Grupo Omnilife S.A. de C.V. is the holding company for a manufacturer and distributor of vitamin and mineral supplements, herbal remedies, cosmetics, and soft drinks. Omnilife markets its products door-to-door and is the largest direct sales firm in Mexico. In this kind of business arrangement, distributors—who are independent contractors, not employees—earn money for themselves and their sponsoring company both by selling products and recruiting others to do the same. Omnilife maintains a large number of cash-and-carry distribution centers in Mexico and is active in other countries—chiefly those in Latin America but also in Canada, the United States, Spain, and Russia. Grupo Omnilife is also the holding company for a number of other enterprises, some of which serve its distributors and employees, while others are engaged in such highprofile areas as movies, magazines, live shows, and soccer. The founder of Grupo Omnilife, Jorge Vergara Madrigal, is, with his wife, the owner of the company.

Vergara’s detractors consider him a huckster peddling worthless home remedies and look askance at the direct sales model, which can resemble a pyramid scheme. More friendly observers consider the company’s activities in the developing world—like those of Avon Products, Inc., and Amway Corporation—a training ground for entrepreneurship in the capitalist new world order that followed the fall of the Soviet Union. In the Omnilife model, which is based on U.S. direct sales organizations, people buy the company’s products from its distribution centers at wholesale prices. They may then sell the products to others at retail prices. If they buy and sell enough, they can become supervisors and receive bigger discounts on their purchases. They can also become supervisors by recruiting new distributors, and they then receive a percentage of each recruit’s sales.

MULTILEVEL MARKETING, LATIN STYLE

Jorge Vergara Madrigal was the son of a well-to-do Guadalajara business executive. After leaving school he first worked as a mechanic and auto salesman. In 1978, at the age of 23, he won a position as a subdirector for a real estate firm tied to Grupo Industrial Alfa, S.A. de C.V., a large Mexican conglomerate. In the aftermath of one of Mexico’s worst financial crises, Vergara, in 1984, was dismissed, along with 13,000 other Alfa employees. He subsequently failed at several business ventures, including as a pork wholesaler to taco venders and in running an Italian restaurant. In 1986, however, he became a distributor for Herbalife International, Inc., a Los Angeles-based distributor of a broad array of cosmetics and health and nutrition products.

Vergara worked for Herbalife in the United States, France, and Spain, as well as in Mexico, but left that company in 1991. Backed by his Argentine-born wife, Maricruz Zatarain, and two Americans, he formed his own company, Omnitrion de México, S.A., with a loan of $10,000, six distributors, and a few employees. Although in many respects Omnitrion was modeled after Herbalife, Vergara had concluded that its scheme of multilevel marketing did not correspond to Latin culture. He developed a concept, which he called multidevelopment, that, unlike the U.S. model, did not teach distributors to sell but to interact with others and, in place of compensation by the volume of sales realized, rewarded them for their dedication and effort. “The multilevel [marketing model] sells the American dream of having money to buy houses, automobiles, and goods,” he told Guadalupe Rico Tavera for a 2001 article in the Mexican business magazine Expansión. “By contrast, in multidevelopment we teach people that money is a tool to make changes in your life and to grow.”

When Vergara joined Herbalife, he consumed its products and credited them with lowering his weight, reducing his stress level, and generally improving his health. Accordingly, he required Omnitrion’s distributors to use its products themselves so that they could speak from experience to other people, who might then also become distributors. The fact that these products were not prescription drugs carried little weight in a part of the world suspicious of doctors and accustomed to the use of home remedies. Personal testimony, by contrast, played a powerful role in persuading people to try the products, one reinforced by the widespread notion that most illnesses can be cured by improved mental attitude. Another secret of the company’s success was modifying the products to the consumption habits of Hispanics. Instead of tablets, Omnitrion manufactured its nutritional products in the form of powders dissolved in beverages such as tea, coffee, and canned soft drinks—or even in cookies and chewing gum.

In other respects, Omnitrion resembled the U.S. companies that Nicole Woolsey Biggart, a University of California at Davis professor, described as “network direct sales organizations” in her book Charismatic Capitalism. Distributors for Omnitrion joined the company as independent contractors by paying a small fee that gave them the right to purchase the company’s products, cash and carry at a discount, from a conveniently located company distribution center. Although they made some money on sales to the public, the true profit was in recruiting other distributors, who paid a commission on sales to those higher up in the organization. The top echelons of distributors operated their own support centers and training sessions, presiding over networks that could extend to thousands of people.

According to Peter S. Cahn, a University of Oklahoma anthropologist who spent six months of “fieldwork” in Morelia, Michoacán, in 2003–04, only a select few distributors rose to riches, while the majority of recruits bought only for personal consumption and never earned a royalty check from the company, which did not release figures on the average earnings of its distributors. Writing in American Ethnologist, he indicated that he saw Omnilife’s support centers as promoting a transformative “spiritual message of rebirth through self-empowerment” similar to evangelical Christianity. Biggart, studying the company’s U.S. models and noting the self esteem that participants gained by seeing themselves as “entrepreneurs,” came to the same conclusion.

COMPANY PERSPECTIVES

To bring well-being to more people, helping them to achieve more plentiful lives; to reward strength and commitment; to promote unity, respect and tolerance; to preserve the environment; to support education, culture and sports—these are some of the qualities that characterize our work. In everything we do, we are people who care about people.

A DECADE OF GROWTH: 1991–99

Gross sales, according to Omnilife’s figures, were $2.5 million in 1991, when Omnitrion opened distribution centers in Mexico City and Guadalajara. There were eight distribution centers in 1992, when Omnitrion arrived in Spain. Three new centers opened in 1993. Gross sales were $77 million in 1994, when the company entered Colombia and Costa Rica. Grupo Omnilife, founded as the holding company in 1995, then arrived in Argentina and Peru. A U.S. branch was established in 1996. Gross sales reached $200 million in 1997. By 1999 Omnilife was operating in nine countries.

Omnitrion was only the first of a chain of Grupo Omnilife companies, numbering 19 in 2001. Omniflys, organized in 1992, bought three air taxis for distributors and executives, and later purchased a Gulfstream jet, followed by a Boeing 737 refitted to seat 36 passengers instead of 150. In 1993, Ego Desarrollos began administering product laboratories in Guadalajara and Barcelona, Spain, doing research on nutritional and beauty products. Omnilife Manufactura, established in 1994, eventually was turning out more than 70 products in Guadalajara manufacturing plants for powders and liquids. Also in 1994, the group formed other companies for designing solutions in information and technology; recruiting and contracting personnel; producing images and designs for the group and other clients; financing and selling automobiles and housing for its distributors; and mounting live show entertainment for industrial fairs.

In 1996, Transur was placed in charge of trucking Omnilife’s products to its distribution centers, while Ecopark was established as a Guadalajara industrial park for several enterprises, including Transur and a warehouse. The following year saw the establishment of Casa Rufino, a caterer for social and industrial gatherings, including Omnilife’s, that served natural foods and eschewed red meat; Florian, a greenhouse producing a million organically grown roses a year; and OM, a quarterly house organ. Biopack was founded in 1998 to make plastic bottles and cans. Omnilife also founded charitable enterprises. Educare, established in 1995, was a trilingual “school for success” that adopted the Montessori teaching method. A foundation for the benefit of the world’s children was established in 1994; another, to promote cultural activities, was created in 1997.

STILL GROWING AND EXPANDING: 2000–05

Omnilife continued to spawn more companies in the early years of the 21st century. OML Finanzas became the financial arm of the group, and OML Seguros offered insurance for the group’s distributors and employees. Suaverecords was a music label. Omnilife Radio disseminated the group’s philosophy on the Internet. Origen Media was founded to produce television documentaries and series. Celeste was a youthoriented cultural quarterly magazine, and Wow International, a monthly of general information and socalled civic journalism edited in Houston. However, the most important Omnilife media enterprise was Productora Anhelo, a film production joint venture formed in 2000 with Mexican director Alfonso Cuarón. Anhelo scored a quick success with Y tu mamá también (2001), which earned about $30 million on its investment of about $3 million. It followed with El espinazo del diablo, which had Spanish director Pedro Almadóvar as a coproducer, and Crónicas, starring John Leguizamo. Monsoon Entertainment, Omnilife’s Los Angeles-based film unit, produced the 2004 film The Assassination of Richard Nixon, starring Sean Penn.

A sports fan as well as a film buff, Vergara purchased, for about $120 million, the Chivas of Guadalajara in 2002. He said that his nutritional plan for Chivas—one of the two most popular soccer teams in Mexico—would be based on Omnilife products. Three years later, Vergara and Antonio Cué paid $25 million to introduce a Los Angeles-based team, Chivas USA, to Major League Soccer. Omnilife also had purchased a Costa Rican soccer team in 2003.

KEY DATES

1991:: Jorge Vergara Madrigal founds Omnitrion de México.
1995:: Establishment of Grupo Omnilife as the holding company.
1997:: Omnilife reaches gross sales of $200 million a year.
2000:: By means of a joint venture, Omnilife becomes a movie producer.
2001:: The number of companies under the Grupo Omnilife banner reaches 19.
2002:: Vergara purchases the popular Mexican soccer team Chivas.
2005:: Vergara and a partner introduce Chivas USA, a soccer team based in Los Angeles.
2006:: Omnilife moves its offices to a planned community outside Guadalajara.

The far-flung Omnilife enterprises acted synergistically to reinforce one another. For example, Y tu mamá también was seen by thousands of distributors in 100 theaters before being released to the public. Similarly, before launching new products or services, Omnilife tested them on its employees, then on the distributors. Financing for employees’ and distributors’ housing and autos was tied in with insurance policies. OMI Entertainment mounted the tents, sound consoles, and other infrastructure for company extravaganzas.

Two massive rallies a year, featuring live entertainment, attracted thousands of Omnilife distributors a year. Here Vergara, treated like a rock star—if not a messiah—held court, delivering eight-hour speeches on personal development to enthralled audiences. Although impeccably dressed in bespoke suits, he never wore socks, which he maintained interfered with the natural thermostatic properties of the feet. In fact, many distributors adopted this personal eccentricity. Based on points awards for sales volume, star distributors also qualified for a luxury cruise each year, bound for such destinations as Rome, Turkey, and Israel.

Omnilife reported sales of $800 million in 2002, of which Mexico accounted for 70 percent and the United States 8 percent. Nutritional supplements accounted for half of all sales. Vergara said that two-thirds of total revenue went to sales representatives. The profit margin was said to be in the neighborhood of 20 percent. All profits were reinvested, Vergara said, in conformity with the company’s axiom of “receive and give, give and receive,” which he preached to the distributors, who in response had formed a savings trust in which to invest their surplus earnings.

REALIZING A CHERISHED DREAM IN 2006

Especially dear to Vergara’s heart was the satellite city he was planning to build outside of Guadalajara, in Zapopan, on a 750-acre vacant site that would also serve as Omnilife’s headquarters. Named the JVC Center for the initials of Vergara’s father, Jorge Vergara Cabrera, this site was to include an art museum, children’s museum, university, sports stadium, cockfighting ring, hotel, convention center, industrial fairgrounds, entertainment and shopping center, corporate offices, and high-end housing. Vergara hired an all star team of 11 architects, including Rem Koolhaas, Daniel Libeskind, and Philip Johnson, to design individual buildings and brought them together several times to present their projects and discuss all aspects of the proposed development, under the direction of a master plan coordinated by Koolhaas and a Mexican architect, Enrique Norten. Although Koolhaas soon withdrew—calling the project a circus—ground was broken in 2001 for the center, which was estimated to carry a price tag of $460 million. Little progress was made in the ensuing years, but in 2006 Omnilife moved its Guadalajara operations, including its headquarters and two manufacturing plants, to the Zapopan site. Also in 2006, Omnilife added a second manufacturing plant, for liquids, in Colombia, to supplement an existing one there for food and vitamins.

Grupo Omnilife claimed revenues of $1.2 billion in 2005 and 3.5 million distributors in 18 countries, including Canada and Russia. It was planning to have a presence for the first time in Brazil, China, India, Paraguay, and Uruguay. The company’s profits were believed to be very high; one consultant thought the profit margin might be 90 to 95 percent. The cost of the materials in the Omnilife products was said to be very low, the production processes were automated, and operational expenses almost nonexistent. Transport costs were low because the products only had to be carried to the distribution centers, rather than to retail points of sale. Labor costs were very low because the distributors were self employed contractors.

Robert Halasz