Is Lyoness shopping network just another pyramid scheme?
Unhappy members take company to court in Europe
FEW among us have not been approached at some stage by friends or colleagues and urged to join a “lucrative” multi-level marketing scheme. Think Herbalife, Amway, Sportron and Avon. In these network marketing businesses, participants earn money not only from what they sell but also from the sales of people they recruit to the scheme. There are no retail stores; direct sales generally come from wordof-mouth marketing and referrals.
These business models have operated legally in South Africa for decades. That is not to say they are all squeaky clean. Many face allegations of being pyramid schemes in disguise.
The problem is that legal network marketing and illegal pyramid schemes use very similar, if not identical, business models, with multiple layers of distributors and recruits.
So pyramid schemes, in which fraudsters use money coming in from new recruits to pay off early-stage investors, can pass themselves off as legitimate multi-level marketing programmes.
In genuine network marketing, people can still make money through the company’s products or services with- out having to sign up new members. The reality, however, is that this is not very enticing.
And considering most people join these companies looking for quick, easy money, the recruiting of new members is the obvious (and usually heavily encouraged) next step.
Recently billionaire Wall Street hedge-fund manager Bill Ackman accused Herbalife, which has operated in South Africa and abroad for years, of being a sham. He has placed a $1-billion bet that the company’s alleged fraudulent practices will be its undoing.
There are similar misgivings about another player on the scene, international shopping loyalty programme Lyoness. Founded 10 years ago in Austria, membership has grown to three million in 44 countries.
Launched in South Africa in 2011, it boasts 30 000 members — and a growing group of detractors who claim it is a pyramid scheme.
Lyoness sells itself as a “free” loyalty programme in which members get cash back on every purchase from selected merchants through a cashback card, mobile vouchers, merchant vouchers or store gift cards, and online shopping.
For every purchase, a member receives benefit amounts varying from 3% to more than 20%. Up to 2% of the purchase amount is credited to a member’s Lyoness account, and once it reaches R250, it is transferred to the member’s own private bank account.
The remaining benefits are booked into what is known as a personal accounting programme, which, depending on units earned, can offer further benefits.
There is also a friendship bonus whereby members who recommend Lyoness to others get up to 0.5% of the new member’s spend and another 0.5% from the spend of the new member’s friends. However, to register a new member online costs R10, or R100 if you opt for “friendship flyers” as a recruitment tool.
In addition to the cashback and friendship bonus, members can choose to become premium members. To be a premium member, you have to spend more than R200 000 in a year. If that is not feasible, you can spend, for example, R100 000 and offer a R10 000 down payment for the buying of future vouchers or gift cards.
And if that is not an option, you can just make a down payment of R20 000.
The benefits for premium members include loyalty credits and commissions based on the number of units accumulated, including the units of a member’s recruits.
The fact that members seem able to build up units by making large deposits on future shopping seems to make the pure shopping aspect at merchant partners — the basis of the Lyoness company — a bit redundant.
Granted, members can earn units — worth R500 each — by spending and getting their recruits to spend, but it is likely to take a much longer time to generate the required units for impressive benefits.
Oddly, details of the more lucrative “income streams” mentioned to members do not feature on the Lyoness website, with only passing references to them in its general terms and conditions. The information on “extended member benefits” are contained in additional terms and conditions which are not accessible.
Confused yet? Me too. Between a response from the managing director of Lyoness Cashback Programme SA, Gerhard Buckholz, information on the company website, and its terms and conditions, the waters appear a little muddy.
For one, down payments for gift cards cannot be cancelled or refunded; if members want out, they have to top up the balance in cash to get the full giftcard value.
The fact that the contract is signed with a Lyoness entity registered in Switzerland, not the South African company, could complicate matters for locals who have a legal gripe later on.
They would not be alone. Some 300 complainants in Austria are demand- ing refunds from Lyoness, many of them represented by Austrian lawyer Eric Breiteneder. The amounts in dispute range from à2 000 (about R26 000) to à25 000.
On Wednesday, a Vienna court ruled that Lyoness must refund the down payment of one of Breiteneder’s clients. Three weeks ago he won a similar victory for another Lyoness client, with 4% interest. He has 30 other cases pending.
The Austrian economic and corruption prosecutor is investigating a pyramid scheme allegation following complaints by two former Lyoness managers.
In South Africa, four retailers — Woolworths, Pick n Pay, Dis-Chem and the Foschini Group — said this week they would no longer allow Lyoness to buy bulk gift cards.
Woolworths said it had never been in a formal partnership with Lyoness.
Said Zoey Rylands, head of selling operations: “We sold them gift cards in bulk but had no control of third-party resale of our gift cards and the terms and conditions under which they were traded. We have subsequently terminated the sale of gift cards in bulk to organisations such as Lyoness.”
Ditto the others, which are unhappy with Lyoness reselling discounted gift cards to consumers.
Buckholz said Lyoness was a shopping community, “not a get-rich-quick scheme”.
“We are aware that due to the growth of Lyoness in South Africa, education, especially from members directly, can sometimes lead to confusion,” he said.
Sometimes issues got “mixed up by people with no proper education”. Because of this, the company offered business training, he said.
According to Buckholz, 96.5% of local members were “normal shoppers” and only 3.5% were premium members.
“Lyoness offers people who want to start their business the opportunity to develop and grow their own shopping network to benefit . . . in general the percentage of members worldwide using this option to generate a unit by down payment is below 5%.”
Following a batch of additional questions I e-mailed to Buckholz, he suggested I did not understand the concept and needed “training”.