Is Ly­oness shop­ping net­work just another pyra­mid scheme?

Un­happy mem­bers take com­pany to court in Europe

Sunday Times - - NEWS -

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”.

Pic­ture: RUVAN BOSHOFF

JUST A CLICK AWAY: The Ly­oness web­site is like a jun­gle of con­fu­sion

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