Report 66 Business Practices Committee 4. The Omega scheme

 

 

 

New Omega members are canvassed by existing members. vR preferred to talk about "cardholders" and not members. In this report, however, the "cardholders" will be called members. A prospective new member attends a presentation in his area in the company of an existing member. vR said that Omega did not turn away prospective new members who attended the presentation by themselves. Prospective members are invited by existing members to attend a presentation by Omega and are required to pay R50 ("door money") as a contribution to the snacks that are served. No alcohol is served to those attending. During the presentation a number of slides are shown to those present. The following are the contents of these colour slides:

 

 

Slide (g) was misleading. It was explained to vR early in 1998 that it just was not possible to achieve "... a saving of 11.2% for its members". Omega apparently did not take the expenditure and shopping patters patterns of South African consumers into consideration, It seemed that the percentage of 11.2% was not a deliberate attempt to mislead prospective members. vR conceded that the wording "... a saving of 11.2%" was a mistake, but the same slide was used during presentations early in January 1999.

 

Those wishing to become members sign an application form. The "Conditions Applicable to Cardholder" are published an the reverse of the application form. Condition 6 states:

 

"The Trust shall be obliged within 21 days after having received payment of the amount referred to above, to issue the Cardholder with his/her discount card and consumer directory which will however only be available for distribution at a workshop session where the operation of the card is explained".

 

New members may join Omega's "marketing team". There is, however, no obligation to do so. A new member wishing to become part of the marketing team has to sign a document called ACKNOWLEDGEMENT. In the document the member declares that:

 

 

 

 

 

 

 

The following is stated in an Omega brochure/folder:

 

"As you know Omega Trust is a registered trading trust. Extensive investigations were done with the Receiver of Revenue and the Registrar of Banks. As consumers we know some protection comes from the Newspaper "consumer watchdogs". One such "watchdog" - Die Beeld Newspaper's "TOT U DIENS" - did extensive investigations about Omega Trust, We are very pleased to say we have passed with flying colours and we have had a positive article published in the newspaper".

 

A photo, copied from the report in the Beeld, shows vR displaying a letter that "Mr. Francois van Rensburg of Omega ... received from the Registrar of Banks. In the letter the Registrar sets out guidelines as to the way Omega should market their discount card". (Directly translated from the Afrikaans). It would seem from section 1 of this report, however, that the Registrar was not convinced that the proposed business of Omega fell within the meaning of a bona fide multi-level marketing programme.

 

It is also stated in the folder:

 

"A simple philosophy to follow ... The more card holders you enroll for Omega Trust, the more successful you and Omega Trust will be" and "Save & earn money with Omega Trust".

 

It was stated that Omega was formed with the purpose of enhancing "... your consumer empowerment through collective bargaining as well as new opportunities to take charge of your economic future".

 

 

To become a member of Omega as from 6 April 1998, a person has to pay R6 736.85. Previously this amount was R5 263.16. The R6 736.85 applied when a member paid by instalments on a credit card. Those members who paid by cash or by cheque were given a discount and were required to pay R6 400 only. The R6 400 per member was paid into the account of Omega. Omega retained R2 760 (43.13 per cent) of this amount and the remaining R3 640 (56.87 per cent) was paid to OPM. The R3 640 was distributed as follows:

 

R2 500 was paid to the existing member(s) that recruited the new member.

 

R500 was paid to the marketing manager which manages the area in which the new member was signed up; and

 

R300 was paid to the marketing "director" to whom the relevant marketing manager reported.

 

R40 was paid to the national "director"; and

 

R200 was paid to the regional "director" to whom the relevant marketing "director" reported.

 

R100, in addition to the R500, was paid to the marketing manager should he achieve certain marketing goals.

 

A new member ("X") could, if he/she so wished, become part of the marketing team for Omega. "X" would receive R1 000 each for the first two members canvassed by him/her. Should "X" canvass a third member he/she becomes a "senior" marketer and would receive R2 500 for the third and consecutive, and unlimited, new members. "X would also receive R1 500 for the first two members recruited by the third and consecutive members canvassed by him/her.

 

The scheme could also be explained as follows: Assume an individual (YOU) becomes a member of Omega. YOU could earn commission on the introduction of new members by yourself. When following the steps set out below, one should keep in mind that each new member pays R6 400 and R2 500 of this amount is earmarked by Omega for the recruitment of members. The amounts deducted in respect of income tax are ignored because the effect on each member will be different, depending on the marginal tax rate of the member.

 

 

 

 

 

 

 

 

YOUR number of junior partners increases, provided they recruit other junior partners, resulting in income being produced without YOU having to recruit new members YOURSELF. Furthermore, the increase in the number of YOUR junior partners grows at an exponential rate. For example, assuming that each junior partner recruits two new members, the number of partners after the ninth level would be 28 = 256.

 

The scheme allows for each member, provided the member advances to the status of a senior partner, to start his own structure or "pyramid". These structures or pyramids are not the same. For example, member A could canvass ten new members and member B three new members. Each new member thus canvassed by A and B would probably enroll various numbers of other new members. The number of people in each structure will differ between each partnership or pyramid. In general, however, Omega is also characterised by a pyramid structure in the sense that the marketing managers, marketing "directors", national "director" and the regional "directors" find themselves at the top of the pyramid.

 

Should "YOU" canvass only one new member per month and these new members (from the third new member onwards) also canvass one member per month, "YOU" stand to receive R46 500 after nine months (see Slide k above). These figures are explained to those attending the presentations arranged by the marketing "directors" and marketing managers. "YOU" will pay income tax on the monies received by you, vR stressed that there was no obligation whatsoever an new members to canvass new members. The only benefit for these members joining the scheme war that they could enjoy the benefits of the scheme. The benefits of the scheme are discussed under section 5 of this report.

 

 

On 7 April 1998 Omega had 1 316 members. With the collapse of Newport, Omega offered membership to an unknown number of ex Newport members of which ± 660 accepted. this offer was only valid to the end of December 1997. The cost of membership to these ex Newport members was R250. The number of new members canvassed by Omega since 1 March 1997 to 6 April 1998 was ± 656. During April 1998 vR predicted that the growth during the rest of 1998 would be much better.

 

The Omega members who elected to become part of the marketing team will cease to receive commissions once Omega has a substantial member base. vR guessed that 100 000 members would constitute a "substantial" member base. The reasoning is that the scheme would by then have gained such momentum that new members will come forward without having to canvass them. The eventuality is conveyed to new members of the marketing team.

 

It was put to vR that if Omega continued to canvass 656 members per annum the "substantial" number base of 100 000 would be achieved in 165 years. During the meeting on 18 March 1998 vR told the members of the Committee that Omega intended having "... a consumer base in excess of 10 000 cardholders over six months". This implies that 1 666 members should be canvassed per month over the months April 1998 to September 1998. This is an increase of 175 percent above the average of 605 new members per month in April 1998.

 

On 26 December 1998 the total membership of Omega was 3 050. This is an increase of 1 734 from 7 April 1998 to 26 December 1998, or an average of 198 per month. This is obviously far less than vR anticipated. vR was apparently not alarmed at the slow rate of growth.

 

 

The distribution of the commissions paid by Omega as at 3 July 1998 is reflected in the table on the next page. It is clear from this table that approximately 80 per cent of the 555 members have not recouped their capital outlays. During the presentations prospective members are told that they could "make" R46 500 by canvassing one member per month for nine months. It is also clear from the table that only 11 members (2 per cent of 555) received more than R40 000. In the Committee's Report No 56: Newport Business Club (Pty) Ltd and Others (4) it was stated that 91 per cent of the Newport members have not recouped their payments, compared with only 9 per cent who have done so. The percentages in the Newport case were almost identical to those calculated during the investigation into the Rainbow Business Club and others (5) (Rainbow) and may be indicative of the trend in these types of schemes.

 

vR said that the figures in the table could be expected, because "... members do not join Omega Trust to recoup their monies. They join purely for the benefits that membership entails".