When most people, whether in China or the United States, hear the name Nu Skin or Herbalife, they usually hang up the phone or run the other way. Both American companies are perceived as pyramid schemes that prey on low-income individuals who are lured into becoming distributors at a hefty product buy-in.
But for every person with good common sense, there are those who are easily duped after hearing multiple rags-to-riches stories from “master” distributors.
The fact of the matter, according to former distributors, is that the only way a distributor can succeed in one of these multi-level marketing schemes is to recruit new distributors and that the most successful distributors are the ones that become “recruiting machines”.
On Monday, China fined Nu Skin Enterprises Inc. more than US$500,000 for illegal product sales and misleading local consumers.
Chinese laws allow direct sales under limited conditions, but there are laws banning so-called pyramid selling, in which members make more money recruiting new members than selling the actual product.
Direct sales firms have come under fire in China, said Reuters, with the official People’s Daily newspaper saying in January Nu Skin had organized “brainwashing” gatherings, prompting SAIC to launch the probe which culminated in the fine.
China’s State Administration for Industry and Commerce (SAIC) said it will look to increase regulation of the direct sales sector, an area analysts said was a regulatory gray area in China. This could pose a headache for rivals such as Herbalife, currently under investigation in the US.
“For the next step, SAIC will work with other departments to increase the level of regulation of the direct sales market and sternly investigate and prosecute any illegal behavior in the direct sales sector,” the SAIC statement said.
Nu Skin, which began operating in China in 2003 selling anti-aging cosmetics and nutritional supplements, is said to have a business model where the compensation of its 40,000 distributors is driven not by how much product they sell to retail consumers, but on how successful they are in recruiting other distributors.
Hedge fund manager William Ackman, who has placed a US$1 billion short bet against Herbalife, said the nutrition and weight loss company is breaking direct-selling laws in China, its fastest growing market. He says the company’s end users and distributors are one and the same.
According to Reuters, Herbalife said sales in China rose more than 120 percent in the fourth quarter of 2013, the fastest of any region worldwide, contributing about 10 percent to global sales last year. The company has 200,000 sales representatives in the country and uses a “unique marketing program” to meet Chinese regulations, it said in its latest annual report. Herbalife reported 2013 annual sales of US$4.83 billion.
China comprised 32 percent of Nu Skin’s annual revenues, according to its March 18, 2014 filing with the US Securities and Exchange Commission. Revenues in China soared to US$1 billion in 2013 from US$256.8 million in the previous year. Global sales were US$3.18 billion.
Nu Skin China has voluntarily suspended business promotion meetings and applications for new sales representatives, according to a company statement.
According to Bloomberg, Nu Skin shares gained the most in eight months after the company agreed to pay fines to the Chinese government, signaling that an investigation into its sales practices could be nearing an end. The stock gain marked the biggest one-day increase since July 2013. Shares of the Provo, Utah-based company had plunged 38 percent in January after the investigation became public.
I guess that means speculators think Nu Skin will be back to business as usual. Whether that business proves to be a pyramid scheme or sales reps actually selling product remains to be seen.
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