Eastern Promises

In the 1925 film Go West, Buster Keaton traveled across the American landscape seeking his fortune. If Keaton were alive and making the film today, he might have reversed direction and called it Go East. With more than 4 billion inhabitants and counting, Asia boasts a booming economy. Its growing middle class now has discretionary income to spend on American goods and services. So it's not surprising that many American companies are looking to hitch their wagons to Asia's rising economic star.

Asia's familiarity with traditional herbal medicines makes it a natural fit for dietary supplements. It's also an attractive destination for direct sales, thanks to its entrepreneurial spirit. Direct sales in Asia took a hit in 1998 when one of the region's largest markets, China, banned the practice after a wave of pyramid schemes disrupted the economy. But in 2005, China reversed course, enacting new legislation permitting direct sales under certain conditions. Since then, several American companies have obtained licenses that enable them to operate in China.

It's not just Asia that holds promise for direct sales, however. Eastern Europe and Latin America are also developing into key markets that may help offset the softening U.S. economy. Worldwide, more than 58 million people used direct sales to move $109 billion worth of goods in 2006, including approximately $22 billion in wellness products, according to the World Federation of Direct Selling Associations (Washington, DC).

Direct sales has great potential, but it also faces great challenges. Key obstacles include local regulations that differ from country to country, controversy generated by pyramid schemes disguised as legitimate opportunities, and the difficulty of controlling an independent sales force. In the United States, several direct-sales companies have been forced to defend their practices in the courts and in the media. In other countries, regulations may preclude some of these difficulties.

CHINA: 1998 TO 2005

Who's Selling?

More than 58 million people around the globe par­ticipated in direct sales in 2006, according to data from the World Federation of Direct Selling Associations (Washington, DC) and the Direct Selling Association (Washington, DC). About a quarter of those people live in the United States. Most of those people tend to share certain characteristics.

The typical American direct-sales distributor is female (85.2%), aged 35–54 (54%), married (76%), and a college graduate (35%). An overwhelming majority sell part time (almost 90%). Interestingly, distributors are almost evenly split on the reason for selling. About one-third are seeking additional income (36%), while another third participate in direct sales to receive product discounts (29%). The remaining third are in direct sales because it is important to them to have their own business (31%).

 In 1998, many Asian countries were emerging from an international currency crisis. While China was mostly unaffected by the crisis, it soon faced economic problems of its own, as a series of pyramid schemes defrauded thousands of consumers. To restore consumer confidence, China effectively banned direct sales and multilevel marketing (MLM). The government did, however, permit some companies to remain in the country, provided they shift their operations to retail stores.

China eased its commercial regulations a few years later as part of an effort to qualify for admission to the World Trade Organization. In December 2005, the Chinese government enacted new rules reinstating direct sales. To qualify, American companies had to apply for a license, meet certain capital requirements, and maintain some retail storefronts. But China essentially kept the ban on MLM intact by preventing distributors working in China from receiving a commission for sales to other distributors.

Although people often use the terms direct sales and MLM interchangeably, there are some important differences. Direct sales refers to marketing that bypasses retail operations and directly targets consumers. MLM refers to a business model in which a company sells its products to distributors, who then receive a commission for selling those products to other distributors (known as their downline) or the public. In the United States, about 95% of direct sales companies use an MLM compensation structure, according to the Direct Selling Association (Washington, DC).

Several American companies, including Alticor Inc. (Ada, MI), Nu Skin Enterprises Inc. (Provo, UT), and Herbalife Ltd. (Los Angeles), currently hold direct-selling licenses from the Chinese government. While some companies are struggling with their Chinese operations, most anticipate success in the near future.

ALTICOR

Contract Manufacturing Contributes to Bottom Line

When it comes to international sales, profitability can depend on a number of factors, including the state of the local economy, the state of foreign economies, and currency exchange rates. One way some companies can improve their financial situation is by offering their manufacturing operations on a contract basis.

For instance, in 2007, Access Business Group, the product development and manufacturing arm of Alticor (Ada, MI), yielded $142.6 million in revenues related to third-party development, manufacturing, and logistics. Access also won several prestigious honors in 2006 and 2007, including a World-Class Manufacturer award from the Grand Rapids Area Chamber of Commerce (Grand Rapids, MI), as well as a Global Supply Chain Excellence Award and a separate Operational Excellence Award from the Supply Chain Council (Washington, DC).

"Access Business Group continues to deliver the product and supply-chain innovation that is critical to the transformation under way," Al Koop, Access Business Group's chief operating officer, said on February 6. "In the mere seven years that Access Business Group has been pursuing contract sales, our company is consistently recognized as a leader in operational excellence by our peers, competitors, and most important of all, the growing ranks of third-party partners who have come to depend on our know-how to help them succeed.".

 Alticor, the corporate parent of Amway, Quixtar, and Access Business Group, raked in more than $7 billion in 2007, with about two-thirds of its revenues coming from Asia. Amway (a portmanteau of American and way) already has a huge presence in China, which granted the company a direct-selling license on December 1, 2006. Amway's Chinese operations currently consist of about 180 retail shops and a growing network of sales associates. The company also recorded strong growth for the year in other Asian countries, such as Thailand, Indonesia, the Philippines, and India, according to a February 6 press release.

Although Alticor enjoyed strong sales last year in Asia, the company saw its greatest regional improvement in Europe, which posted a 33% increase for the year. Russia and Ukraine led sales in the region, followed by other Eastern European countries, including Slovakia, Turkey, the Czech Republic, and Romania.

Alticor's Quixtar division also had a good year. Quixtar reported fiscal sales of $1.072 billion for 2007, its fifth consec­utive year of billion-dollar revenues. Quixtar said its decision to end its business relationship with some independent business owners who refused to change "unacceptable" business practices had a minimal impact on sales.

"We're proud to see so many of our established markets doing well and growing, and our newest markets growing at a strong, sustainable pace," Alticor chairman Steve Van Andel said on February 6. "That kind of balance provides an excellent base for a company like ours to take measured risks and act from a position of strength."

NU SKIN

Nu Skin Enterprises Inc., which sells dietary supplements and personal-care products under its Pharmanex and Nu Skin brands, underwent a painful restructuring of its Asian operations in 2007. In November, the company announced that it planned to close 67 of its 115 retail stores in China while opening five new flagship stores in major cities. Nu Skin also reorganized its Asian management team and cut its workforce, eliminating an unspecified number of employees in the United States and China. Fourth-quarter earnings plunged from $25.9 million in 2006 to $5.9 million in 2007.

Nu Skin president and CEO Truman Hunt, however, was optimistic that the changes would strengthen the company's position. NuSkin reported fourth-quarter revenues in North Asia of $157.3 million for 2007, compared with $152.7 million for 2006. Greater China revenue grew 1% to $52 million, aided by strong currency revenue growth in Hong Kong. But sales in mainland China slipped 10%.

One bright spot for Nu Skin, according to Hunt, was that the company received permission from the Chinese Ministry of Commerce to begin direct-selling operations in all 18 Beijing districts and all 12 Shanghai districts. The new authorization expands Nu Skin's reach to more than 37 million consumers. Hunt said the company will continue to seek regulatory approval for direct sales in other areas of the country.

"Overall, we continue to see great potential in China and are confident in our local management team and its ability to move the market forward," Hunt said on January 8.

USANA

Although it currently doesn't operate in China, Usana Health Sciences Inc. (Salt Lake City) celebrated its sixth consecutive year of record sales in 2007, thanks in no small part to its operations in Asia. Usana associates sell products in 13 markets, including several Asian countries such as Hong Kong, Japan, Taiwan, South Korea, and Singapore. Moreover, on June 23, 2007, the company opened a new office in Kuala Lumpur, Malaysia.

On February 5, Usana reported con­solidated net sales for 2007 of $423.1 million, a jump of 15.9% over 2006. However, the company also noted a 4.8% decrease in the number of ac­tive sales associates in the United States during the fourth quarter, a development that prompted its stock price to sink by about 16% in afternoon trading. Favorable reso­lutions to a Securities and Exchange Commission (Washington, DC) inquiry and a dropped shareholder lawsuit announced in January also failed to mollify shareholder concerns.

On the other hand, the company's sales in the Asia Pacific region reached double-digit growth in Hong Kong, Australia, New Zealand, and Japan. Aided by a 28.8% increase in active sales associates, net sales for the re­gion rose 25.1% to $40.8 million during the fourth quarter. Usana's new Malaysian operation also brought in 11,000 active associates and $4.5 million in sales for the quarter.

Despite the drop in U.S. activity, the company still predicts a solid performance for 2008, with growth in the 7–10% range, according to Usana executives.

"The Asia Pacific region's contribution to Usana's sales growth continues to increase both on a year-over-year and a running-quarter basis," Usana president Dave Wentz said on February 5. "Australia, New Zealand, and Hong Kong, along with our newest market, Malaysia, continue to be the major growth drivers in this region. We remain focused on growing and strengthening our markets in this region throughout 2008."

HERBALIFE

Herbalife is well known to soccer fans through its sponsorship of the Los Angeles Galaxy. In fact, more than 1 million Galaxy-themed pieces of apparel display Herbalife's corporate logo. The company already has a large international reach, but Herbalife is hoping that its first direct-selling license from China, awarded last March, will in­crease its universe of potential customers even further.

To ramp up its China operations, Herbalife opened 90 retail stores in the third quarter and hired a new general manager for the region. The effort seems to have paid off. During a November 7, 2007, conference call for investors, Herbalife president and COO Greg Probert reported that net sales growth in China rose 89% in the quarter, compared with 20.4% for the United States and 23.6% in Taiwan. He also noted that the company had applied for a direct-selling license in five additional provinces. Herbalife also hired a new vice president for the East Central Europe region last November.

"Our efforts in 2008 will focus on further expansion, coupled with investment in our infrastructure to ensure we provide employees, distributors, and retail customers with business plan training, a premium customer service, and world-class products," Probert said.

THE YEAR OF THE RAT

This February marked the beginning of the Chinese Year of the Rat. The Chinese zodiac associates rats with adaptability and material prosperity, two traits that bode well for the direct-sales industry. On the other hand, it will take more than astrology for the industry to succeed. In the United States, the practices of some direct-sales and MLM companies are controversial. Making matters worse, critics sometimes fail to distinguish between legitimate and un­scrupulous companies, blurring the lines between direct sales, MLM, and pyramid operations. Critics have also pointed out that many distributors fail to recoup their in­vestments under certain compensation systems. Furthermore, large companies can have a difficult time controlling a force of independent sales associates that may be tempted to make exaggerated claims. As China's 1998 ban shows, government acceptance of direct sales and MLM is not open-ended. Businesses considering "going east" should navigate carefully.