China Consumer

Just a wrinkle?

Cosmetics firm’s stock craters on China news

CHINA/

Hedge fund manager Bill Ackman of Pershing Square grabbed headlines last year when he took a large short position ($1 billion to be precise) in Herbalife, the nutritional supplements company. He then accused it of being “a massive pyramid scheme” and said it should be shut down.

One year on, Ackman hasn’t gained much traction with fellow investors and his bet has left him with losses estimated at more than $500 million. Rather than collapsing as predicted, Herbalife this week traded at $65.92 (up 52% from a year ago).

Ackman’s problem? Even if he is convinced that he sees one, it is very hard to prove that a pyramid scheme exists.

Perhaps the People’s Daily will have better luck. For three consecutive days last week, the state-run newspaper published reports accusing Nu Skin of using marketing methods “akin to brainwashing” to sell its weight-loss kits and skin cleansers in China, also warning that Nu Skin’s bonus and worker-management systems resembled a “suspected illegal pyramid scheme” (i.e. when sales staff make money by recruiting additional salespeople rather than selling directly to final consumers).

In response, the State Administration for Industry and Commerce has ordered an investigation.

Nu Skin, based in Utah in the United States, quickly published a statement warning that the accusations contained “inaccuracies and exaggerations that are not representative of Nu Skin’s business in China”. Its website also claims that Nu Skin “will not allow direct sales to profit through signing up other people to the sales team. [It will also] not allow other peoples’ sales performance to be calculated as the basis for direct sales rewards.”

How does that translate in reality? Here’s the story of Miss Xu, a former Nu Skin agent. She told the Beijing Youth Daily that she was introduced to the brand after her friends spoke enthusiastically about how much they made from promoting Nu Skin products. Some were claiming that selling Nu Skin had boosted their monthly incomes by tens of thousands of yuan (and in some cases, by hundreds of thousands). Impressed, Xu joined her friends at a “training session”.

“During the training session, the trainer told us that with the money he makes from Nu Skin, he could afford to buy a new luxury car every year. It made a lasting impression on me,” she told the newspaper.

However, Xu says that she also learned that the key to making money was not about selling Nu Skin products on her own but recruiting more distributors in order to collect more commission.

Xu confirmed that trainers emphasised time and again that the goal was to recruit more sales colleagues. “They told us for more senior sales staff, they can’t just rely on selling products on their own. They are going to be exhausted and they still couldn’t afford to buy a villa,” the former sales agent remembers.

Xu says she later quit Nu Skin because its selling techniques were too aggressive for her.

On Tuesday, Nu Skin said it would suspend such promotional meetings in China after finding instances where some of its sales representatives had failed to “adequately follow and enforce our policies and regulations”.

It also confirmed it will provide additional training to reinforce its existing policies and educate employees on regulations in China.

Beijing has long been suspicious of direct selling, banning the practice entirely until 2006 (see WiC95). But the People’s Daily is struggling with the same challenge as Bill Ackman in proving that a pyramid scheme genuinely exists. On paper, the difference between direct selling and pyramid sales is clear enough but the reality is usually more complicated. Many multi-level marketing companies do sell products to final customers, including establishing physical stores (Avon and Nu Skin both have Chinese retail stores), an industry observer told Oriental Daily News.

Nu Skin entered the Chinese market in 2003 and got a licence for direct selling from the Ministry of Commerce three years later. It recorded sales of $667 million in the first nine months of last year, about a third of its worldwide total. Investors are evidently concerned: its shares dropped 40% after the allegations surfaced. If only Bill Ackman had shorted this stock instead…


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