Yu Jing, a 23-year old assistant manager of a clothing company in Shanghai, bought her first item from a direct seller while she was a college student. Over the past few years, she has continued to make occasional purchases, most recently a Mary Kay facial mask that cost RMB108 (US$15.72). But, while she may buy the goods, she’s not exactly sold on the process.
“I only trust famous brands from direct selling companies like Mary Kay or Amway. If the company is very famous that means many people have experience with their products and haven’t had any problems,” she said.
“Generally, I prefer to buy things in a store because I find the products are safer and more trustworthy.”
Yu represents a growing number of Chinese who are buying from direct selling firms since the market was reopened in 2005 with a slate of new rules. But analysts and experts say the current regulatory regime has prevented these companies from achieving their real potential on the mainland.
No matter one’s view of direct selling – proving ground for small businesses, convenience for customers or opportunity for fraud – no one can deny that it’s big business. The global direct selling market in 2006 stood at US$109 billion, compared with US$102.6 billion the previous year, according to the World Federation of Direct Selling Associations (WFDSA).
Alticor, the parent company of direct selling brand Amway, reported global sales of US$7.1 billion in 2007, up 12% over 2006. The privately held company said in a statement that the sales growth was partly due “to a rebound in China following the long-awaited establishment of direct selling regulations.”
Amway China, which is the market leader here, said its sales reached US$2 billion in 2007, though comparative figures were not available.
Asia has been a key expansion market for Western direct selling firms for years now, but China’s growth is expected to be phenomenal. Market research firm Euromonitor International estimates that China’s direct selling market will grow by 103.9% from 2007-2012, compared with a mere 8.7% in the same period for the Asia Pacific region.
It’s not just the multinationals that are in the game, with domestic players accounting for half of China’s top 10 direct selling firms. One such company, Tiens Biotech, has even expanded into over 100 countries, including the US, with its nutrition and personal care products.
Experts credit the relationship-based nature of Chinese society and business with providing fertile ground for direct selling firms. But Ailsa Gu, senior research analyst with Euromonitor in Singapore, highlights another reason for the high levels of growth seen in China.
“Direct selling gives [money-making] opportunities to people who probably have a lower educational background or who have already retired,” she said.
China’s history with direct selling stretches back to 1990, when Avon began operations on the mainland. But Chinese regulators essentially closed the market in 1998 after thousands of consumers were cheated by pyramid schemes and other frauds. A small number of direct selling firms, such as Amway, were allowed to stay and operate retail stores.
The government reopened its doors to direct sellers in late 2005 with new regulations, though many companies did not receive licenses for direct selling operations until 2006.
The new regulations required firms to have registered capital of at least US$11.65 million (RMB80 million), and bank deposits worth US$2.91 million (RMB20 million). Foreign companies must also have at least three years’ experience in direct selling outside the mainland. Chinese firms can only qualify for licenses if they have an operating history of five years.
One level only
In addition, the government enacted another key regulation prohibiting multi-level marketing (MLM) in a bid to eliminate pyramid schemes, which have recruitment strategies similar to those used by legitimate direct selling firms.
This provision makes China unique among all nations in which direct selling firms operate, according to Truman Hunt, CEO of Utah-based Nu Skin Enterprises and Chairman of the World Federation of Direct Selling Associations.
“It’s fair to say that the Chinese regulatory structure is unique. I actually can’t think of another country that prohibits multi-level compensation the way China has,” he said.
In other parts of the world, the MLM model allows direct sellers to recruit part-time independent sellers into what is known in the industry as a “downline.” The recruiter provides training and supervision and receives a cut of their recruits’ sales.
Direct sellers in China must be full-time employees and can only operate on a single-level – essentially as normal salespeople. Their commissions are also capped at 30%, though sources say many firms are able to circumvent these restrictions on commissions. While direct selling employees in China are allowed to recruit new staff, new recruits must also be full-time employees, rather than independent, part-time direct sellers.
“That’s a fairly significant impediment to the development of any direct sales organization, when people have to leave their job in order to join the company,” Hunt said.
Furthermore, direct selling licenses are issued on a provincial level – Nu Skin, for example, is only currently licensed in Beijing and Shanghai – which means that companies must operate elsewhere in China on a traditional retail model.
Nu Skin hasn’t exactly suffered under these regulations. Hunt said the firm has been posting annual sales of around US$65 million in China, after virtually “starting from scratch” in 2003.
He expects the overall direct selling market in China to reach US$10 billion in about 10 years’ time. By comparison, the US market for direct selling was US$30.8 billion in 2007, according to the WFDSA. Hunt believes the growth rate could be even greater if direct selling firms were able to operate on the same model they use worldwide.
“From our perspective, we would prefer as an industry to have an opportunity to do business as we do it everywhere else, but we also recognize that China is a different place,” he said.
The WFDSA is in regular talks with Chinese regulators and Hunt describes their attitude as “cautiously open to the prospect of direct selling in China.”
License to sell
The tight restrictions on the direct selling market – as of March there were only 20 firms with licenses to conduct direct selling on the mainland – may have also had the opposite effect on the industry than intended by regulators, according to Chen Der-Fa, professor and executive director of the Research Center for Direct Selling at Peking University’s Shenzhen Graduate School.
“Under current restrictions so few companies can get licenses and most of them have to run their business underground,” he said. “I would imagine [underground direct selling] is very big. And it’s a bomb because most of them tend to be pyramid schemes.”
This does little to reassure the likes of Yu Jing, who remain dubious about the current state of the market.
“I don’t think the market is safer for consumers now,” Yu said. “Right now the market is more open than before, so more and more untrustworthy products have been pumped into the market and it’s easy for consumers to be cheated by salesmen.”
Companies such as Nu Skin are keen to see the market mature and overcome the negative publicity, something Nu Skin believes can only happen by fully opening the door to direct sellers. But when that will happen is anybody’s guess.
You must log in to post a comment.
Yes, I would like to receive emails from China Economic Review. (You can unsubscribe anytime)
Copyright © 2018 SinoMedia Group Limited All rights reserved