Selling, Beijing's Way
Never seen an Amway store? There are 200 in China
Among the incongruous scenes in Chinese cities like Shanghai and Beijing are little stores selling the wares of Amway, Mary Kay, and other companies that normally rely on an army of foot soldiers to peddle their products. For seven years, the Chinese government banned these direct-sales companies from using chains of individuals to sell cosmetics, household cleaners, and other goods from their homes. So, to avoid missing out on the growing Chinese market, the companies radically shifted their business models. For the first time, they opened up stores and factories, absorbing the higher costs, and some reported taking huge losses.
"I am always running into friends who have been to China and they say, 'We saw your store,'" says Truman Hunt, CEO of Nu Skin. Despite running about 160 stores in China, he says the Utah cosmetics and nutrition company lost money there. "It has been a very long-term project," says Hunt, who is also head of the World Federation of Direct Selling Associations, about the waiting game that Nu Skin and others have played.
Door to door. Now the wait is over. Direct-sales companies are trying to cash in on China's year-old rules letting them implement some of the methods they use in other countries, including traditional door-to-door sales. In network marketing, as direct sales is also known, independent contractors sell a company's goods in person and on commission. Typically, they earn more by signing up other salespeople.
Still, China will keep a short leash on direct sellers, and the companies won't be able to dismantle stand-alone stores and factories. China continues to shut out foreign sellers. That's a blow to high-powered sales reps like Pat and Marguerite Sung of Potomac, Md. The couple won't disclose their Nu Skin income, but in 1993 they hit the "blue-diamond" level for those with over $1 million in sales.
Direct-sales companies say, however, that their efforts in China haven't been a waste. Hunt calls Nu Skin's stores "an investment in our future," a way of familiarizing Chinese consumers with the company's products.
Network marketing is big business, generating $102.6 billion in sales and employing 58.6 million people globally in 2005, according to the WFDSA, and Asia is fertile ground. While the United States accounts for the biggest chunk with $30.5 billion in sales, Japan comes in second with $23 billion in sales, and South Korea is third with $8 billion. Those numbers made China attractive for direct sellers.
For years, direct sales went unregulated in China, and unscrupulous sellers set up pyramid schemes alongside legitimate players. Some bankrupt middlemen, unable to sell goods they'd bought in advance, staged demonstrations. As a result, in 1998 the government cracked down, allowing only 10 network marketers to stay.
These companies had to tie sales to stores and, like other enterprises, make their products in China. The companies responded in different ways, testing out new moves that they used only in China. Relatively cheap real estate made it possible for American companies to build factories and set up shop in prime locations such as shopping malls or ground-level storefronts.
After the rules took effect, Amway sales plummeted nearly 50 percent in the country. The Michigan company had begun operating in mainland China in 1995 and sank more than $200 million into a Guangzhou factory. After the 1998 restrictions, Amway spent $29 million more to set up 200 stores, its only ones in the world. It kept an army of 180,000 sales staff and rewarded salespeople who brought friends to the stores. The moves helped Amway hit $2 billion in 2004 China sales-a third of total company revenues.
New York cosmetics company Avon took another approach. It blanketed China with 5,700 stores, but the ranks of its sellers plunged from 250,000 to 20,000, according to a 2005 Morgan Stanley report, and its sales suffered.
Unlike other network marketers, Nu Skin didn't have established Chinese operations. It had been researching China when the 1998 restrictions hit, so shoppers didn't know its skin care products. Undeterred, Nu Skin eventually set up four plants in the country, the only factories it owns anywhere. Progress has been slow. The company's China sales hit only $70 million last year.
Late in 2005, four years after China joined the World Trade Organization, the government said it would let network marketers back in. The new rules don't allow companies to mimic sales models they follow internationally, says Christine Chung, a China tax partner at KPMG. China bans chain selling, meaning that sales representatives can sell only to customers and not to other salespeople. Sales reps must attend a government-run training program. Commissions are capped and tied to the end-product price. And the rules allow companies to sell only five categories of products: cosmetics, healthcare equipment, cleaning goods, health food, and small kitchen appliances, Chung says. Companies must secure government licenses. So far 13, including Amway, Avon, and Nu Skin, have gotten them.
Pink Cadillacs. Companies are celebrating the added wiggle room. "The China hype is real," says the Morgan Stanley report, which predicted Avon China sales will top $650 million in 2007. Hunt estimates that Nu Skin China will become profitable by next year. Amway wants to add more sales staff in rural areas. Rather than tear down stores, Hunt says, Nu Skin will add hundreds of locations so that consumers can pick up and return products in person, another Chinese requirement. By the end of 2006, Avon was training its 350,000 Chinese salespeople to meet new requirements. By playing by the rules, Hunt says, direct sellers hope that China will lengthen the leash.
Meanwhile, direct sellers should have less trouble signing up Chinese salespeople. About 7 percent of consumers, especially young women and rural dwellers, say they are strongly interested in such work, according to the Morgan Stanley report. Even if only a quarter elect to join network marketers, that would still make 13 million salespeople, about the same number as in the United States. Ten top Mary Kay Chinese sellers have already earned pink Cadillacs.
The Sungs won't be able to share in the Chinese wealth. The Chinese-born couple moved to the United States from Taiwan in the 1960s and began selling Nu Skin products in 1988. Eventually, Pat and Marguerite quit their jobs as a lawyer and computer programmer, respectively; they were making more selling Nu Skin. They've taken advantage of Nu Skin's global reach, signing up salespeople in 30 countries, including Canada, Japan, and Brazil, as well as Hong Kong, which operates under different rules than mainland China. They won't receive a commission, however, for signing up Marguerite's sister in Nanjing or her cousin in remote Urumqi. Asked if the Chinese restrictions frustrate her, Marguerite exclaims, "You can say that again!" Still, she is pleased her family can pocket some extra cash: "It's nice to be able to help people."
This story appears in the March 5, 2007 print edition of U.S. News & World Report.