A move by China’s State Administration for Industry and Commerce to tighten direct selling rules in the Chinese market threatens to put a damper on companies like Herbalife (
NYSE:HLF,
Stock Forum), NuSkin (
NYSE:NUS,
Stock Forum), Amway and Mary Kay, following an article in People’s Daily that alleged NuSkin was a “suspected illegal pyramid scheme.”
The company responded with a news release saying, “The article that appeared in today's
People's Daily contains inaccuracies and exaggerations that are not representative of Nu Skin's business in China. The reporters did not attempt to verify any information with Nu Skin. We do not believe that the article was the result of any particular government inquiry.”
Nu Skin’s share price plunged almost 50% on the back of the allegations, with Herbalife falling 10% by loose association. Dozens of
class action lawsuits have been filed on behalf of investors, alleging the company misguided shareholders.
Activist investor
Bill Ackman shorted Herbalife in a billion dollar play in 2013, claiming it was a pyramid scheme that would soon fall. It hasn't yet.
Chinese officials now say they will draft new rules that may include regulating sales force training, monitoring marketing meetings and making it harder to get a sales licence.
Nu Skin has 40,000 salespeople working in China, selling skin cleansers and weight loss kits, as well as recruiting sales networks. Over one million people sell their products worldwide to friends, family and strangers, earning $3 billion in annual revenue, with over half its Q3 revenue coming from China.
“We are absolutely not a pyramid scheme,” CEO M. Truman Hunt told reporters. “Nobody gets rich in our world by recruiting others and selling them on nothing but the income opportunity.”
Direct selling was banned in China in 1998 until intense US lobbying reopened the industry in 2006, albeit with tight rules. Companies must have a sales licence (only 40 do), there must be a return policy, and sellers cannot earn more than 30% of their sales as salary, which is intended to deter recruitment bonuses.