A new challenge has arisen for multilevel-marketing companies
operating in China. The Chinese government has recently begun an
Nu Skin Enterprises Inc.
) following claims by local newspaper, People's Daily (on Jan 15)
that the company was operating an illegal pyramid scheme in the
The news has not only affected the share price of Nu Skin but
also that of several other companies with the same distribution
model as investors fear that the investigation could extend to
these direct selling companies as well. Other companies that have
lost their market value drastically in the last two trading days
USANA Health Sciences Inc.
Shares of the skin-care and nutritional products marketer, Nu
Skin have lost around 37.9% in the last two trading days while
Herbalife and USANA lost 11.3% and 14.0, respectively.
China has become the highest revenue generating nation for
most of the foreign based direct selling companies. China alone
contributes over 30% to Nu Skin's total revenues, while for USANA
and Herbalife, it generates nearly 60% and 11%, respectively of
their total sales.
These companies are experiencing huge revenue growth
opportunities in the world's second largest economy. This is
evident from Herbalife's third-quarter fiscal 2013 results, in
which revenues from China soared 77% year over year.
China has always been suspicious toward these direct selling
companies. These were earlier banned by the Communist Party in
1998. Since then, any kind of pyramid selling scheme is
illegal in the country. In 2005, the ban was lifted after
multilevel-marketing companies changed their agent payment
In near term, it will be wise to stay away from direct selling
companies, which have much exposure in the Chinese market, until
the investigation yields some positive news. Another
better-ranked retail stock that appears promising in near term is
Sally Beauty Holdings Inc.
) with a Zacks Rank #2 (Buy).
HERBALIFE LTD (HLF): Free Stock Analysis
NU SKIN ENTERP (NUS): Free Stock Analysis
SALLY BEAUTY CO (SBH): Free Stock Analysis
USANA HLTH SCI (USNA): Free Stock Analysis
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