Nu Skin Falls Under Media Microscope

Nu Skin blasted by People’s Daily

It’s not too often that I agree with articles published in the People’s Daily, but for once I  have to say that a new attack by the newspaper on personal health products maker Nu Skin (NYSE: NUS) looks at least partly deserved. That said, I did find the language used to attack Nu Skin somewhat comical and exaggerated, even if it the basic ideas are probably true. I was also somewhat surprised at how big a market China has become for Nu Skin, reflecting how easily such companies can win over Chinese consumers and businesspeople who often assume that any product with a western name must be good and trustworthy.

Some might argue this latest attack on Nu Skin is just part of a broader series of similar media campaigns over the last 6 months that have targeted a wide range of big western names from coffee chain Starbucks (Nasdaq: SBUX) to consumer electronics giant Apple (Nasdaq: AAPL). But I would say this latest attack is somewhat different, since the allegations against the other companies were all based on relatively small issues. By comparison, the grounds for the Nu Skin probe are based on its sales tactics, which in my view are dangerously aggressive.

According to the latest reports, China’s State Administration for Industry and Commerce (SAIC) launched a probe into Nu Skin after the People’s Daily reported the company was exaggerating its influence and creditworthiness in some of its literature. (English article) The People’s Daily also accused Nu Skin of “brainwashing” people at mass gatherings it organized. Shares of Nu Skin, which now gets about half of its nearly $500 million in quarterly sales from China, lost a third of their value after the latest flurry of reports came out.

For those who are unfamiliar with this company, Nu Skin and other companies like Herbalife (NYSE: HLF) and USANA (NYSE: USNA) use a business model where they sell their products through small armies of salespeople that directly visit customers and sell to them individually. Such an approach theoretically works well by creating stronger relationships between salespeople and customers, providing more intimate service in convenient settings.

But the reality is that these salespeople are often quite aggressive, using pressure tactics to find new customers and win business. Nu Skin and others like it have also been accused of operating “pyramid schemes”, where salespeople can make money not only through their own sales, but also through commissions on sales made by others they recruit into the company’s sales network. My only encounter with Nu Skin in China came one day over my WeChat service, when an unknown user solicited me with a message asking if I had ever heard of the company’s products and wanting to tell me more. Needless to say, I told him I wasn’t interested.

All that brings us back to the original issue, which is why I think this crackdown on Nu Skin and others like it are at least partly deserved. For starters, pyramid schemes are illegal in China, and are actually illegal in many other countries also. Nu Skin and others argue that they don’t encourage the recruitment of new salespeople as a way to earn money, but the reality remains that this kind of practice is probably quite common and is one of the big attractions of working for companies like Nu Skin.

More broadly speaking, I really think this kind of aggressive selling is unfair, especially to Chinese consumers who often put too much trust in products with foreign brand names. I do think that this kind of business model should be allowed if it doesn’t violate any laws. But I also believe that legal curbs should be put on sales tactics, and Beijing should launch a broader educational campaign to teach Chinese consumers how to say “no” when they get approached by aggressive salespeople peddling products they don’t really want or need.

Bottom line: China’s latest probe into Nu Skin is at least partly deserved, and should serve as a call for them to curb their aggressive sales tactics

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