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Eastern Europe: Direct Selling in an Emerging Economy
Market America Expands Into Taiwan

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Eastern Europe:
Direct Selling in an
Emerging Economy

Eastern Europe has been out of the Cold War for more than 15 years. Words like privatization and entrepreneurship have since become common
terms, indications of a new economic world in these budding countries. With millions of people poised to explore the business potential offered by capitalism, direct selling companies are creating opportunities and modifying their operations to fit perfectly within the cultures.

Rewind 20 years
The Soviet Union was still a behemoth during the 1980s, but the end of the decade brought historic change with territories and former nations demanding independence. The 1990s saw “new” entities appear on the map: Lithuania, Estonia, Latvia, Kazakhstan and others. The creation of new governments introduced vast economic changes. State-owned institutions gradually were privatized, and the populace began to embrace capitalism.

It was the dawn of a new age for people who were never able to earn more than government-sponsored jobs would allow. Multi-level marketing entered the scene, but several of the first businesses were not legitimate and did not adhere to industry standards. The predictable results: In Russia alone 40 million people were victims of illegitimate MLM schemes, with one notorious company taking $2.3 million from unsuspecting hopefuls.

Such infamous beginnings left a bad taste in the mouths of many consumers and former salespeople. Strong direct-selling companies entering Eastern Europe face the challenge of proving themselves viable winners by overcoming a tarnished reputation.

Entrepreneurs at the Ready
Companies with significant international operations such as Nu Skin, Amway and Nikken boldly entered key Eastern European markets and are building solid reputations. Other companies such as Royal Body Care followed field leaders into the region to leverage experience. All are banking on the area’s advantages and are spearheading the formation of direct selling associations to enforce standards and assure legitimacy.

One of the biggest appeals of the market is that people are well educated, thanks to the former government’s universal education. Both the field salespeople and consumers are well versed enough to recognize the opportunity for income and the value of quality products.

“The spirit of entrepreneurship combined with sophisticated and value-minded consumers offer great potential,” says Marek Florczuk, Vice President of Amway Eastern Europe. Amway has operations in nine Eastern European countries, with its first market entrance in 1991 and the latest in March 2005. Working with Amway affiliates, the region’s more than 183,000 distributors produced more than $123 million in sales last year.

“People are very well educated, ambitious and entrepreneurial,” says Dan Chard, Vice President of Nu Skin’s European Operations. “Generally our Eastern European distributors pursue networking on a full-time basis and take advantage of the income opportunity.” Nu Skin began operations in Poland in 1998 and adds 3,500 distributors on a quarterly basis. The company expects to launch in Russia in 2006 and is evaluating areas surrounding Hungary for future expansion.

In the case of Royal Body Care, one entrepreneur paved the way for many more to join throughout Eastern Europe. “One of our Canadian associates offered his extensive experience and familiarity with Eastern Europe,” says Trevor Scofield, Vice President of International Operations. Royal Body Care teamed with the associate in 1999 and gave him distribution/ licensing agreements to move forward. The company now operates in 11 countries in the region, generating $25-$35 million in sales and has plans to expand into 10 more.

The Direct Selling Association and World Federation of Direct Selling Associations show that the fastest industry growth is in Russia and the Ukraine, growing by more than 50 percent annually. Only seven of the 29 Eastern European countries are currently reflected by DSA sales figures, but those seven countries represent an impressive $2.5 billion in sales. Each country has an average population of 10 million, a vast untapped market.

Unique Challenges
Operating in an emerging economy has its challenges, of course, and the early direct sellers are learning how to adapt. “Use local resources as much as possible to overcome cultural differences and to ensure that things move forward,” advises Tony Chaplin, Managing Director of Nikken UK. Nikken’s 10,000 Russian distributors have proven that they know how to negotiate within the nascent infrastructure, and Mr. Chaplin’s management team—including its native Russian general manager—look to their distributor network for accurate feedback and direction.

Amway also credits its success to the initiatives of local leadership.“We have found it very helpful to have experienced salespeople from other markets support new independent business owners,” says Florczuk. “As markets mature, local IBOs quickly become an overwhelming majority and recognize entrepreneurship as a key factor in economic growth.”

Specific differences within the area include limited Internet use and widespread cash use. “Russians prefer using the phone and being face-to-face with you rather than using the Internet,” says Chaplin. This preference is consistent throughout the area, as underscored by Poland’s Direct Selling Association research showing consumers’ No. 1 reason for buying through direct sellers is the comfort of having the seller at their home.

The credit and banking industries lag in developed countries and cash is the payment of choice for most business. Western companies have reverted to old school ways of managing hard currency. “Cash is big there,” says Scofield. “Our business is like most others—we work through credit and electronic payments. We had to develop ways to manage cash-based transactions.”

Product Review
Product preferences tend to be different in the region as well. The undisputed top selling category is personal care, which covers a wide spectrum including nutritional supplements and cosmetics. The nature of retail in Eastern Europe makes seemingly commonplace items marketable. For example, Royal Body Care sells many herbal products in the area but no longer sells them in the United States. “In Eastern Europe, you can’t just go to the corner store to get herbal supplements. They’re among our top sellers in the region,” says Scofield. “One of the most surprising aspects of business in these countries is that products that may be outdated in the United States could be great in Eastern Europe because these consumers haven’t seen the items before. ”

Nu Skin, along with its Pharmanex business, has found that its distributors and customers appreciate the science behind the health-related products but have less disposable income. “We are launching new product lines that maintain the company’s product philosophy in more economically priced products,” explained Chard, who substantiated the region’s preference for botanicals. “We have excellent response for products that appeal to the long-term Polish tradition of herbs and plants in cosmetology.”

Nikken, too, has found a different product mix works for this region. “We have an unusual product range where our magnetic and water items seem to be very successful,” says Mr. Chaplin. “We offer a subset of products so distributors can learn without being overwhelmed.”

Government Footprints
The biggest influence in Eastern Europe business operations is the European Union. Latvia, Estonia, the Czech Republic, Slovakia, Slovenia, Poland, Hungary and Lithuania all joined the EU on May 1, 2004. Romania and Bulgaria are scheduled to join in May 2007 and Croatia is negotiating its entrance.

The EU requires its members to streamline regulations and create prudent monetary policies. Tariffs between member states are basically eliminated and many of the developing economies have the luxury of flat taxes—a seemingly unreachable dream for established countries that rely upon multiple tax layers. Estonia’s corporate profit tax is 19 percent; Russia’s is 6 percent of entrepreneurs’ revenue or 15 percent of profits; Slovakia’s is 19 percent on all corporate and personal income; Latvia, Poland and Hungary’s corporate taxes are less than 20 percent. All of these steps make the area appealing for corporations to enter with reasonable initial investments.

Chard of Nu Skin has seen the positive effects of this government influence. “Definitely the biggest step forward [for our Polish business] was
when Poland joined the EU. This allowed goods to flow more smoothly in and out of the country, reduced procedural requirements and helped avoid unnecessary spending. Today the Polish direct sales industry is waiting impatiently for finalization of social insurance law changes, which will significantly reduce initial charges for distributors.”

Companies already operating in EU countries have found entrance into Eastern countries less cumbersome, capitalizing on their experience in older EU countries. But Royal Body Care’s first European expansion was into non-EU countries. “Now that we’ve met all the new EU requirements, we’ve laid the groundwork for going into Western Europe,” says Scofield. “But each country has its own individual laws as well, so it’s not uniform. For example, in France, direct sellers have to be treated as employees—with all the benefits and stipulations. In Sweden, it’s much easier. There are still a lot of differences between countries.”

One universal experience of these corporations and others who are doing business in Eastern Europe is that the opportunity is there. People are looking for a way to build income and feed their entrepreneurial dreams. Governments are clearing roadblocks for direct sellers and both consumers and distributors are eagerly responding. Perhaps Nikken’s Tony Chaplin sums up the typical experience best:“Business is different and difficult compared to Western Europe, but getting into a growing market is preferable to waiting for everything to be in place.”

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Market America
Expands Into Taiwan

Market America, a product brokerage and Internet marketing company specializing in One-to-One Marketing and Mass Customization, today announced the opening of its newest international operation, Market Taiwan. Headquartered in Taipei, with sales centers in Taichung and Kaoshiung, Market Taiwan will service the company’s burgeoning international customer base.

“Our expansion into Taiwan is a direct result of successes in Canada and Australia,” said James H. Ridinger, Market America’s President and CEO. “Our Australian operations have been hugely successful and thousands there have seen that they can be an independent business owner. By building on the success in North America and Australia, Taiwan is the perfect extension of our company and launching point for further expansion into the Pacific Rim.”

Market America opened Market Australia in 2002. The company has used that success as a foundation for further expansion into the Pacific Rim. Since its opening, Market Australia has generated nearly $30 million in revenue and continues to grow through its independent distributors.

Market America has appointed George Hu as Market Taiwan Branch Manager and Kevin Yen as Sales Manager. Prior to Market Taiwan George Hu was Senior Director and Chief Financial Officer for Global Unichip Corp. He has also worked as Taiwan Branch President for Mary Kay Inc. where he worked to build the organization’s sales. Kevin Yen comes to Market Taiwan with more than 12 years in the direct selling industry. He previously worked as Sales Manager for Mary Kay Inc., Taiwan Branch.

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