Industry News

Stories in this section:
2006: Year in Review
Company Spotlight: The Longaberger Company
Industry with Heart: CyberWize
Young Company Focus: 5LINX

2006: Year in Review
by Barabara Seale

When direct selling companies figuratively sang Auld Lang Syne at the beginning of 2007, they could look back on a 2006 characterized by the word opportunity. No matter what form the opportunities took, direct sellers could feel good the industry had banded together to face them all.

Opportunities came in several forms in 2006. Three stand out: new markets, expanding product lines and a thorny threat from the Federal Trade Commission called The Business Opportunity Rule.

The Orient Express

International expansion seemed to be on the minds of almost every company in 2006, and often sights were set on the East. Direct selling in India is growing at a rate of 15 to 20 percent a year, Korea has become the third-largest direct selling market in the world and Japan is starting to come back to life after 15 languid years. But the country on almost everyone’s screen was China.

China banned direct selling in 1998 but committed to reintroducing it in 2001 after joining the World Trade Organization. Supported by the U.S. government and the American Chamber of Commerce, the Direct Selling Association (DSA) and the World Federation of Direct Selling Associations (WFDSA) organized members to conduct a consistent, long-term lobbying campaign to urge the Chinese government to ease its restrictions on multilevel compensation. Their efforts are paying off, and the direct selling doors to China’s 1.3 billion consumers are starting to open, if ever so slightly.

DSA President Neil Offen explains what the organization’s strategy will be after early licenses are granted in China. “We would then conduct business for a year or so to show that we are good corporate citizens, we can control our sales organizations and we are not a threat to social stability,” he says. “Then, we would seek amendment of the rules to allow some form of multilevel compensation to be permitted.”

So far, 13 direct selling companies—four from the United States—have been awarded licenses to operate in China, including Amway, Avon, Mary Kay and Nu Skin; all four already had a retail presence in the country. Other companies hope to follow in their footsteps. For example, the state of Utah—home to several direct selling companies—organized a trade mission to China in October that included representatives from XanGo, Nu Skin Enterprises, Nature’s Sunshine and Tahitian Noni.

Avon described receiving its license as one of its high spots of 2006. “A very important highlight was being awarded the first direct selling license in China in March,” says Avon’s Brian Connolly, Executive Vice President, Global Direct Selling. “This positions Avon to leverage our 120 years of direct selling experience in one of our most significant long-term growth opportunities. We are excited to offer a direct selling opportunity that will bring about a brighter future for women in China.”

Nu Skin’s Dan Chard, Executive Vice President of Distributor Success, notes that becoming the second non-Chinese direct selling company to secure a license in China was one of the company’s most memorable events. Nu Skin will begin rolling out its direct selling opportunity in China in 2007, starting in Shanghai. China will become the latest country to experience the Nu Skin direct selling opportunity. “We increased our global footprint to include 44 markets and saw impressive growth in many of our markets, including South Korea, where we experienced double-digit growth throughout 2006,” Chard says.

Entry into the Chinese market has an impact reaching beyond the immediate companies involved. Wall Street takes an interest, as well. Scott Van Winkle, who covers the direct selling industry for investment firm Canaccord Adams, says the most positive catalyst for the direct selling investment community last year was Chinese approval of several direct sellers.

“China is likely to continue to be the hot topic in direct selling stocks as the 2006 approvals begin to post revenue and earnings growth in China and as additional companies receive direct selling approval,” Van Winkle says.

About 30 publicly traded companies earn at least part of their income through direct selling, with 19 of those receiving more than one-half of their revenue through network marketing, direct selling or party plan business models. It was a good year for the whole group. On average, the 30 companies saw their stock values increase by more than 50 percent in 2006.

Whether publicly traded or privately held, direct selling companies are responsible for some $103 billion in sales by about 59 million salespeople worldwide, the DSA’s Offen told members at the organization’s annual meeting in July. In the United States, overall revenue from direct selling exceeds $30 billion annually.

Obstructing Opportunity

A possible threat to growth was posed on April 5, 2006, when the Federal Trade Commission (FTC) issued a proposed Business Opportunity Rule that could have an onerous effect on the direct selling industry. The proposed rule outlines a number of requirements that would affect direct sellers, including a seven-day waiting period after being presented with the opportunity before an individual would be allowed to join a direct sales company. Other provisions require each prospect be given the names, addresses and phone numbers of nearby distributors so they can be contacted as company references and that the company disclose to the potential recruit information about all legal cases in which the company had been engaged during the previous 10 years, regardless of the case’s outcome.

The DSA mobilized its members, encouraging companies and individual sellers to send the FTC comments in opposition to the proposed rule. The FTC received more than 17,000 comments regarding the rule—99 percent in opposition.

Congressmen and senators joined in a rare bipartisan effort to oppose the proposed rule. Senators Orrin Hatch, R-Utah; Republicans Larry Craig and Michael Crapo from Idaho; Texas Republican Representatives Pete Sessions and Joe Barton; and Gary Ackerman, D-N.Y. have been among the leaders. Congressman Ackerman also drafted a letter to FTC Chairman Deborah Platt Majoras carrying the signatures of 15 Democrat members of the House, including a number of members of the key Commerce Committee. The letter recommends that the FTC protect legitimate businesses like those involved in direct selling. Joseph Mariano, DSA Executive Vice President and Legal Counsel, predicts the FTC will take most of 2007 to analyze the comments and prepare its report.

“DSA will continue to use every appropriate resource to ensure that the FTC’s proposal does not harm direct sellers or limit the contributions we make to our communities,” says Mariano. “We trust that real business opportunity fraud can be eliminated from the marketplace without harming any of the good companies, the millions of salespeople, and the millions more customers that make up our industry; DSA is absolutely and unequivocally committed to that result.”

Canaccord Adams’ Van Winkle notes that Wall Street’s response to direct selling in 2006 was driven by the risks associated with the proposed rule. “The FTC’s Business Opportunity Rule will continue to be an important challenge for the industry to battle and for investors to worry about,” he says. “A softening consumer backdrop in the United States is likely to also remain a challenge as the housing market continues to struggle.”

Direct sellers can celebrate other governmental relations victories, including the passage of anti-pyramid legislation in Utah and Washington. The legislation will protect the citizens of those states by creating a clear distinction between legitimate direct selling companies and pyramid schemes.

Sipping Supplements

At least one opportunity was easy to swallow in 2006: liquid supplements. The tasty tonics have spawned fast-growing direct selling companies that sometimes focus on selling a single product or product line, such as Vemma and The Limu Company. And established wellness companies such as Pharmanex and Oxyfresh have expanded their offerings to include the popular potions.

Vitamins and minerals in pill, tablet or capsule form have been available for decades through direct sellers and retail outlets. As scientists have identified “super foods” containing megalevels of nutrients, the demand has grown for more condensed nutritional sources. Liquid-nutritional-supplement makers responded with beverages based on ingredients that science says boost general nutrition, increase stamina, support the immune system or deliver other functional benefits. Juices are prevalent, but tea and water—sometimes spiked with additional nutrients—are staking out retail shelf space, as well. Even Coca-Cola offers a sparkling green-tea beverage that it says burns calories.

Why the trend toward liquids? Many companies point to the aging of America as a big reason. As we get older, our digestive systems become less efficient at absorbing nutrients. Liquid nutrients, the reasoning goes, are more accessible to customers as young as 30. Liquids aren’t exactly new to direct sellers, though. In the ’80s, Matol Botanical International Ltd. pioneered the liquid-product category with its original product, Km® Health Tonic, still one of the few that uses no flavoring agents. But many newer nutritional drinks are based on fruits and fruit juices. Antioxidant-rich fruits are used for flavoring, including acai berries, noni, mangosteen, pomegranates, goji berries and good-old, North American blueberries. They are key ingredients in many nutrition drinks, either as primary products or simply for their delicious flavors. A few liquid-nutrition drinks focus instead on herbs, sea plants or dairy products, sometimes shunning fruits altogether in favor of other flavorings.

Currie Corbin, Director of Marketing and Public Relations at Oxyfresh, noted that the introduction of the company’s new fruit-based nutrition drink line was a company highlight in 2006. “We waged a successful media campaign targeting a health-conscious audience,” Corbin says. “From this, Oxyfresh registered 160 million media hits in national magazines and newspapers. The media was especially impressed with our nutritional line. Primorye OTG™, Oxyfresh’s exclusive adaptogenic tonic and Lifeshots™, our unmatched liquid antioxidant complex, are adding new customer loyalty, growth and recruitment to the mix.”

Liquid supplements have yielded a harvest of fruitful financial results for direct selling companies and their distributors. While 2006 results aren’t yet available, Nutrition Business Journal, the nutrition industry’s leading business publication, estimates sales of nutrition products by direct sellers reached $6.4 billion in 2005. Results are often fueled by automatic-fulfillment programs, which send products to distributors or health-conscious consumers each month while delivering automatic revenue for direct sellers. Numerous liquid-nutrition-focused companies haven’t yet seen their 5th anniversaries, including The Limu Company, MonaVie, Sibu, Vemma, VivaTRU and Xango, among others. All are growing rapidly (see the November issue of Direct Selling News for more on liquid supplements).

So if you and your direct selling colleagues weren’t together to welcome the New Year and reflect on your 2006 accomplishments, it isn’t too late to lift a glass—perhaps one filled with a nutritional beverage. As Sinatra sang, it was a very good year.