June 01, 2017
Building Strategy for Future Growth
by Heather Martin
IN THIS ISSUE:
Whether you’ve been around the block, like Amway, or you’re relatively new in town, like Total Life Changes (TLC), direct selling was a good business to be in for 2016.
Even with such pressures as a softening in China’s economy—the largest market for some of the channel’s biggest players—and increased regulatory scrutiny, about half of this year’s Global 100 companies reported higher revenue than they reported a year before. They launched products that are winning with consumers, invested heavily in technology and designed incentives that are driving distributor success. These targeted growth strategies, along with an even sharper focus on best practices, are positioning direct sellers to continue to expand footprints, broaden retail sales and create opportunities for entrepreneurs.
The Global 100 had aggregate revenue of more than $82 billion in 2016, with 10 list-makers growing by $100 million or more and 22 reporting annual revenue of $1 billion or more each.
Not everyone saw huge leaps in revenue or crossed a major financial milestone. Some companies’ sales were down—although most of those didn’t decrease by much, and analysts say reports of lower revenue among global companies can be misleading because of how the strong dollar affects exchange rates.
Other direct sellers’ numbers held steady, and many that grew did so modestly, according to Euromonitor, which analyzes the global direct selling channel. “Despite aggressive competition from internet retailing, direct selling posted moderate growth in 2016,” Euromonitor says in a recent report. “The main reason behind its resilient performance is that some consumers still prefer to try products before purchasing.”
Moderation is a good thing, says Bob Bass, Lead Strategic Insights Analyst for Amway, which held tight to its No. 1 spot even though revenue dipped slightly from $9.5 billion to $8.8 billion. Bass says he could largely attribute that decline to the changing Chinese economy—which we’ll discuss later in the story—but he believes the outlook is bright for Amway and other direct sellers, especially those that have a large overseas presence. “We are very optimistic about our strategies to recover and very optimistic for the China direct selling space,” Bass says.
New products were rolling out from every corner of the direct selling market in 2016. And the anecdotal evidence suggests that companies are focusing on niches within their niches, creating highly targeted versions of existing products and pursuing very specific customers.
During its 2016 International Convention, USANA Health Sciences—No. 20 on the Global 100, having hit the $1 billion mark—unveiled its InCelligence technology. Found in several USANA products, such as CellSentials, the company created InCelligence to harness the body’s ability to nourish, protect and renew itself, and it seems to be performing well. Last year, the supplements line that includes the new technology accounted for 20 percent of USANA’s overall product revenue, according to the company’s annual report.
The consumer drive to drop pounds also fueled new supplement technology. As part of the ongoing development of its 4Life Transfer Factor line, 4Life introduced 4LifeTransform Burn at the company’s annual convention in October. 4LifeTransfer Burn is meant to accelerate metabolism and double the body’s ability to burn fat, executives say, adding that they believe it will keep the company on a hot streak. “Burn will, I think, give us the momentum we need to make 2017 another record-breaking year,” Chief Marketing Officer Danny Lee told DSN last year.
Mannatech, which landed at No. 73 on the list with $180 million in revenue, also introduced a fat-loss system last year. While it declined to say what percentage of its revenue came from TruHealth sales, Director of Communications Mike Crouch said last fall that more than 20 percent of new associates had joined Mannatech by purchasing TruHealth.
At a different point on the broad products spectrum, Princess House—which grew by $25 million to $195 million in revenue and ranked No. 72 on the list—has launched cookware for younger families in its largely Hispanic customer base. Traditional Princess House product users often are cooking for large family gatherings, says Vice President of Operations Russ Whittle. “One of our best sellers is a 50-quart stockpot—the kind you usually see only at Chipotle or Qdoba.” The new ware includes smaller skillets and griddles for the family that’s just starting out. The company also has focused on expanding into other categories, such as food storage containers, one of which just won a Good Housekeeping Seal of approval and the Direct Selling Association Ethos Award for product innovation, Whittle said.
The younger consumer is the sweet spot for TLC’s newest product as well, an instant version of the company’s detox tea. Busy millennials appreciate this new stick pack, says Chief Operating Officer John Licari, because they can just pour the tea into a 12- or 20-ounce bottle of water and shake the bottle to blend the drink. No tea bag to steep.
Launching in new geographic markets also gives these direct selling companies potential for a substantial return. Even the smaller companies such as TLC—which is up six spots on the list to No. 94, with $88 million in revenue—are interested in international expansion. They opened offices in Japan, Taiwan and the Philippines in 2016. Additionally, in December, Mannatech announced that it had launched a cross-border e-commerce model in China. Princess House increased its penetration here at home into the Southeast, the Pacific Northwest and Northern California. Whittle says international expansion is a possibility, but “we realize we have a lot more opportunity here in the United States, and that’s where our current focus is.”
High-Tech Low-Tech Balance
The technology that supports the sales of all these new products and growing salesforces got a boost last year, as well. On-demand, easily accessible training is no longer optional for companies who want to gain or keep a competetive advantage; it’s a critical part of any successful consultant-support program. New software at TLC guides incoming distributors through mandatory online training videos to make sure they’re aware of crucial compliance issues, says CEO Jack Fallon. Tech-savvy USANA also sees continuing value in investing in IT, having ramped up its investment in its technology infrastructure over the last year, says CEO Kevin Guest. “Technology is one of our greatest opportunity areas. The world today is in everyone’s pocket on their phones.”
USANA focused in particular on building its WeChat presence in China, the platform through which nearly all of China’s e-commerce and social media traffic flow, according to Bloomberg.com. On average, Chinese internet users spend more than one-third of their online time in WeChat. “It’s literally how many people in China function from a mobile perspective,” Guest says.
While technology continues to aid and transform direct selling—making expansion and growth exponentially easier and faster—company executives are still talking about the importance of maintaining face-to-face connections in an increasingly virtual business. Simply put, technology can never replace the personal nature of the consultant-to-customer relationships and its benefits.
“A lot of direct selling companies who want a high-tech approach also want to keep the high-touch activities so they don’t lose that personal relationship selling model that is traditional,” says Amway’s Bass about the online-to-offline (OTO) trend. “Buyers can be much more loyal to the direct sellers that offer social media and OTO opportunities.”
Product innovation and a blend of high-tech and traditional sales methods are fundamental to the modern direct seller’s success. So are strong leaders in the field. Without them, a company cannot be competitive.
And while most successful entrepreneurs are self-driven, they also are highly motivated by incentives. So direct selling companies continue to create programs that increase the engagement and performance of their field teams as well as draw new retail customers.
4Life has created a weight loss contest in which participants use a pack of products for a month and share before-and-after pictures to illustrate their transformations. “In the United States, challenging people with the opportunity to lose weight through friendly competition has proven really successful for us in getting them to use and share the products,” says Calvin Jolley, VP of Communications, indicating that most of the company’s recent growth coincides with the positive effects of the challenge.
USANA has had success with targeted promotions, as well, Guest says. Short-term regional and marketing-specific incentives like travel rewards for the Filipino salesforce, for example, have gained a lot of traction. “Most people in the Philippines don’t have the opportunity to travel,” he says. “If they have the ability, through their productivity and their growth, to see parts of the world they’ve never had the opportunity to see, that’s a great incentive.”
Sometimes it’s about simple math. Customers are often motivated to hold parties for host rewards of products they desire, but for which they don’t want to pay full price. At Princess House, the incentive emphasis has been on giving a major product discount to a party host who hits a certain sales target. “If you can get a $500 retail item for $99 for getting a $750 show, you’re going to work a little harder,” Whittle says.
As analysts have said, the steady but less rapid growth—and for some, the slight decline—among global direct sellers is due primarily to shifts in the Chinese economy and to the strong dollar in general.
Trends to Watch in China
Amway has seen it all in China. The company was there when the direct selling channel got its foot in the door. It was there when the government shut the channel down for a period in the late 1990s because of poor actors creating pyramid schemes. And Amway’s there now, as the channel is coming out of a period of rapid growth. While the pace is slowing and the government appears to be tightening the reins a bit, Amway Strategic Insights Analyst Bob Bass believes there are promising trends that will create new opportunities for direct sellers to succeed.
Let’s start with the dollar exchange rate, which affects how U.S. companies record revenue and profit generated in other countries. On average in 2016, the dollar was up against most currencies, except the euro and the yen. In China, the exchange rate was 6.91 yuan for every dollar; in India, the average rate was 70 rupees for every dollar; and in Japan, US$1 would exchange for 113 yen. For U.S.-based companies that do a majority of their business overseas, their earnings can look less robust when the dollar is strong compared with the currency in a particular country. The money those companies make in that foreign currency doesn’t translate to as many dollars as it would if its local currency exchange rate were equal to or stronger than the dollar.
For example, Nu Skin’s local currency growth rate for sales in China in 2016 was 14 percent, says Doug Lane, a securities analyst who specializes in direct selling companies. But the skin products company reported dollar growth in sales of only 8 percent because of the depreciation of the yuan against the dollar. Simply put, it’s important to consider the exchange rates when evaluating the strength of a U.S. company that conducts a significant amount of commerce in countries with weaker currencies, Lane says. Failing to do so can create a false negative impression of a company’s overall performance.
The overall Chinese economy has also had an effect on a number of companies who do business there. Bass says that direct sellers are going to have to adjust to a new reality in China. The channel’s growth this year in China could be in the -5 percent to +5 percent range. As of press time, no one really knows yet. The only sure thing is that this critical market for many direct sellers is changing—partly because the Chinese government has slowed the rate at which it grants licenses to direct sellers. Bass doesn’t expect the government to double the number of licenses over the next two years, as it did from 2014 to 2016, when the number went from 40 to 80. The other change is coming from a declining gross domestic product, he says. According to the International Monetary Fund, China’s GDP was about 6.7 percent at the end of 2016, down from the 7.5 percent range in 2013. Bass says some projections have the GDP falling to as low as 5.9 percent by 2020. “That is a drastic decline from an economy that still has a large and rapidly growing middle class.”
These pullbacks along with China’s notoriously tough rules for network marketers aren’t causing panic; they’re just reminding direct sales executives that they must continue to be diligent about their Chinese operations.
Nu Skin notes in its 2016 annual report that it’s still feeling the effects of a crackdown on its practices in China in 2014. “Our business in mainland China still has not fully recovered from these events,” the report states. “The regulatory environment in mainland China is particularly complex and continues to evolve.”
As the Chinese economy loses some steam, the government is turning inward, analysts say, encouraging its citizens to buy indigenous products. Lane says this “Buy China” message likely will affect mass marketers more than it will hurt direct sellers. “A lot of direct sellers tend to offer premium products,” he says. “When you get into the prestige markets, that consumer is looking for a U.S. product or a Japanese product, an upscale brand with the cachet of originating from a sophisticated overseas source. There’s a huge opportunity with an emerging middle class with disposable income going up, a market that’s a natural fit for direct selling culturally.”
Frank Jiang, who leads Amway’s global China sales team, agrees that direct sellers should stay positive about their position in and prospects for China and should commit to “continuing their best practices of corporate citizenship.” Direct sellers also need to keep an eye out for competitors who may not share that commitment, he continues. “There’s always the potential for newly licensed companies to want to accelerate their growth trajectory and that can often lead to bad practices. We’re all in this together, and we need to watch for bad actors.”
USANA’s Guest understands that while the direct selling channel in China has grown dramatically, it’s still “a new frontier” in many ways, and companies need to be diligent. “We want to be a good corporate citizen in China,” he says. “We want to understand what the regulatory environment is and what they’re trying to accomplish, and how we can support the future of direct sales in China.”
Guest says that while USANA certainly “feels pressure from an exchange rate perspective,” the company believes its future in China is clear because of how strongly its health-supporting products are resonating with a population increasingly in tune with the need to combat environmental stressors.
Top Companies Per Region
Asia/Asia Pacific 40
1. Infinitus, Malaysia $3.41B
2. Perfect, China $3.06B
3. Quanjian, China $2.89B
4. JoyMain, China $1.49B
5. New Era, China $1.16B
1. Avon, UK $5.70B
2. Vorwerk, Germany $4.2B
3. Oriflame, Switzerland $1.40B
4. Telecom Plus, UK $1.12B
5. PM International, Germany $460M
North America 46
1. Amway, USA $8.80B
2. Herbalife, USA $4.50B
3. Mary Kay, USA $3.50B
4. Tupperware, USA $2.210B
5. Nu Skin, USA $2.208B
6. Primerica, USA $1.52B
7. Jeunesse, USA $1.41B
8. Ambit Energy, USA $1.20B
9. USANA, USA $1.01B
10. Young Living, USA $1.00B
South America 5
1. Natura, Brazil $2.26B
2. Belcorp, Peru $1.09B
3. Yanbal, Peru $924.0M
4. Marketing Personal, Colombia $153M
5. FuXion Biotech, Peru $116M
Practices Make Perfect
Compliance issues in direct selling are on the front burner in the United States, too. In 2016, two high-profile Federal Trade Commission settlements—with Vemma and Herbalife—heightened companies’ awareness of the need to self-regulate to make sure potential income claims are honest and transparent, to have a robust retail customer base, and to ensure that the majority of distributors’ volume comes from customers outside the compensation plan.Guest says direct selling tends to attract high-achievers, and sometimes the way they describe their success can inadvertently cause problems. “You see people who are not trying to be deceptive; they’re honestly not trying to say anything other than, ‘This is what I did!’ ” But if a particular distributor’s success is not the norm, a potential salesperson may misunderstand unless the company clarifies what the average person can expect.
He adds, “When someone enrolls in USANA we talk about proper income claims and about how to run their personal business within the constraints of the law.” At Princess House, the company’s “Success Start” program helps new consultants understand how much work it will take to achieve a particular level of success. Clarity on this issue is paramount in today’s regulatory climate. When a company strengthens the new person’s grasp of the work involved, both parties benefit. Whittle says. “If [a consultant] wants her business as a passive income, she’ll earn less” than if she is actively working it.
As we round the mid-year point of 2017, the outlook for this channel is promising, and we anticipate another year of success for direct selling worldwide. Our channel remains the single best entrepreneurial opportunity for anyone, from any walk of life, to improve their circumstances. We look forward to reporting the 2018 Global 100 List!