Pyramid scheme claims spark Nu Skin review in China

Seller of skin-care products plans to stay in market and take corrective actions while an internal assessment into its sales practices is under way

PUBLISHED : Thursday, 23 January, 2014, 1:19am
UPDATED : Thursday, 23 January, 2014, 1:19am

Nu Skin Enterprises, the seller of skin-care products that is under investigation by the mainland, plans to continue to sell its merchandise while conducting an internal review there.

Shares of Nu Skin plunged last week after the People's Daily said the company was running a "suspected illegal pyramid scheme". In a letter to customers in China yesterday, Nu Skin said it would review employee and sales-force practices and intended to take "corrective actions".

Chief executive Truman Hunt, who oversaw a sevenfold gain in the direct-seller's shares in the past seven years, said last week that Nu Skin was "absolutely not a pyramid scheme".

Some of our sales people failed to adequately follow our policies

His comments followed a report in the state-run newspaper saying Nu Skin brainwashed trainees and sold more products than allowed.

"As part of our initial review, we were disappointed to learn that during our recent rapid growth, there were instances where some of our sales people failed to adequately follow and enforce our policies and regulations," Nu Skin said in yesterday's letter.

The Utah-based company said it would provide additional training to reinforce its existing policies and educate employees on laws and regulations in China. It will release an update on the status of its review on February 6.

Nu Skin fell 2.6 per cent to US$77.39 at the close in New York. The stock declined 6.3 per cent on January 17 and 26 per cent on January 16, the day after the People's Daily report.

The company said in a statement last week that the newspaper's allegations were exaggerated and "not representative of our business in China".

Nu Skin has had rapid growth in its China unit, where sales more than tripled in the three months to September, accounting for the bulk of the company's 76 per cent revenue gain for the quarter.

The mainland alone accounted for 30 per cent of the firm's US$2.16 billion in revenue during the first nine months of 2013, Hunt said last week.

Nu Skin's more than 40,000 salespeople on the mainland sell weight-loss kits and skin cleansers in at least 19 of the 32 provinces and municipalities. The market is particularly ripe for the company's anti-ageing products. The United Nations has forecast the population of people aged 65 and older in the country will increase by about 66 million from 2015 to 2025.

The mainland is key to Hunt's plan to reach US$10 billion in revenue by 2020, a goal he said was "aspirational" yet "reachable". Nu Skin expects to surpass US$3 billion this year. Investors boosted the stock as high as US$140.50 last week from US$17.58 at the end of 2005.

Globally, the company's sales were split almost evenly between nutrition and personal-care products, Hunt said. The biggest seller is the LifePak dietary supplement, which generated about 15 per cent of sales.

Nu Skin sells more than 200 products by way of its consumer and sales networks that include almost one million people. The representatives earn commissions from the products they and others in their network sell to friends, family and strangers.

The model is different on the mainland, which heavily regulates direct-sellers. There, products are sold in large part by an employed sales force through its own stores. Some independent direct-sellers are licensed in specific areas to sell away from the stores as well.