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January 21, 2013

Direct Selling in Consumer Health

ChrisSchmidtAnalyst Insight by Chris Schmidt, Consumer Health Company Analyst at Euromonitor International

View Chris Schmidt's profile on LinkedIn

Direct sellers have received significant attention in the financial media of late. Given the harsh accusations recently levelled against firms like Nu Skin Enterprises Inc, Avon Products Inc and the hedge fund battle brewing around Herbalife Ltd, it would seem the old adage “there’s no such thing as bad publicity” may need to be retooled. A glaring spotlight has been cast on direct selling and, in particular, on important consumer health direct sellers. Given the extreme rhetoric involved in the back-and-forth, two important questions need to be raised: what is the role of direct selling in consumer health; and what are its prospects moving forward?

Investor woes draw attention to important sales channel

Two of the consumer health’s biggest publically traded direct sellers – Herbalife and Nu Skin – have been the targets of scathing investment reports recently. In August 2012, Nu Skin was targeted by the short-sale specialist Citron Research, which accused the company of operating an illegal multi-level marketing scheme in China, violating regulations in the US and falsifying its research relationship with the renowned Stanford University. Herbalife was targeted twice in 2012, once by noted short-seller David Einhorn for changes in its disclosure, and again in December by Bill Ackman, who released a 300-page report accusing the company of running a pyramid scheme and questionable financial reporting.

The attacks reflect a suspicion of the direct selling industry, which is seated in its fairly unsavoury history. Illegal pyramid schemes, recruiting machines with no intent to sell products to end users, were frequent in the early days of direct selling. While dozens of national commerce and trade regulators have moved to ban these schemes, they still occur with too much regularity. However, the attention and increased regulation has had limited impact on serious multi-level marketers, which have often worked directly with regulatory agencies to craft consumer protection laws and have shown both a willingness and ability to adjust their operating models to conform. In China, for example, a spate of fly-by night pyramid operators in the mid-1990’s caused the government to ban multi-level networks outright in 1998. Instead of withdrawing from the markets, serious operators like Amway Corp opened retail outlets and worked with the government to craft legislation that eventually reopened the world’s now second-largest economy to direct sellers in 2006.

Direct sellers remain a major force in consumer health

Direct selling is a major consumption channel for consumer health, particularly the vitamin and dietary supplement (VDS) and weight management (WM) categories. Throughout the forecast period, direct selling’s share of global distribution for both categories grew steadily, and in 2012, direct sellers generated more than one-fifth of global VDS and nearly one-third of WM retail sales.

Distribution Share of Direct Sellers in Consumer Health by Category
Distribution Share of Direct Sellers in Consumer Health by Category

Source: Euromonitor International

Note:  As a percentage of total RSP sales

Direct selling heavyweights like Amway and Herbalife are some of the top performers in the most important VDS and WM markets globally. Additionally, as they are often one of the few truly global producers present, they sell some of the most innovative products in the least developed markets. In fact, direct sellers were some of the first global companies to concentrate significant resources on many of what are now important emerging VDS and WM markets, such as those in Southeast Asia and Latin America. Direct selling has several inherent advantages in the developing world. The cultures of many of these markets stress strong family bonds and cottage industry remains an important source of income. This creates a built-in sales demographic for new distributors, who are eager to supplement their generally low incomes. Additionally, concern over local production standards often drives aspirational consumers toward respected international brands. Here, the personal relationship between a distributor and end-consumer can prove to be an incredibly effective marketing tool, particularly in less urban areas, where international brands are not as heavily advertised.

Combined Amway and Herbalife Shares of Top 5 VDS and WM Markets (2012, RSP)
Combined Amway and Herbalife Shares of Top 5 VDS and WM Markets

Source: Euromonitor International

Note:  RSP represents total market size across all five markets

While pyramid schemes are not uncommon in consumer health, legitimate direct sellers are an important source of some consumer health products around the world and have played an undeniably important role in the category’s development, particularly in emerging markets. However, their role is changing, as traditional consumer health companies increasingly turn their attention on the VDS and WM categories.

More competition expected

Many of the multinational pharmaceutical companies that have long dominated the important OTC category have largely slept through the global supplement boom. Recent large-scale acquisitions by the likes of Pfizer Inc, Church & Dwight Co Inc and Reckitt Benckiser Plc signal that many producers see their future in the VDS category. However, with fierce competition, increasingly consolidated categories and relatively slower growth in Western Europe and North America, many of these companies will be targeting growth in the markets that companies like Amway and Herbalife have been milking for years. As incomes rise and regulations lighten in the emerging world, consumers will find it increasingly easy to obtain the megabrands of traditional pharmaceutical powerhouses. As traditional producers throw down the gauntlet, direct sellers will be pressed harder than ever to invest in meaningful innovation and advertising.


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