American direct selling company Nu Skin has hit back at an article in an official Chinese newspaper that slammed the firm's marketing techniques as tantamount to "brainwashing".
The Utah-based firm sells personal care products and dietary supplements in China through a network of independent agents. The country accounts for almost one-third of Nu Skin's global revenues—an unprecedented figure for this segment.
Alleging that reporters from People’s Daily did not attempt to verify any of their claims in an article this week that compared Nu Skin’s sales methods with brain washing, the company swiftly condemned the story.
It said in a statement: “The article… contains inaccuracies and exaggerations that are not representative of Nu Skin’s business in China.
“We do not believe that the article was the result of any particular government inquiry.”
Following the report, under the headline “Watch how Nu Skin fabricates lies”, Nu Skin saw its shares plummet by almost 20%.
The story included the line: “Southwest University of Politics and Law Lecturer Hu Jiang believes that such acts alleged mind control, commonly known as ‘brainwashing’."
It also suggested that Nu Skin’s marketing was dishonest and that its “pyramid structure” might even be illegal.
For its part, Nu Skin responded by saying: “Our business activities are regularly monitored by the government in this rapidly growing marketplace.
“As is our practice, we will communicate openly with regulators to address questions arising from this article.”
Merrill Lynch analyst Olivia Tong summed up her views in a note on Wednesday. She said:
“The [translated] article includes what appears to be a letter to the editor from a relative of a failed distributor, questions the company’s recruiting and selling practices and claims, and shows a video of a recent Nu Skin meeting.
“In our view, the accusations in this article are not uncommon, but clearly, when originating in Nu Skin’s fastest-growing market, and after a 237% run in the stock last year, will cause concern…”
Tong added that she didn’t believe there is sufficient evidence to validate the negative claims targeted at the company. But with Nu Skin receiving new government licenses in China as recently as July, it may prove difficult for the company to defend itself, at least in the very near term.
Dim view by authorities
It is no secret that China has shown a level of disdain for direct selling corporations and banned them altogether in 1998. However, once Avon was granted a licence in 2006, such marketeers have since returned to the country.
People’s Daily also called into question the number of product licences Nu Skin has at its disposal, claiming that these were limited to 84 products, whereas the company’s brochure lists 104.
It seems the paper has taken umbrage over an item in the brochure that purports to be a “feature story” in People’s Daily extolling the virtues of Nu Skin’s technology when in fact it says it was paid advertising.
As the publication is owned by China’s central government and serves as its mouthpiece, it is not hard to understand why Nu Skin’s shares have been hit so hard by the article: those in the direct marketing industry will be fearful that the authorities are about to turn their rage once again to sellers in this category.
Segment rival Herbalife, whose shares dropped by over 3% following the article, will be especially concerned, as China is its third-largest market and accounts for around 10% of its sales.