So many Western companies have turned to China to re-energize their sales. And for many companies, like Coach (COH) and Estee Lauder Cos (EL), the world’s fastest growing economy has been a boon.
But for some companies, China has turned out to be a curse. Ask Avon Products (AVP), where revenue fell 31% to in the second quarter, the latest bloodbath for the direct-seller of beauty products. (Avon has run afoul of the U.S. Foreign Corrupt Practices Act, which bars American companies from making bribes to overseas officials to develop their business.)
Now Nu Skin, (NUS) best known for its anti-wrinkle products, is similarly discovering China is a tough slog. Its shares took a beating (down 16% at last count) on Wednesday after it reported a huge drop in sales in greater China, its biggest market, and costs jumped. In that market, second-quarter revenue fell 12% to $229.9 million, while more ominously, the number of active reps fell 32%. The reps count is a leading indicator of sales because in direct-selling business, you don’t sell products without sales reps.
Nu Skin was slammed last winter after People’s Daily, a Chinese newspaper, suggested the company runs a pyramid scheme, which is illegal in China. Following that report, Nu Skin halted promotional meetings and applications in China until receiving further direction for the Chinese government. It was later fined $540,000 for selling products via direct selling that had only been approved for sale in retail stores, and for making claims about various products without sufficient proof.
China allows direct-selling under limited conditions but bans pyramid selling, in which members make more money recruiting new members than by selling actual products.
Nu Skin’s net income in the quarter ended June 30 plunged to $19.5 million, or 32 cents per share, in the second quarter from $74.4 million, or $1.22 per share, a year earlier.