Net­work sales or pyra­mid scheme?

This is the first of the two-part se­ries high­light­ing the busi­ness mod­els of Amway and Her­bal­ife. — ED.

The Korea Times - - BUSINESS - By Park Jae-hyuk jae­hyuk@ktimes.com

Amway, Her­bal­ife’s busi­ness mod­els draw con­tro­versy

Since the Fair Trade Com­mis­sion (FTC) re­cently un­veiled in­for­ma­tion on 124 multi-level mar­ket­ing com­pa­nies in Korea, con­tro­versy has sprung up again over such firms as Amway and Her­bal­ife.

Al­though the com­pa­nies have con­tin­ued to claim their le­gal ba­sis, crit­ics are still sus­pi­cious about their rev­enue model.

Re­cent FTC data showed the pay­ment gap be­tween the top and bot­tom lay­ers of re­cruits is widen­ing.

The so-called spon­sor al­lowances — in­cen­tives for sales — were given to 1.64 mil­lion sales­peo­ple among 8.29 mil­lion who are reg­is­tered with the 124 firms as of last year. The an­titrust watch­dog noted that the num­ber of 8.29 mil­lion may in­clude those who do not sell prod­ucts and those who have reg­is­tered with sev­eral com­pa­nies.

Among the 1.64 mil­lion, 16,370 sales­peo­ple who ac­counted for less than 1 per­cent of the top level re­ceived an av­er­age of 57 mil­lion won ($51,000) in spon­sor al­lowances, up 11.8 per­cent year-on-year.

The re­main­ing 99 per­cent got 470,000 won on av­er­age, an 11.3 per­cent drop from a year ear­lier.

The top 10 com­pa­nies in terms of rev­enue gave al­lowances to 1.22 mil­lion sales­peo­ple. Each of the sales­peo­ple got 1 mil­lion won on av­er­age. The 10 firms in­clude Amway Korea, Atomy Korea, Nu Skin Korea, Unic­ity Korea, Her­bal­ife Korea, BOM Korea, Seacret Di­rect Korea, ACN Korea, Afull and Aphro­zone.

Busi­ness bell­wether Amway’s top 1 per­cent of sales­peo­ple re­ceived 53.46 mil­lion won on av­er­age, while its over­all sales­peo­ple got 780,000 won. The run­ner-up Atomy gave 55.85 mil­lion won to the top 1 per­cent and 950,000 won to its over­all sales­peo­ple.

Such a huge gap has pro­voked com­plaints among sales­peo­ple reg­is­tered with the firms.

Un­cer­tain about the amount of al­lowances paid to their col­leagues, Amway sales­peo­ple have grum­bled about the gap re­ported by the press. To re­ceive big­ger in­cen­tives, sus­pi­cions have it that some of them even re­duced prices of items they sold with­out the com­pany’s per­mis­sion.

“If you are con­sid­er­ing join­ing multi-level mar­ket­ing com­pa­nies or buy­ing prod­ucts from them, you should check de­tails on the firms that are re­vealed by the FTC ev­ery year,” a com­mis­sion of­fi­cial said.

“You should also know that the to­tal amount of spon­sor al­lowance should be less than 35 per­cent of sales, ac­cord­ing to the law.”

Amway Korea re­futed the crit­i­cism, say­ing the data fell into the trap of false sta­tis­tics.

“Be­cause con­sumers are cat­e­go­rized as sales­peo­ple in the data, the amount of al­lowances per per­son seem­ingly gets lower,” an Amway Korea spokesman said. “It is im­pos­si­ble for us to ac­cu­rately dis­tin­guish con­sumers from sales­peo­ple.”

On­go­ing con­flict

The size of the multi-level mar­ket­ing busi­ness in Korea has grown into a 5.13 tril­lion won in­dus­try, the third-largest in the world. How­ever, it still seems to have a poor rep­u­ta­tion among most peo­ple here.

An in­ter­net com­mu­nity named Anti-Amway is full of neg­a­tive opin­ions and sto­ries on Amway and other multi-level mar­ket­ing firms. Most of the sto­ries are writ­ten by hus­bands who worry about their wives work­ing for the com­pa­nies.

They crit­i­cized the com­pa­nies for rak­ing in prof­its in Korea, while their sales­peo­ple earn less than the min­i­mum wage. The mem­bers said the firms are try­ing to avoid their re­spon­si­bil­ity by be­ing vague about the dis­tinc­tion be­tween sales­peo­ple and con­sumers.

Some of them even liken the firms to a pseudo-re­li­gion.

“Join­ing multi-level mar­ket­ing firms may not be bad in it­self,” a com­mu­nity mem­ber wrote. “How­ever, most sales­peo­ple tend to spend a huge amount of money to get more al­lowances, even­tu­ally los­ing money.”

An Amway Korea spokesman em­pha­sized that “our method of di­rect sell­ing is dif­fer­ent from il­le­gal pyra­mid schemes.”

In­dus­try ex­perts have also de­manded the dereg­u­la­tion of multi-level mar­ket­ing, or di­rect sell­ing.

“The multi-level mar­ket­ing busi­ness must be re­garded as a com­pet­i­tive in­dus­try sec­tor from now on,” Prof. Kwak Kwan-hoon of Sun Moon Univer­sity said in a sym­po­sium in March. “Un­law­ful acts should be pre­vented in ad­vance, rather than be­ing reg­u­lated after­wards.”

Prof. Han Sang-lin of Hanyang Univer­sity said the term should be changed, so as to ad­dress neg­a­tive per­spec­tives on the busi­ness model. “We should adopt the term, di­rect sell­ing, in­stead of multi-level mar­ket­ing,” he said.

In fact, the con­tro­versy is no ex­cep­tion in other coun­tries.

Mary Kay, a U.S. di­rect sales com­pany spe­cial­iz­ing in cos­met­ics, has also faced crit­i­cism, ac­cus­ing the firm of set­ting up a pyra­mid scheme.

The firm, how­ever, in­ge­niously avoided the trap, by al­low­ing bot­tom level re­cruits to earn 50 per­cent of profit mar­gins, even if they never bother to find down-line re­cruits, ac­cord­ing to “New Ideas from Dead CEOs” by Todd G. Buch­holz.

“In a pyra­mid scheme, a re­cruit must bring in yet more re­cruits to stay afloat,” the book reads. “The bot­tom layer of re­cruits sends its prof­its up­stream and must re­cruit a new layer or else they go broke.”

Buch­holz said Mary Kay’s 50 per­cent profit mar­gin for beauty con­sul­tants was a sig­nif­i­cant leap from the typ­i­cal 35 per­cent com­mis­sion at the time.

Given the lower layer of sales­peo­ple in Korea sta­tis­ti­cally fail to earn such a fat profit, how­ever, the con­tro­versy over multi-level mar­ket­ing com­pa­nies will seem­ingly con­tinue here.

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