Greenberg: Should Herbalife, Usana Worry in China?
As a result of restrictions in China on direct selling activities, we have implemented a retail store model utilizing an employed sales force and contractual sales promoters, and we are currently integrating direct selling in our business model in this market pursuant to applicable direct selling regulations. The regulatory environment in China remains complex. China's direct selling and anti-pyramiding regulations are restrictive and contain various limitations, including a restriction on the ability to pay multi-level compensation. Our operations in China have attracted significant regulatory and media scrutiny since we expanded our operations there in January 2003.Even so, it has been one of the hottest growth areas for companies like Nu Skin, Herbalife (HLF - Get Report) and Usana (USNA - Get Report). Nu Skin has been the hottest, with China sales skyrocketing last quarter by 240%. China now represents roughly half of all revenue. At Herbalife, where China accounts for 11% of revenue, sales in China zoomed 77% off a low but rapidly rising base. Sales growth in China for Usana, meanwhile was flat last quarter -- mostly the result of a change in internal policy. Still, China represents 40% of Usana revenue. Herbalife hasn't mentioned whether it has received any inquiry from China officials, but a spokeswoman said: "We are confident in our consumption-based business model in China." And on its last earnings call President Des Walsh countered a question from an analyst who had mentioned "issues" in China by saying: "In China, as you know, we recently received another license. And as you know, any time we get licenses in China, part of the process is the central government goes out to all of the existing provinces in which we have licenses, and asks for local officials to give us a good housekeeping seal of approval. And based on that, then further licenses are granted." That may be, but reality: On its analyst day in November, Dan Chard, head of Nu Skin's global operations said, "The certain important things about Mainland China that make it unique as a market beyond just the size is government licensing and we're now licensed in over half of the provinces in Mainland China and that's enabled us to do with our direct selling business in most of the major populated cities in Mainland China." And they're still being investigated. Usana hasn't responded to a request for comment. -- Written by Herb Greenberg in San Diego