Nu Skin to Review Practices in China After Pyramid Claim

Jan. 21 (Bloomberg) -- Nu Skin Enterprises Inc., the seller of skin-care products that’s under investigation by the Chinese government, plans to continue to sell its merchandise in the Asian nation while conducting an internal review there.

Shares of Nu Skin plunged last week after the People’s Daily newspaper said the company was running a “suspected illegal pyramid scheme.” In a letter to customers in China today, Nu Skin said it would review employee and sales-force practices and intends to take “corrective actions.”

Chief Executive Officer M. Truman Hunt, who oversaw a sevenfold gain in the direct-seller’s shares in the past seven years, said in an interview last week that Nu Skin is “absolutely not a pyramid scheme.” His comments followed a report in the state-run Chinese newspaper, which said Nu Skin brainwashes trainees and sells more products than allowed.

“As part of our initial review, we were disappointed to learn that during our recent rapid growth, there were instances where some of our sales people failed to adequately follow and enforce our policies and regulations,” Nu Skin said in today’s letter.

The Provo, Utah-based company said it will provide additional training to reinforce its existing policies and educate employees on laws and regulations in China. Nu Skin will release an update on the status of its review on Feb. 6.

Nu Skin fell 2.6 percent to $77.39 at the close in New York. The stock declined 6.3 percent on Jan. 17 and dropped 26 percent on Jan. 16, the day after the People’s Daily report.

Rapid Growth

The company said in a statement last week that the Chinese newspaper’s allegations were exaggerated, and “not representative of our business in China.”

Nu Skin has had rapid growth in its Greater China unit, which includes Hong Kong and Taiwan. Sales there more than tripled in the three-month period ending Sept. 30, accounting for the bulk of the company’s total 76 percent revenue gain for the quarter. Mainland China alone accounted for 30 percent of Nu Skin’s $2.16 billion in revenue during the first nine months of 2013, Hunt said last week.

In China, Nu Skin’s more than 40,000-person salesforce sells weight-loss kits and skin cleansers in at least 19 of the 32 provinces and municipalities. The country’s market is particularly ripe for Nu Skin’s anti-aging products. The United Nations has forecast the population of people aged 65 and older there will increase by about 66 million from 2015 to 2025.

Surpass $3 Billion

The country is key to Hunt’s plan to reach $10 billion in revenue by 2020, a goal he said is “aspirational” yet “reachable.” The company expects to surpass $3 billion this year. Investors boosted Nu Skin’s shares as high as $140.50 last week, from $17.58 at the end of 2005.

Globally, Nu Skin’s sales are split almost evenly between nutrition and personal-care products, Hunt said. The biggest seller is the LifePak dietary supplement, a collection of vitamins, minerals, antioxidants and other ingredients packaged in pouches. The product generated about 15 percent of sales.

Nu Skin sells more than 200 products by way of its consumer and sales networks that include almost 1 million people. The representatives earn commissions from the products they and others in their network sell to friends, family and strangers. The model is different in mainland China, which heavily regulates direct sellers. There, products are sold in large part by an employed salesforce through its own stores. Some independent direct sellers are licensed in specific areas to sell away from the stores, as well.

Federal Investigations

The company has been accused of wrongdoing before. In 1991, the television show “Nightline” characterized the seven-year-old company as a pyramid scheme. The following year, Nu Skin settled charges with five states that alleged deceptive advertising and recruiting claims.

There also were federal investigations. In 1994, Nu Skin and related entities were ordered to pay about $1.23 million to resolve allegations by the Federal Trade Commission. The FTC said Nu Skin misled consumers and sellers, ordering the company to back up product claims with “reliable scientific evidence.” Three years later, Nu Skin was ordered to pay a $1.5 million fine to the FTC after allegations that it made unsubstantiated product claims.

To contact the reporter on this story: Duane D. Stanford in Atlanta at dstanford2@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net