The reputation of multilevel marketing was severely tarnished by frequent cases of illegal pyramid schemes that claimed to sell just about anything during the 1970s and the 1980s. Known as “rat clubs,” these organizations would purport to sell products, but not actually have them. Whether rat clubs intended to purchase the items they touted once their customers achieved critical mass or not, the fact is that most of them took the money and ran. Any notion of the trust required for such commercial transactions was ground into dust.
To overcome these lingering trust issues and prove their commercial legitimacy, direct sellers are building bricks-and-mortar stores and generally becoming more professional. “Seeing is indeed believing. The store demonstrates that we actually exist--that we’re not just a nominal organization,” says Chen Kung-ju, external affairs manager of Amway Taiwan. “This new strategy makes us a more trustworthy brand.”
This type of marketing strategy signals a change in the direct-selling industry which has traditionally relied on the absence of pricey retail outlets to reduce costs and to pass these savings on to their customers.
A well-known international brand, Amway has operated in Taiwan since 1982 using the standard direct-selling model. However, in 2004 it unveiled a “logistics center” in Taoyuan, worth NT$250 million (US$7.8 million). The upscale center houses an Internet kiosk and the Amway Experience Area, which includes a store, a coffee shop and the Hall of Amway History. The company has subsequently built three more stores in Taipei, Tainan and Kaohsiung and plans to operate five to seven of them eventually.
The effectiveness of bricks-and-mortar operations is evident to Amway Taiwan. In its first year, the Taoyuan logistics center turned over NT$29.4 million (US$900,000) per month on average, but the figure more than doubled the following year to hit $59 million ($1.8 million). Membership has enjoyed an annual growth rate of about 15 percent.
Similarly, Melaleuca, an American cosmetics, household and personal-care products company, got into the Taiwanese market in 1997 and then set up stores in 2004 to enhance corporate visibility. It now runs 17 stores across the island and aims to boost that number to 25 by year-end.
“Direct selling has suffered from credibility issues for a long time,” says John Liu , managing director of Melaleuca Taiwan. “People always used to ask us where our company was, but now the sales outlets have cemented customer trust and consequently brand loyalty. Plus, when they come to our stores, people end up buying more than they originally intended to.”
Amway product lines extend to more than 400 items. (Photo by Chang Su-ching)
Liu says that Melaleuca Taiwan’s sales climbed from NT$2.2 billion (US$69 million) in 2003 to $3.2 billion ($100 million) in 2005 and that customers have a repeat-purchase rate of 95 percent, up 2 percent in the same period.
“Transparency is the key factor in our recent sales boom,” explains Amway’s Chen. “In the last two years, we’ve been trying to remove the mysterious veil over direct selling in the minds of consumers. It looks like we’re heading in the right direction.”
Chen says that in the past, distributors had to find a venue themselves to introduce products to potential clients, but now they can take them directly to the center where the products are displayed in a casual, home-like style. Customers can test all the products on-site and shop in an upscale retail environment. Once they make purchases, they become the down-lines of the distributor who brought them there and who makes a commission on whatever they buy. This creates a favorable situation for both distributors and members, who in turn can earn commission on the purchases of people they bring to the center.
Amway Taiwan’s well-equipped logistics center is also open to the public and has become a site frequently visited by other enterprises and universities as a model to learn from. Chen says the center receives about 1,000 visitors a month and allows his company to interact more closely with the general public.
Nu Skin set up on the island in 1992 and made a new attempt to broaden its client base last year. The company launched a national campaign to promote its anti-aging products using its proprietary biophotonic scanners (to measure the carotenoid antioxidant levels in the skin) to recommend dietary supplements. According to John Chou, president of Nu Skin Taiwan, the number of the products’ repeat buyers surged from 33,000 before the campaign to 47,000 afterward.
Taking a step further, Nu Skin Taiwan opened a five-star multi-million-dollar health club combining a gym, a spa and a showcase retail outlet in June this year. Chou says the construction of such a center is unprecedented in the direct-selling industry the world over, although it does not actually correspond to the company’s established business model. Nevertheless, the project was conceived to assure consumers of the company’s commitment. “We aim to promote beauty and health at the same time,” says Chou. “Also from the business viewpoint, people who go to the gym care about their appearance and health, and so are potential customers we’d like to reach.”
Chen Der-fa, professor in the Department of Business Management at National Sun Yat-sen University (NSYSU), agrees that the establishment of bricks-and-mortar shops builds customer trust and increases sales, but he points out that the retail business requires considerable capital investment and fixed costs that are likely to become burdensome. He does not recommend new companies adopt this strategy, adding that the spirit of direct selling, after all, is to pass cost savings on to members.
Addressing the damage done to the industry’s reputation by rat clubs, Chen points out that the biggest challenge faced by Taiwan’s direct sellers has always been how to improve its image. Melaleuca’s Liu sees this as a barrier to corporate development, too. “We sell real products and professional services. Our investment in R&D and opening stores shows our long-term commitment to the Taiwan market,” he says. “However, the malpractice of a few unscrupulous organizations means that this is the toughest obstacle we need to overcome.”
Liu calls for enhanced cooperation among academics, the government and the industry to develop management regulations and launch image-boosting publicity campaigns. “Direct selling is now a mature and popular industry in the United States. Here in Taiwan it makes an important contribution to national economic growth,” he says. “Our priority is to give people a clear understanding of what direct selling is.”
Direct selling revenue in Taiwan grew by almost 10 percent in 2005, raking in NT$73 billion (US$2.3 billion), compared with $68.3 billion ($2.1 billion) in 2004. Moreover, it has thus far attracted some 3.8 million participants which means that approximately 6.5 million households, about one out of every two, are involved in direct selling. “We deserve more attention and recognition from the public,” Liu says.
Liu set up the Taiwan ROC Direct Selling Association with other legitimate operators last December. Its aim is to upgrade the industry’s performance and image through the implementation of self-regulatory principles, sponsoring public activities and funding research papers. Individually, the association’s member companies also fund charities and are involved in environmental protection work.
Meanwhile, the academic drive is led by Chen Der-fa. Starting in 1993, Chen carried out studies on the direct-selling industry and organized seminars, and in 1997, he founded a direct-selling research center at NSYSU. Since then, an increasing number of academics and graduate students have participated in research papers and attended panel discussions. “I believe that our research methods and results are really convincing to the general public,” he says. “We give them an impartial and objective view of the business.”
Chen thinks that the establishment of a certification program would be a considerable boost for direct selling’s reputation and serve as a good index for consumer purchasing. Regulations governing the management of multilevel marketing businesses were put in place by the Fair Trade Commission, and it is now studying the feasibility of a certification system.
Chen believes that these endeavors have borne fruit, but is adamant that product range and quality are fundamental to the industry’s success and notes that most direct sellers have increased their investments in R&D.
John Chou agrees and goes on to explain Nu Skin’s person-to-person sales approach. “We offer people and family-oriented products like food supplements, household items and personal-care products,” he says. “These are more marketable through personal recommendation, based on your own experience.”
Currently, the two bestsellers are nutrition supplements and personal-care products. Their popularity points to the growing emphasis in Taiwan on health and beauty against the backdrop of an increasingly aging society. “Our R&D focuses on these two fields,” says Chou. “The supplements we produce feature natural ingredients, including ginseng and ginkgo, and are all clinically certified by the Department of Health.”
Chen Kung-ju of Amway Taiwan says that over the last two decades, his company has expanded its product lines from a few cleaning agents to more than 400 items that feature natural ingredients and organic processing. “We’ve a dynamic product profile in that we are constantly adding new items and discontinuing others in response to market trends and seasonal changes,” he says. “Consumers can tailor their purchases from our broad product range--that’s why we’re doing good business.”
Melaleuca Taiwan presently has some 250 products to choose from. “Our mission is to help people achieve physical well-being,” says John Liu. “Our products are economical--a small amount will do--and environmentally-friendly.”
While product range and quality are obviously important, Liu thinks consumers know more about products, are more independent in making purchasing decisions and look for greater shopping convenience. He predicts that direct sellers who provide detailed product information through distributors as well as diverse sales channels will find success. Some have even operated sales counters in convenience stores, department stores and personal-care shops.
“You can buy our products from distributors, by fax, mail, telephone or the Internet. This kind of integrated marketing has become our niche,” he says. “In particular, face-to-face selling provides direct customer contact and feedback that place us in a better position than retailers to offer the products and services people want.”
On another front, many direct-selling companies are dedicated to product and sales training. “Person-to-person selling is still our primary point of sale, so teaching our distributors is an important task,” Chen Kung-ju says. Amway Taiwan has offered nutrition classes to its distributors at Taipei Medical University and it also encourages them to cultivate professional skills that complement their products.
John Liu says that Melaleuca’s training programs highlight product information, interpersonal relationships and management skills and are classified as basic, medium and advanced.
Chen Der-fa sees a bright future for direct selling in Taiwan. Based on his survey, the majority of direct-selling participants are buyers, with just 20 percent involved in the business of distribution. He thinks that, as the image and product quality of direct selling improve, more and more participants will get actively involved in the businesses and create larger sales volumes for the whole industry.
John Chou says although the direct-selling industry’s membership penetration rate has been pretty high, current sales make up less than 3 percent of the island’s total retail sales. That leaves considerable room for expansion. Nu Skin Taiwan has set an ambitious goal to lift its annual sales from the current NT$3.2 billion (US$100 million) to $5 billion ($156 million) in 2009. Amway Taiwan is similarly hopeful: “With this new business model,” Chen Kung-ju says with infectious confidence, “we’re going to take off!”
Such enthusiasm may or may not be commercially elevating, but direct sellers’ efforts to add a concrete dimension to the industry and soup up its business model have clearly dusted off the trust issues.