China authorities have put direct sales player Nu Skin under investigation, following a report in the China newspaper People’s Daily last week that the company has been operating an illegal pyramid scheme.
China government regulators have now initiated a review that will focus on the allegations raised in the newspaper report, which sent the company’s share prices into free fall, after the news report first broke last Wednesday.
Currently the company shares are trading at under $80 per share in early morning trading on the New York Stock Exchange today, down from over $130 a share before the China news report broke last week.
Company moves to control the damage
The brand made moves to control the damage that may be done to its business in China, but investors have remained cautious.
"We are aware that Chinese regulators have now initiated investigations to review issues raised by recent news reports,” the company said in an official statement.
“The government regularly monitors all businesses in this rapidly growing marketplace, and as is our practice, we will continue to communicate openly with regulators to address any questions they may have.”
The company says it has subsequently initiated its own province by province business review, which will also involve the representatives from the China regulatory agency.
Nu Skin specializes in nutritional and skin care products and is one of the first international cosmetic companies to make inroads into the fast growing China market, when it got a direct sales license 11 years ago.
'Brainwashed' sales staff and flouting license agreement
However, the accusations in the People’s Daily publication are serious. They have already caused the company significant loss in share value, and if the investigation backs up the newspaper report, the loss of its sales license would be a major blow.
The report stated that sales trainees were ‘brainwashed’ into selling the products, while the company is currently listing 104 products for sale in the country, which is 20 more than the government license to sell currently allows.
Nu Skin responded to the accusations in the article, claiming that it contained inaccuracies and exaggerations that were not a reflection of how it conducts business in the country.
Nu Skin has been doing business in China for 11 years and was one of the first overseas direct sales companies to secure a license to sell there. Currently approximately 20% of its annual revenues, which this year are forecast to be in excess of $2.5bn.
According to Nu Skin the most recent China government license was issued in July of 2013, which stipulated that it could legally trade in 19 of the country’s total of 32 provinces.