Direct sales giant Nu Skin has come under attack after a newspaper in China, one of its biggest market, accused the company of operating an illegal pyramid scheme to sell its products.
The company, which specializes in nutritional and skin care products, was accused of being a ‘suspected illegal pyramid scheme', by a China government-backed newspaper, The People’s Daily, which is also one of the country’s most popular news sources.
Investors reacted negatively to the news about the US-headquartered company, with shares plunging 16% yesterday on the New York Stock Exchange, to close at $15.23, the biggest drop in share prices the company has seen in nearly ten years.
The drop in market value reflects the gravity of the accusations made in the People’s Daily report, which also hinted at corruption and law-breaking acitvities.
'Brainwashed' sales staff and flouting license agreement
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 responds to criticsms
“The reporters did not attempt to verify any information with Nu Skin. We do not believe that the article was the result of any particular government inquiry,” the statement read.
Our business activities are regularly monitored by the government in this rapidly growing marketplace. As is our practice, we will communicate openly with regulators to address questions arising from this article."
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.