In January, China announced a ‘100-day’ effort to examine what the government called deceptive practices in the sale of health food. Among those mentioned were deceptive advertisements, the sale of counterfeit products and other deceptive practices.
Consequences of '100 day operation'
Network marketing and direct sales continue to be impacted even after the end of the official review, said Usana CEO Kevin Guest. Even though Usana is based in Salt Lake City, UT, the majority of the company’s sales of dietary supplements and personal care products are made in China and this has been true for some time.
“We continue to see a challenging market environment in China during the second quarter. When we reported our first quarter results, we believe that we would begin to see consumer sentiment in China improve during the second quarter, but that did not happen,” Guest said in a call with stock analysts to discuss the company’s second quarter 2019 earnings. The call was posted as a transcript on the site seekingalpha.com.
Guest said that in addition to the official halt on sales in some provinces, the official crackdown has dented consumer confidence in direct sales companies.
“We offered promotions and incentives during the quarter that have historically generated meaningful sales of customer growth in China. However, the contribution of these promotions and incentives was significantly lower than we anticipated, and we believe this is due to continued lower consumer sentiment in China towards the health products and direct selling industry,” he said.
Some provinces still preventing meetings
One way in which direct sales companies fire up their distributor base is with group sales meetings, which resemble more an old religious tent revival meeting than they do a standard business conference. New products and promotions are introduced to distributors at these events, and companies often report sales bumps thereafter.
But Guest said that one continuing albeit smaller consequence of the government crackdown is that some provinces continue to prevent these sales meetings from taking place, even though the end of action has officially passed.
“Additionally, while we began holding distributor meetings again in several provinces and municipalities, there were some areas where we were unable to hold meetings. Although our ability to hold meetings was somewhat limited, the challenging consumer environment was the primary factor that affected our performance for the quarter,” he said.
Earnings details
Usana recorded sales of $256 million in the second quarter, compared with $301.5 million in the prior-year period, or a 15.1% decrease year-over-year. Profits were down, too; second quarter net earnings were $21.4 million, or $0.91 per diluted share, compared with $33.9 million, or $1.36 per share during the prior-year period. The company also cut its full year guidance by more than $200 million. It now expects sales to come in at slightly more than $1 billion for the full year.