Usana Health Sciences: Another Direct Seller Banking on China

SALT LAKE CITY—Nu Skin Enterprises Inc., Herbalife, Ltd. and Amway are not the only direct sellers of nutritional products with a fast-growing Chinese business.

Last year, Greater China led sales with 15.4-percent growth for Utah-based Usana Health Sciences, Inc. (NYSE: USNA), the marketer of supplements, weight-management and personal care products.  

Of Usana's USD $718.2 million in worldwide sales, 37.9 percent ($271.8 million) derived from Greater China, which is comprised of China, Hong Kong and Taiwan. In the Asia-Pacific region, which made up 63.3 percent of Usana's annual sales, mainland China led growth while sales in Hong Kong declined nearly 27 percent, according to the company's annual report and 10-K filing with the Securities and Exchange Commission (SEC).

China has emerged as a bastion of growth for direct sellers of nutritional products even though the government prohibits multi-level marketing arrangements in which marketers can earn compensation based on product sales to other distributors within their own network. Usana said its compensation plan in China is different from its plan in other markets.

Usana operates in China through its wholly owned subsidiary, BabyCare Holdings Ltd., which was acquired in 2010. 

"Going forward, we anticipate that Mainland China will continue to drive our growth in this region," Usana stated in its annual report, "but we also expect our business to grow in most of our other markets in this region as a result of the initiatives we introduced in 2013."  

Last year, Usana received direct selling licenses in three additional provinces in mainland China and announced plans to build a manufacturing facility that will become operational in 2015. The company said it continued registering its products in the country, educating customers on its business model and product offerings, and improving its information systems and infrastructure.

But Usana said a global policy it implemented last year to limit cross-border purchasing of products hurt sales in the Greater China region.

According to Euromonitor International, the market research firm, direct sales in China have ballooned from $6.7 billion in 2009 to $14.4 billion in 2013, and represented the largest retail distribution channel for vitamins and supplements in 2012, comprising 64 percent of "value sales" that year.

Founded in 1992 by Myron W. Wentz, Ph.D., the company's largest shareholder , Usana operates in 19 markets around the world, with 78.1 percent of sales coming from outside the United States.

According to a March 11, 2014 investor presentation, Usana is the 20th largest direct selling company in the world. That same presentation highlighted a "significant China opportunity."

Still, Usana's sales in its most mature markets—the Americas and Europe—are significant, comprising 36.4 percent of 2013 sales.

Annual sales are comprised of targeted supplements (54 percent), core vitamin and mineral supplements (26 percent), and meal-replacement shakes, snack bars and related products (12 percent), according to Usana's annual report. Usana also sells personal care products (6 percent of sales) and materials and online tools (2 percent) to help its distributors build their business.

Like its competitors Amway, Herbalife and Nu Skin, Usana distributes its products through a network of distributors that the company has dubbed "associates". As of Dec. 28, 2013, the company had 265,000 active associates as well as 78,000 "preferred customers," who purchase products strictly for their personal use and are not allowed to resell them. Eighty nine percent of Usana's distribution network are part-timers, according to its investor presentation.

In greater China, the number of active associates last year rose 7.8 percent to 111,000.

A recent government probe into Nu Skin's business practices raised questions as to whether direct sellers' heady growth in China could hit the skids should the Communist regime impose tighter restrictions on direct sales. Yesterday, Nu Skin announced that it was fined by China's Administration of Industry and Commerce, alleviating concerns that the government would take more drastic actions against the company or the broader direct selling industry.

"Investors' worst fears that included material business model adjustments for NUS and/or a major direct selling crackdown were not realized," said Scott Van Winkle, an analyst with Canaccord Genuity, a banking and financial services company, in a research note.