Home to a billion people, China is the world’s largest consumer market. And it has been attracting some of the biggest companies around the world, including many from Singapore.
The potential of the market is huge, but it is not easy to crack. Fraught with intense competition and even harsher regulation – the likes of which can change at a moment’s notice - it takes guts to enter the market, and an iron will to succeed.
But to do what health and consumer products company Best World has done – flagrantly flout the rules in communist China and then deny that it has done so – is on a completely different level of bravado.
Best World International Limited develops, manufactures, and distributes skincare, personal care, nutritional and wellness products. It operates mostly in Asia, and one of its more prominent product lines, DR’s Secret, accounts for two thirds of the company’s total revenue and more than 80 per cent of China’s revenues. Best World got its big break in the last few years when its China and Taiwan business segments took off and its market capitalisation tripled in the last 24 months. Today, the company’s China business makes up more than half of company’s total revenue.
To recap, there has been much debate and discussion over exactly how Best World has been operating in China. The crux of that debate centres around whether the company has been engaged in multi-level marketing in the country, which is illegal.
The company has hemmed and hawed, preferring to lead investors on with vague statements and even cloudier promises. This is understandable, of course. After all, more than half of the company’s revenue and profits are derived from China. There is much incentive to keep up with the pretense in order to keep its profit margins high, and stock prices even higher. But the house of cards will tumble and those caught in the fall out will likely be staring at the true nature of a company that promised the best of the world, but delivered the worst of it.
We have done extensive research on the company, from interviewing the company’s sales people to checking up on the company’s payments to and from its so-called Chinese ‘franchises’. The conclusion is straightforward: The company has perpetuated lies and more lies.
This report is the first of two reports we will release on Best World. It will look at the fundamental issue of whether the company is indeed engaging in an MLM business in China, and the implications of that.
Demystifying Direct Selling (直销) and Multi-level marketing (传销)
Direct selling is a method of marketing and retailing goods or services directly to consumers, through personal contact, away from permanent retail premises. In China, businesses are only allowed to operate direct selling if they have a proper direct selling license. In the case of Best World, they do not have proper direct selling license in China to sell their most prized product, DR’s Secret.
Now, what then is MLM? To put simply, MLM is a type of direct selling system where the marketing strategy of the company is based on the number of sales persons they’ve recruited in different tiers of selling. The compensation of the sales force is not only for sales they generate but also for sales of the other sales people that they recruit in this marketing strategy.
MLM (传销) is outright illegal in China. Period.
Under China's Regulations on Forbidding MLM, parties who introduce, lure or force others to join in multi-level marketing shall have the relevant assets and illegal income confiscated and fined up to CNY500,000 and serious violators shall be punished by law or jailed up to five years.
So how is Best World operating in China?
Just one way: Best World has been and continues to operate an MLM scheme.
We know this because of a simple reason: it continues to engage sales staff through a commissions-based model.
There are a total of four bonus mechanisms: (1) service commissions, 2) management commissions, 3) performance commissions, and 4) national dividend; and more than 7 tiers (Chinese law allows only for 3 tiers of direct selling) of selling within Best World China operations.
To break it down:
1) Service bonus: You have to pay an upfront RMB 20,000 to become a lowest tier selling member (BM), you can make 25% of this upfront fee from any new (lowest-tiered) members you bring in.
2) Management commissions (sales rebate): After attaining the bronze business manager (BBM) status, you get to make commissions on the next seven generation of members below. 6% of sales generated by the first three immediate generations, 2% of sales generated by the latter four generation.
3) Performance commissions: When you attain the BBM and above status, i.e. SD (Silver Director), GD (Gold Director), PD (Platinum Director), you’re entitled to performance commissions that do not have a seven-generation cap like management commissions. Commissions are 3%, 11%, 14% and 16% respectively for BBM, SM, GD, and PD.
4) National dividend: GD and PD gets a share of 1% of national dividends in different proportions
A graphic illustration of a PD’s commissions system
This model applies to its franchisees as well (more on this franchise model later).
In short, this model confirms that Best World is currently operating an MLM model, much like how it operates in Taiwan.
Best World’s China business rewards model is very similar to the Taiwan’s one - see BW’s Taiwan website (http://bwlmitsuper.com/rule/) and the screenshot below. The company has, itself, acknowledged that its Taiwanese business is running a direct selling business.
What about claims that it has a direct selling license? Yes it does but only in Hangzhou. But even on this front, it is selective with the truth.
In China, the direct selling scheme cannot exceed three layers as stipulated clearly by law. In BWI’s model, there are eight.
Form over substance – the franchise model
Best World’s defence to this charge is that it no longer directly operates its businesses in China; it operates a franchising model now, following the successful acquisition of the franchise licenses in China. As such, it does not have full knowledge or control over how its franchises sells its products.
Don’t be fooled.
First, all 33 franchisees listed on the Best World website are essentially owned and operated by their sales people who have attained the highest tier/level of PD.
The company also claims that it no longer operates a direct selling model and that its franchises sell their products through a retail presence. But this is red herring – having a retail presence does not mean you are no longer an MLM.
Quanjian, a former MLM company, tried to skirt around the MLM rules by setting up 7,000 shops nationwide. But it was busted and today the 3 billion-dollar business no longer exists.
Second, these physical stores are just a front for the MLM business. The so-called ‘lifestyle centres’ are actually training centres for their lower-tiered sales people. Many of these centres are completely new, situated in residential apartment units. These spaces are used to recruit and train fresh blood and new sales people.
Lastly, and this is the key issue that investors should pay attention to, Best World is simply trying to deflect the MLM issue. It claims that it is operating a franchisee model and that it has nothing to do with what goes on in China.
Here’s the thing: When the law finally catches up on their franchisees – and it will because this is China – the company’s China business will go up in smoke. Not only will half its revenue disappear but its reputation will be tainted and its founders questioned.
End of Part 1
About us
Valiant Varriors are a group of activist investors on the lookout for companies that are priced incorrectly due to the lack of transparency in large listed stocks in Singapore. If the companies themselves don’t want to come clean, we will help them along the way. All our efforts is in the valiant attempt to help SGX be more investor friendly and promote The Lion city to the rest of the world.
Contact: valiantvarriors@gmail.com
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