Best World & Other Direct Selling Co in China

 24 April 2019 Update 4

Bonitas Research issued a report about Best World (BWL) on 24 April 2019.  It claimed that “BWL is a fraud and that its Chinese sales are a fraction of what was reported to shareholders".  For a single day on 24 April 2019,  BWL's stock price plunged about 9%  and lost about S$80 million in the market cap.

What is inside the Report?

The  28-page report spent about 10 pages talking about “ChangSa Best” and how “ChangSa Best” was “colluding” with BWL to transfer a sum of at least S$31 mil to BWL in 2018. It spent another 5 pages talking about their field visits to find BWL's branches and stores not opening for business or not selling goods to walk-in customers.  The rest of the pages were spent on BWL not doing online businesses,  how pyramid selling and MLM worked, It also compared BWL's products and prices to other brands. Lastly, the report  described how the 2 founders rewarded themselves with larger compensations.  This article will only cover the gist of the report. 

What is gist of the report?

The gist is about "ChangSha Best". It described ChangSa Best as "independent import agent" but not so independent as it expected.  It found that ChangSha Best was heavily linked to BWL in term of manpower recruitment,  funds and profit transfers.   It found also that ChangSha Best  was transferring a profits of some S$10.0 mil in 2018 when BWL changed its Export model  to Franchisee model.

In one of the sentences, it asked "What kind of independent party pays nearly 100% of accumulated profits upon termination of its agency arrangement? In our opinion, not an independent party”.

What can be said about the Report?

Bonitas was probably right to point out that ChangSa Best was not an independent party nor an ordinary import agent.   In fact,  it was probably the one quoted in the BWL's clarification note (dated 23 February 2019 page 3) that BWL was dealing with a "Primary Import Agent" in China.   

In the BWL's clarification note,  it never mention this "Primary Import Agent” was an independent party nor it had said Changsha Best was the "Primary Import Agent.    However, if we assume that Changsha Best was indeed the other subsidiary of BWL in China, then everything will become clear and logical.   There would be  nothing wrong to transfer funds and profits back to the HQ in Singapore after Changsha Best was closed with its role replaced by BWL(China) in 2018.  As to why BWL has chosen this “secret” way to do businesses in China is best to be explained by BWL.   It might be for tax avoidance purposes.

Why Retail Branches and Stores not for walk-in Customers?

Talking about finding the branches and stores closed and not serving walk-in customers, one will have to find separate answers as to why these branches and store were necessary in the first place under the present Chinese rules and regulation.

The original concept of Direct selling is actually “door to door” selling that requires only a warehouse where "paddlers" or salesmen can get their goods.  This was the case in China before 1999.   Then there were lots of complaint about MLM and pyramid selling.   The new rules after 1999 required all Direct Sellers to have sale offices and retail stores for convenient of official contacts. (Read  异化的店铺式经营 section)   They are actually NOT retail sale branches and stores per se. 

Here is a simplified  translated version  of the 异化的店铺式经营 section about  Sale offices and Retail Store for DS companies in China

“Distorted” Retail Sale Offices or Branches

3 months after the banning of MLM in 1998,  AVON,  Amway,  MaryKay,  Perfect99 and other 10 DS (Direct Selling) companies were allowed to  operate in China again but one of the requirement in the new regulation mandated DS companies to have Retail Sale Offices or Branches. 

In overseas,  DS service is always done “door to door” without any sale  office or store.  The idea of having such requirement is to facilitate the control and management of the DS companies.  The Authority wanted to be able to get hold of the people in charged. 

 So companies like AVON retailed their sale operate from these premises whereas AMWAY continued to operate by bringing-in also their DS sale personals.   However, both companies did roaring business under the new arrangement.  The sale doubled or tripled within a span of 4 year from 1999 to 2013.  There were about 6000 such specialty retail shop and 2000 specialty counters operating in about 100 cities by 2002.

15 April 2019 Update 3 

The Chinese Government has issued an administrative notice for the Supervision of the Health and Health care product in the Chinese markets (市场监管总局征求调整保健食品保健功能意见的公告).  

The sales of 487 health care and skin care products in China will be affected by this Governmental request to review the various “claims” of the products that DS companies are selling.  21 of these products has been identified to have the claims or the product removed (取消),  18 products are to  have the claims “modified” (调整) and 6 are pending further reviews and studies.    It is understood this is a following up action after the “100-day Action”,  starting from  8 January this year in an attempt to stamp out unhealthy promotion of the health care products.

The first batch under review are those those dealt with immunity (免疫)，strengthening body health,  improve digestion system or increase bone density.  Altogether,  there are 18 different types of benefits and claims reviewed.

Among the “claims” proposed to be removed are from the direct sale of the following  products

1.  Skin or beauty improvement products  (美容（改善皮肤油分）/改善皮肤油分)

2.  Growth care products  (促进生长发育/改善生长发育); and

3.  Lactation growth product  (促进泌乳)

There are also other products in the list to be removed,  among them are health products that claimed to promote and improve growth (促进生长发育/改善生长发育的保健食品) and also those that have healing power such as those resisting tumour growth etc.   Some products will have the production stopped immediately.

About 61 products under 32 direct selling companies have been sentenced to “death” in this review. Among them are those related to medical treatments such as  those products that will lower blood sugar and reduce blood pressure etc.
 In this review,  the products of 75 companies under direct selling will be affected.

Best World has 6 products listed;   3 of them are affected.
 

23 March 2019 Update 2

If one examines carefully through this approval license given to Best World,  one could easily find out that
a)  The approval is only for product called  "皙之密" or  "Dr. Secret"
b)  The license is only for a designated area called "长沙市" or Changsha.
Changsha is a township in Hunan Province and it has an area of about 11,000 km2 with about 7 million people. 

Without any other licenses approved by the Authority,  it is understood that one would not be allowed to have Franchisees in other Chinese cities or Provinces.  Presently,  Best World has 33 Franchisees spreading all over China and only 4 of them are located in  The details of various Franchisees registered with the Chinese Authority can be found here.
There are altogether over 4,000 Franchisees operating in China.
Disclaimer:  The information contained herein is only for education and discussion purposes.  The readers are advised to check and verify the details given carefully to make any investment decision. There is no reason to suggest that any company  is involved in any illegal activities until it has been verified by appropriate authorities.

25 February 2019 Update 1

Best World International clarified that it had changed the  business model in China from Export model to Franchises model in May 2018 and this had the approval of the Chinese Authority for a product called "DR. Secret".      They disclosed the names and addresses of the 33 Franchises in China.    Best World declared that  "the Franchisees purchase the Products from them for distribution through BWL Lifestyle Centres to end consumers and independent third parties;  some of which are licensed to sell Best World products to other consumers in China. Under this model, only the Franchisees are the direct customers". 

Best World lifted its trading halt in the SGX exchange on Monday,  25 February 2018.   Its stock price plunged another 18 -20% after 3 hours of trading.   This is on top of the 17%  drop recorded on Monday,  18 February 2018 when Best World requested for the trading halt.

China is a good market for Direct Selling (DS) business.   Most the DS companies having businesses in China are reporting awesome revenues and profits recently.  These companies included Best World who had reported nearly 100% rise in Revenue for 3^rd Quarter 2018.  It was also reported that Best World's premium skincare product called “DR’s Secret” was selling like "hot cake" and was reeling in about 66%  of the company's income.   The revenue from China rose about 140% in 2018 with sale of about SGD$60 billions representing about 70% of total revenue.  This article intends to find out more about the DS businesses in China. 

What is Direct Selling (DS)?

This term refers to “direct sale of a product without going through any third party”.  There are many articles written about DS and how DS differs from Multi-Level Marketing (MLM).  They can be found by simply “googling”.   MLM is one derivative of DS that allows members to form multiple tiers in a hierarchy structure.  In MLM,  members in the tiers can recruit other members and take a cut in the sale of product.   China and many other countries like Singapore and the US have banned MLM.

What is the Present Rulings in China?

China’s ruling on DS is very strict and stringent.  Among the ‘thousands of rulings” is the “one tier DS”  in which a DS company can recruit members but its members are just customers. They are not allow to recruit and  sell or resell its product to the other members like MLM and take a cut in the sale of the product.  

The other ruling is that all DS companies must obtain a license issued by the State Administration for Market Regulation (SAMR)  who will administer and monitor the DS  companies' activities. Presently,  there are only 91 licenses issued over a 13-year period.   Bulk of the licenses was issued around 2015/16 when Best World got their DS license.

  

The application of a DS license was strict and complicated;  also,   the licenses are restrictively  mentioned for a designated sale area and not for the whole of China.   It usually takes many months or even years.  Because of this,  many companies started running as “Franchise ” or “Agents” of those licensed DS companies who would lease out their operating license for a fee.  Some of these Franchises engaged in “illegal MLM activities”.  It has attracted the authorities’ attention.

Enforcement Actions

SAMR has been taking enforcement actions on and off.  They started licensing operation 13 years ago in 2006. Like any other types of rules and regulations,  these rules are effective only for the initial period.  Then the enforcement becomes lax after some years of operation.  

DS Companies who were found to be violating the laws were fined but they are allowed to continue with their businesses. Their businesses would usually turn larger than before.  For example,  a company called “Quanjian Group or 权健集团旗 with HQ in Tianjin.  Since obtaining the DS license in 2013,  many of its people were fined engaging in the MLM activities.  The latest was a compliant made by  a Chinese Medical Journal  called 丁香医生 in December 2018.  That compliant described a product advertised by Quanjian that could treat cancerous cells;  as a result,  a 4 years old girl's life was lost.
 
Quanjian Group has many franchisees (专营店).  After the company's business was exposed in December 2018,  street after street of Quanjian Group's franchisees were closed down.

Recent Efforts by the Authority

1. The “100day Action”

It involved 13 Inspection Groups (The Groups) located all over various parts of China.   They have been asking the people for reports and feedbacks of illegal activities of DS companies.  In Tianjin,  the informers will be rewarded with RMB$20,000. The Authority would investigate and take necessary actions if necessary to prosecute the errant companies.  This operation started since January 18 2019 and has been in operation for about 40 days which is now at its  peak.

So far,  the Beijing Group has “inspected”about 1973 shops and investigated about 315 complaints  and made attempts to prosecute 80 companies in the process.   

In Hebei,  37 companies were invited by the Authority to help in their investigation.

2.  The “Naked” Operation

The Authority has also initiated a Direct Selling “Naked” operation where users can lodge complaints directly to the Authority via their website.   The errant  companies will be “black listed” for everyone to read.  Also inside the website,  the users can surf to find out the important information about the DS companies including their remuneration packages. Presently,  the website is still under construction. 

Other Recent Happening About DS 

1. The "Refugees" Behind Amway Earnings 

Amway is recently in the Sina News about an activity taking place by groups of people being involved in Amway Direct Selling.  According to this group,  many have been "cheated".in the process of being a member of the company. 

2.  MLM Giant SunHope

SunHope (尚赫) is another Chinese registered DS company in the recent news about MLM activities.

Going Ahead for DS Companies in China

It is likely that with the enforcement actions stepping up,  the revenue of DS companies,  especially those who engaged in “MLM illegal activities" will have their businesses affected or closed down.  Their revenue will plunge unless they carry out their work "under the table".   This will also affect those who appointed  them as franchisees or agents.  

However,  there is a Chinese proverb  saying "魔高一尺，道高一丈“.  It literally means “the devils could never beat the laws”.    Those who involve in MLM will be caught;  it is just  a matter of when and not if.

 Disclaimer:  This article is for information and  educational purposes.   Readers are advised to  conduct their own research and study to make their  own investment decisions.

Other References:  https://tinyurl.com/y2ckpcz8