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BW Businessworld

The Lure Of The Good Life

Abhishek Bachchan gave his daughter a Rs 30-lakh car on her first birthday,” says the man pacing the stage at the Fine Arts Society auditorium in Mumbai. “Where did he get all that money?” “Our pockets,” is the chorus from the almost 1,000-strong audience. “What did you give your child on her first birthday?” is the mocking follow-up.

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The mood is light at this Amway’s Business Building Seminar, as people anticipate the speaker’s next quip. “So get into network distribution,” he urges, adding, “this is the only business that gives you both time as well as money; you are your own boss, and have a chance to earn 4 per cent on all sales by your downline.” The applause is overwhelming, as he brings everyone to their feet when he says that income is for perpetuity and can be passed on to the next generation (a claim the company later denies).

“Every other company uses people to build its business. We use our business to build people,” the speaker concludes, sounding almost like a motivational speaker, which to an extent he is. But at Amway’s monthly, invitation-only meetings for its Independent Business Owners (IBO), it’s also about business.

The speaker for the day is a high-flyer, a Diamond (all Amway leaders are named after gems) with a few lakh downlines (people whose sales earn him a commission). From being a steward with Air India, he has come a long way, and it shows. He’s completely at ease on stage, peppering his speech with just the right amount of humour and passion, and has the audience eating out of the palm of his hand.

US-based Amway is an $11-billion global network marketing, also known as multi-level marketing (MLM), firm. India accounts for just 5 per cent of that. It sells a range of products from nutritional to personal care through a network of distributors, mostly working independently. Because of their compensation structure, MLM firms have been dubbed as pyramid schemes. Critics say that the main business is to add more distributors, or recruit people, rather than sell products, adding that the products are overpriced and their value dubious. But William Pinckney, MD and CEO of Amway India, hotly contests this point of view.

“Our Nutrilite brand, according to Euromonitor, is the leading nutritional, health brand in the world. Reader’s Digest lists Nutrilite as the ‘most trusted’ in India,” he says. But with MLM firms set to become the subjects of intense scrutiny by the Ministry of Corporate Affairs, it seems that dark clouds are looming large over Amway and other MLM firms such as Herbalife and Tupperware. There are many questions being raised about what will happen to their business model and the fate of the distributors who claim to have benefited enormously.

The Mechanics Of MLM
The ministry has drafted a law that will outlaw MLM firms; instead, they will need to adopt a single-level direct sale approach. The yet-to-be-approved Money Circulation Scheme (Banning) Rules, under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, will ban all schemes in which members earn commissions on sales of goods or services made by their downline members. The ministry did not respond to questions for this story. But Pinckney says the new rules are aimed at financial MLMs, or those disguised as product-selling companies, and not legitimate firms like Amway.

A 53-year-old firm with a presence in around 80 countries, Amway runs an elaborate multi-level structure based on commissions from selling exclusive Amway products, including health supplements and daily household items not available in stores. An Amway distributor — after becoming a customer himself — recruits others who then become his downline; commissions coming from sales in the downline are passed on up the ladder. The firm claims that its products are better than offerings from rivals. Bhupesh Choudhary, a Delhi-based Amway IBO for the past year and a half says, “If you don’t make good money in Amway, at least you will get good health.”

But for an IBO, things can get a little worrisome if the law is passed. Especially since the money circulation Act holds anybody participating in such schemes guilty (though that provision is rarely enforced in practice). The distributors, however, are optimistic. “In India, the government cannot ban something that has become the livelihood of lakhs of people,” says Choudhary. But dismantling the MLM commission structure will dampen the spirits of new recruits.
 
THE PROMISE
Amway’s presenters convince people to join, holding out the promise of all the good things in life

At  present, Choudhary informs, this is how the system works: you start getting a commission if you sell around Rs 25,000 worth of goods every month. That initially gives you a commission of 6 per cent, i.e., Rs 1,200 (see The Payoff). Without your downline, that doesn’t seem much for the time and money you invest. Since Amway’s products are not inexpensive, selling them is not easy. Although as distributors, you get a 25 per cent discount on Amway products, which you earn from direct resale on MRP, the income mainly comes from commission from further recruitments. Dismantle that, and the incentive to recruit goes away.

“Single-level marketing would be more like a model where the concept of residual income would not exist,” says Daniel Pranjal, an MLM consultant. “You would have to ‘dig a well every day’, which means that network distributors will not have a chance to build a future with any direct selling company in particular.”

Economist Bibek Debroy, who recently wrote a report on direct selling, says such pyramid structures are not welcome. “When you are offered commission based on the sales of a person whom you recruited, you are going to rope in people who are not necessarily educated,” he says, adding, “they are unaware of the intricacies, their legal rights, and there might be elements of fraud, even if legally not fraudulent.” Case in point, the claim about perpetual royalty-like income from your downline. Yoginder Singh, senior vice-president, legal and corporate affairs, Amway, says there’s nothing like a perennial royalty income, adding that “if no effort is made to build the business, it will go down. It cannot be that after a certain level, you stop working and just keep getting money”. He adds that the company takes any such misrepresentation of its plans seriously.
 
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A Cog In The System
So if the risks (the possibility of the law banning MLM and lack of clarity on whether sales and commissions will come through) are high, what keeps people interested? At the seminar, there appears to be no hint of any risk. The only references are to how Amway has weathered every crisis. “During the slowdown, when every company’s sales fell, Amway managed to show growth in revenues,” the speaker claims. 

During another meeting, a nutritionist introduces some of the highest-selling products; the latest is a Women’s Day special — Hair, Skin & Nails. A children’s health programme is also introduced as something that “we owe our children”. The couple hosting this seminar takes the stage. The woman is a housewife, who claims that till she joined Amway, she could not even speak to her husband in public. The man used to be a bank executive, who says if he can do it, so can anyone. And how did they pull it off? They point to a table on stage laden with books and CDs. “The ‘system’ will help you achieve it.”

The ‘system’ is Network TwentyOne, Amway’s multilevel distribution arm. First, showcase your business to at least 15 people a month. Tell them about the Amway opportunity (a training manual teaches you how to introduce the company to a potential recruit). Second, be a 100 per cent user yourself. “We’re not a business in which we don’t use what we sell,” the husband says. “When your own company makes it, why would you buy from another?” The audience cheers wildly at the mention of “your company”.

Third, listen to motivational CDs and read the recommended books every day (like The 7 Habits of Highly Effective People and Rich Dad, Poor Dad) — which you are expected to buy from the company.

Finally, attend all meetings, seminars and conferences, even if they’re all alike. The pitch: the meeting you choose to miss might be the one event that could change your life.
 
Lost In The Hype
The effectiveness of the motivational events is writ large on the faces of the attendees: cheerfulness and optimism when you ask them about Amway. They are also very polite when changing the topic the minute they’re asked about their success rate, but remain hopeful of rewards. But when it comes to numbers, they just don’t add up. Amway claims to have 800,000-1 million active members in India, and says it hands out about 100,000 commission cheques every month. Then, what happens to the other 700,000-900,000 members? Singh warns against being misled by that statistic, saying it’s perhaps not the same people who are receiving the cheques every month.

A  national-level sportsperson present at the event, one who has been with Amway for several years, said the business hadn’t worked for him because he hadn’t put in the required effort. But when asked why he failed to make money, he replied, “Ask your sponsor (the person who introduced you to the meeting). He will answer questions regarding the business.”

The sponsor later tells me about Amway’s unwritten code of conduct for its IBOs — edification (“We don’t speak badly about our business to others”), counselling and uplifting (“We always motivate those who are not doing well to persist”), and no cross-selling, (“Whatever doubts you have or help that you need, consult your upline”). 

Cheerful IBOs are only part of the story. Prijoe Philips, now a software engineer in the US, used to sell Amway’s wares in India. He says that people usually “fake it till they make it. You pretend you have a lavish lifestyle because of Amway, convince others to join and use Amway products, and you will start getting the commissions that will make you rich”.

Of Wide Margins
In 2011, according to coprorate database Ace Equity, Amway sold Rs 1,812 crore worth of goods in India, making a profit of Rs 410 crore. That’s a pre-tax profit margin of 23 per cent, compared to India’s listed FMCG companies whose average pre-tax margin is 12 per cent. This is excluding the individual commissions. Anecdotal evidence suggests that the top layer in the distribution chain could be making 21 per cent, which then gets distributed among to those down the order, according to their ranking (see Who Makes The Most for a similar revenue model at Herbalife). The revenue statement classifies the company’s entire expenditure, including the cost of goods, as “other general administration expenditure”.

That means you don’t have a break-up of how much the company pays as commissions, what its overheads for keeping this system alive are and what the cost of the goods being sold is. So, how does a company with such a large distribution manage that?

According to the Kerala police, which raided Amway’s warehouses in the state in 2012 , the products were being sold at a profit several times their cost. For example, Nutrilite Protein Family Pack, with a factory price of Rs 484, is sold for Rs 3,119 — a mark-up of 6.5 times. Similarly, skincare product Alpha Hydroxy Serum Plus, with a factory price of Rs 485, is sold at Rs 2,439, while a Rs 51 G&H Body Shampoo is retailed at Rs 395.

But how can such a premium in pricing be sustained over an extraordinarily long period of time? An ‘Emerald’ in a suit (the most high-flying of the lot are impeccably dressed) present at one of the meets, and claiming to have about 100,000 distributors under him, brushes off the question saying, “Don’t see it as a product you are selling, it’s a business opportunity, an environment that will give you financial freedom.” Implying, in other words, that it’s about the downline.

Former Amway IBOs give you a different perspective. Philips says that such riches are not for everybody. “It is a business like any other, in which hardworking and persistent people will succeed,” he says, cautioning against falling for promises that you will be helped by your upline. “It’s like you buying a Subway franchise from someone running it across the road. He will help you, but not in the way you expect. He has his own priorities,” he explains.

Others are less charitable. They see the whole system as a way to make you buy something you don’t need at ridiculous prices. Questioning the Amway modus operandi, a Bangalore-based businessman, on condition of anonymity, asks, “Do they tell you the virtues of the product or do they brainwash innocent IBOs by parading the Diamonds on stage, saying ‘we got here because we worked hard and never gave up’?” He realised that getting people to join was not easy. So he worked harder, went to more seminars, looked hungrily at the Diamonds and wondered what he was doing wrong. Then, he spent more time, energy and money buying products and learning tools. “Finally, it dawns on you that the incentive system is skewed heavily towards those higher up the chain,” says the businessman.

The Fine Arts Society seminar is in its last stages. The speaker is telling the the audience that it will encounter people who will turn it away with excuses. He lists and builds the arguments against them with more motivational anecdotes (and a YouTube video showing a zebra overcoming a lion). “Sell just one more ticket, one more plan,” he exhorts. “When you’re biting the dust, don’t give up.” He might as well have been saying, “Keep up the downline.”

Click here to view interview with William Pinckney

(This story was published in BW | Businessworld Issue Dated 06-05-2013)