Nu Skin's Big Strategic Mistake

Forbes/January 17, 2014

By Panos Mourdoukoutas

In trying to fix quickly its China problem, Nu Skin committed a big strategic mistake, in our opinion.

According to a story published in The Street on Wednesday, Chinese state media expressed their dissatisfaction with the way the company operates — claiming that they have found instances of misleading advertising and marketing and business practices.

In a statement published shortly after the news spread, the company denied the allegations:

“The article that appeared in today’s People’s Daily contains inaccuracies and exaggerations that are not representative of Nu Skin’s business in China. The reporters did not attempt to verify any information with Nu Skin. We do not believe that the article was the result of any particular government inquiry. We are dedicated to operating in full compliance with applicable regulations as interpreted and enforced by the government of China. Nu Skin has an 11-year history of doing business in China under these regulations. Our business activities are regularly monitored by the government in this rapidly growing marketplace. As is our practice, we will communicate openly with regulators to address questions arising from this article. Nu Skin has government-approved direct selling licenses to operate in a majority of provinces in China. The most recent government licensure in July further expanded our direct selling footprint to include 19 of the country’s 32 provinces. We actively educate our sales force to follow all regulations as well as company policies and procedures, and any member of our sales force not operating in accordance with local law or with our company policies is subject to discipline.”

We are in no position to comment on the content of the statement. But we believe that while issuing a statement to refute an allegation in the media would have been the right strategy if the story had appeared in the American media, it was a strategic mistake to try to refute a story that appeared in the Chinese state media.

In fact, Nu Skin has made their problem even bigger. China’s State Administration for Industry and Commerce ordered local authorities to investigate the media report, according to state news agency Xinhua.

What would have been an alternative strategy?

In a piece we posted yesterday, we proposed that Nu Skin work with Chinese government authorities on two solutions:

First, change its business model to address the criticism. That, however, would be practically impossible, as it involves a change in the core of its operations.

The second choice is to appease Chinese leaders by providing some sort of public remedy, like the building of a shrine dedicated to the early revolutionaries, as suggested for Starbucks—which was the target of a negative state media campaign last fall by one of the commentators to a previous piece.

“What Starbucks needs to do to thwart those two fears you listed is: to give something back to China, as Mr. Schwarzman of Blackstone recently has done. My suggestion to Mr. Schultz is: build a shrine for those early revolutionaries and build it at Ruijin county/city of Jiangxi Province, which is the Red Capital of China (long march started there). Contact with me at Yahoo if you need my help.”

Though such a solution may defy conventional wisdom in the US, it makes perfect sense in China, where companies are expected to contribute to the community.

What doesn’t make sense is to challenge Official China.

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