Scams pose threat to direct sales in China

China had outlawed direct sales since 1998 because of a series of high level scams, namely pyramid schemes, that swept the country, cheating hundreds of thousands of consumers out of significant amounts of money.

Following the crack down the government decided to reintroduce direct sales, with a new law passed last December undertaking a stricter regulation of the sector.

The law has given renewed opportunities for international direct sales personal care players to tap into some of the biggest growth prospects in the industry, which is why international players are lining up to tap into the market.

According to research firm Kline & Company, the cosmetic and toiletries market in China increased 13 per cent from 2003 to 2004, with the country's share of the $147.4 billion global market coming in at $7.1 billion at the manufacturers' level, accounting for nearly 5 per cent of total sales.

But it seems that with the re-opening of the direct sales market in China, the authorities will have more problems on their hands.

Police in Zibo City, Eastern China, this week announced that they have cracked the country's biggest pyramid scheme, worth around RMB400m ($49.95m). Allegedly the scheme involved 16,000 people from 15 provinces all over China.

The Chinese police force says that other smaller scale scams are also under investigation and that it is targeting a number of operations that are thought to be operating throughout the country.

According to a Xinhua report pyramid selling schemes have now become a serious crime and authorities will do everything they can to eliminate them.

The action comes following the announcement earlier in the year that Avon has become one of the first international companies to resume direct sales within China. But now many of the leading industry players are bound to be apprehensive about the repercussions should the Chinese authorities fail to get to grip with the problem.

Added to that is the fact that, with the current alert over door-to-door sales of pyramid schemes, consumers might become weary of all sales people coming to their doors, whether or not they are legitimate.