Sunday, July 14, 2013

Me, MLM and morality

I guess that the best consumer stocks in terms of margins, historical growth numbers as highlighted by a nice article by a contributor, (inclusive of Amway) are MLM based companies. Those are strong reasons to purchase a stock which is quite right.

It seems to me along with Amway, Zhulian and Hai-O are really doing well as MLM companies. While Zhulian, Hai-O have done well, many more MLM companies have closed down. Hence, these are the survivors and have succeeded. But my problem is that I could not kick off my mind (or am blocked mentally) of figuring out how MLM companies will perform in the future. Perhaps I am wrong as I have never believed in the products, pricing, methods of selling and the way I was approached before.

I have always felt that if I would have wanted to buy the necessities, I would have drove to AEON or Tesco or Giant, and get my shampoo by P&G, diapers by few companies including NTPM, Coke or even F&N, Nestle's Milo, tissue paper from NTPM and Kimberley, milk by Dutch Lady, infant milk by Mead Johnson and distributed by DKSH etc etc. If the price is right, I will buy. If it is not right, I won't. Many times, MLM purchases are not done through this way. It is the obligation to a friend or a family member that purchases are made.

I am probably among the few that have felt that products distributed by Amway are way too expensive and I would have bought Breeze rather than the detergent by Amway.

If I am to buy clothes, Gap, Uniqlo, perhaps some from Padini, products by Bonia. Thank god there is NO MLM there, in selling clothing.

Frankly, I could not have figured out how a company like Zhulian which is associated with jewellery can be selling cookware, Hai-O, a chinese medicinal products company selling expensive coffee. They are not so focused. As long as the products can be expensive, with high margins - the line of products will be pushed through the channels. It is about the rich - MLM promoters taking opportunities of the poor whom have to look for a second job selling MLM products.

These MLM method of selling are the same as the way most of the life insurances are being sold in which case they have channels and down liners. I am just not convinced of products being sold this way. Life insurance which is a good product and concept - should not be sold through the direct selling method and its sales force getting motivated to do more sales than helping friends.

As an investor who is thinking of value, I have to look at companies that provide value. This does not mean that companies that compete have to be fair. Competition is never fair. But as a value investor, it is not just the shares that provide value - the products have to have value - a good product is to be sold at above average price - not exorbitant price.

In support of Amway, Zhulian and Hai-O

Based on the numbers and dividends that are paid out to shareholders, frankly they have done the right thing - giving the excess cash to the shareholders. These are companies that have provided value to shareholders both on terms of capital appreciation and good dividends. Amway, Zhulian and the rest of the MLMs have trained a lot of people into becoming very good motivational speakers as well as sales people. These are people out of the need to survive, will have to put up with their guts and a thick face into approaching friends, families and colleagues. That is a very important part of training for one's life adventure.

On the other hand however, if I were the shareholder, I would have hoped that the money that I have made is not made out of people whom are buying the products out of feeling sorry towards the family members or friends.

I have bought products from MLM companies and paid thousands of ringgit, and those products were left in the shelf until it past expiry. To me, those purchases did not really enrich my friend (and in the process made me poorer) but rather helped the MLM company. Again, look at the margins that they have made.

Probably it is the morality aspects of it which I am thinking of. Read this on MLM.


Betronist said...

Interesting topic - MLM.

I am too, a hater of MLM companies, especially for their "philosophy" of catching human's greed. However, if operate prudently and "ethically", MLM can be a great business model to invest in. Amway is a very good example (globally).

My dad used to be a direct-selling champion when I was a kid so I followed him around when he gave talk in seminars (he retired early). Therefore, by instinct, I know a little on how to differentiate a good/bad MLM company.

First question of all, PRODUCTS first or MAKE MONEY first? Nowadays, there are tonnes of MLM companies around us with a tag line of "Do you wanna be financially free?" and they almost never bother to talk about their products. Whereas the successful one like Amway, Avon, Herbalife, Tupperware, Forever Living Products, Shaklee, etc, joiners attracted by products first, money comes second. If you notice, most of the successful MLMs sell healthcare goods and it is not easy to build a trustworthy brand for healthcare products. They stand long in the market because the products are genuinely good. People are just so willing to sell it because the products helped themselves so much. (Thinking of any unsuccessful MLM? See Lampe Berger)

Second question, what/how is the MARKETING PLAN? Nowadays Pyramid Scheme is so scary that anyone would run like hell after hearing it. In fact Pyramid Scheme is actually a good marketing plan, PROVIDED that it is sustainable for long term (again, products-first-money-second play a huge role). Lampe Berger failed because everyone was rushing in to supply the fragrance products, only to find out the demand is so little (so the first-in prospered, the last-in bankrupted).

To sum it up, the best way to value MLM-stocks is to sit in their periodic introductory talks and listen to their marketing plan (of course, it will be quite annoying after that LOL). If a MLM company is able to stand for more than 15 years and GRADUALLY grew its members base to a sustainable level, the Margin-of-Safety for investor is deemed adequate. (Sorry for the long comment)

Betronist said...

I think I've side-tracked a bit in my previous comment.

For Amway (M)/ Zhulian / Hai-O to stand long in the market, their integrity and reputation must have been quite established. As an investor, the morality issue on high product price is redundant, because consumers always have a choice of not buying it. I think the demand of their products is genuine judging from their past 10 years sales figure (numbers don't lie).

Unknown said...

I think MLM model is valid, a business that can generate cash and if the products is good, then it's possible to maintain the biz.
Figure dont lie....ever wonder why or how Amway can still pay dividend so consistently? That's exactly what Zhulian have done too...

panaceaasia said...

Excellent posting on MLM and brilliant replies.

phantom78 said...

My 2-sentence quip on MLM. To beat the flawed pyramid organization/scheme, why not ditch the notion of becoming their agent but invest in those good ones with very good track records. That way, you become the "up-line of up-lines". But if morality is an issue, just stay away.

Ivan's fairyland said...

I am a amway user. Personally, I think their products are really good. it worth for what you paid for. If I want stable dividen, i definitely invest in amway. As track record had proven that good MLM company generate good profit although in economic downturn.