After having carved out a solid share of the domestic market, major direct-sales operators in Taiwan have begun to establish physical outlets to supplement their sales networks and brighten their image among local consumers.

For example: Melaleuca Taiwan, whose mainstream product is tea-tree essential oil, plans to add six new physical outlets this year, boosting its total number to 30. Within five years it expects to have 100 such outlets, all directly managed by the company, reaching from major metropolitan areas deep into second- and third-tier cities around the island. Melaleuca will also invest NT$20-30 million (US$625,000-937,000 at NT$32:US$1) to expand its logistics center, so that it can support the growing network of physical outlets as well as the home-delivery service for the direct-sales operation.

The expansion plan underscores the success of Melaleuca`s physical-outlet strategy, which was originally opposed by the company`s headquarters in the United States because of the heavy investment cost. Liu Shu-chung, vice president of Melaleuca`s greater China operation and president of the Taiwan branch, reports that the physical outlets have made substantial contributions by converting walk-in customers into members and burnishing the image of the firm as a director-sales operation. (In Taiwan, direct-sales organizations are commonly associated with "rat associations," the local designation for pyramid schemes--so called because they multiply quickly, like rats.)

To alleviate the adverse effects of the new strategy on its direct-sales members, the company has appropriated NT$100 million (US$3.1 million) to be distributed as bonuses for them this year. Those direct-sales personnel currently collect commissions amounting to 60% of the total revenue of the Taiwan branch, which now boasts 200,000 members--50,000 sales persons and 150,000 pure customers. The branch`s revenue grew 10% to NT$5 billion (US$143 million) last year, ranking it No.2 in the local direct-sales industry.

The Taiwan branch is also stepping up the development of products exclusively for the Taiwanese market. These unique products now account for 2-3% of all merchandise items offered locally, such as organic rice from Chishang Village in southeastern Taiwan`s Taitung County. In addition, the company is offering its customers a 10% bonus which can be used to purchase Melaleuca merchandise. The Taiwan branch is confident that these measures will help boost its revenue by 20% this year, to NT$6 billion.

Into Community Life

Herbalife Taiwan, which sells nutrition products such as "nutritious milkshakes" for breakfast, plans to double the number of its physical outlets--all franchisees, the owners of which are required to undergo training--to 2,400 this year. The company regards these outlets as tentacles extending deep into the life of local communities, in emulation of the 7-Eleven operation. To strengthen integration with local people, the outlets often sponsor community activities.

The company plans to boost the average monthly take of the outlets, which already stands at US$3,000. (In Brazil, which is Herbalife`s fourth-largest market, the figure is only US$600-800.) The Taiwan branch now boasts 120,000 members, including both sales persons and pure customers; it chalked up sales of more than NT$5 billion last year, making the island Herbalife`s largest market in Asia and the third largest in the world.

Sunrider, which sells Chinese herbal medicine-based nutritional products, has been converting its direct-sales network into a network of stores in recent years in order to shed the negative image associated with "rat associations." In Taiwan it already has 350 franchise stores, and the number is expected to hit 1,000 in two years. Sunrider founder and chairman Chen Tei-fun concedes that the conversion has cost the company substantial revenue, but insists that this is the right way to go for the company`s long-term development.

Amway Taiwan, the local market leader, has also set up seven physical outlets, which it calls "merchandise experience centers." In addition, it has established an e-commerce website to provide around-the-clock service to customers. In another departure from traditional direct-sales practices, it has invested substantially in ads to promote its branded products--notably "Nutrilite" health foods, its flagship products, which account for half of its revenue.

Amway Taiwan president Chen Hui-min notes, however, that the physical outlets and e-commerce channel will only supplement and support its direct-sales network, which will remain the core of its operation. The company boasts 270,000 members, including both sales persons and pure customers, and racked up revenue of NT$7.2 billion (US$225 million) in 2009, up 12.5% from 2008. Chen predicts that the figure will hit NT$10 billion (US$313 million) in three years.

The steps being taken by Taiwan`s direct-sales companies are expected to reinvigorate the industry, which appears to have run into a developmental bottleneck 28 years after its inception with the establishment of Amway Taiwan in 1982. The industry`s total sales for last year are estimated at NT$51.4 billion (US$1.6 billion); this is about the same as 2008, when revenues were down 4% from the year before. Nutritional and health care products are the industry`s largest revenue earners, accounting for NT$28 billion (US$875 million) in sales last year, with other major contributors including beauty treatment products and household cleaning products.

(by Philip Liu)