What is Direct Sales?
Direct selling is a retail channel used by top global brands and smaller, entrepreneurial companies to market products and services to consumers. Companies market all types of goods and services, including jewelry, cookware, nutritionals, cosmetics, housewares, energy and insurance, and much more.
The direct selling channel differs from broader retail in an important way. It isn’t only about getting great products and services into consumers’ hands. It’s also an avenue where entrepreneurial-minded people can work independently to build a business with low start-up and overhead costs.
Direct selling consultants work on their own, but affiliate with a company that uses the channel, retaining the freedom to run a business on their own terms. Consultants forge strong personal relationships with prospective customers, primarily through face-to-face discussions and demonstrations. In this age of social networking, direct selling is a go-to market strategy that, for many companies and product lines, may be more effective than traditional advertising or securing premium shelf space.
Millions of people around the world choose to become involved in direct selling because they enjoy a company’s products or services and want to purchase them at a discount. Some decide to market these offerings to friends, family and others and earn commissions from their sales. The most successful consultants may decide to expand their business by building a network of direct sellers.
What is the benefit of direct selling?
Direct selling offers important benefits to people who want an opportunity to earn income and build a business of their own, to consumers as an alternative to retail stores, and a cost effective way for business to bring products to market.
Consumers benefit from direct selling because of the convenience and service it provides, including personal demonstration and explanation of products, home delivery, and generous satisfaction guarantees.
Direct selling offers an alternative to traditional employment for those wanting a flexible opportunity to supplement household income, or whose circumstances don’t allow regular employment. Direct selling opportunities can develop into a fulfilling career for those who achieve success and choose to pursue their independent direct selling business on a full time basis. Start-up costs in direct selling are typically low. Usually, a modestly priced sales kit is all that’s needed to get started, and there is little or no inventory or other cash commitment to begin. This stands in contrast to other businesses with the cost and risk associated with larger outlays.
Direct selling offers a distribution channel for businesses with innovative or distinctive products that for cost or other reasons are not suited to other retailing.
As the external Socio-Economic Impact Studies for the various markets show, direct selling is a positive benefit to the economies and people where direct selling companies operate and serves consumers with a convenient source of quality products.
What’s the development of direct selling in China?
Direct selling in China continued to enjoy dynamic growth in 2016, registering current value growth of 14%. The favorable policy of issuing direct selling licenses, combined with increasing consumer recognition, led to stable high growth. Up to the end of 2016, around 80 direct selling retailers acquired direct selling licenses, issued by the Ministry of Commerce. In addition, due to the rapid development of the internet, traditional direct selling players tended to boost their sales through social media platforms and online marketing. For instance, as WeChat became the most popular social media platform in China, various direct sellers, such as Infinitus (China) Co, promoted their products, built their brand reputations and connected with consumers via WeChat.
China Regulations on Direct Sales?
Two regulations, namely the Regulation on Direct Selling (i.e. Order of the State Council No.443), and the Anti-chuanxiao (Pyramid Selling) Regulation (Order of the State Council No.444), both adopted in 2005, govern the Direct Selling industry in China.
According to the Regulation on Direct Selling a company must obtain an approval from the government before it is allowed to engage in any direct selling or even establish a local company that intends to engage in such activities. With the introduction of the mentioned Regulation direct selling is formally taken as legal activity in China, but within the limits established by the Anti- Pyramid Selling Regulation, which specifically prohibits the so called Pyramid selling.
What is the difference between legitimate Direct Selling under Chinese law and an illegal
“
pyramid scheme
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?
It should be clear that certain fundamental differences exist between legitimate Direct Selling and the fraudulent Pyramid scheme. For example, the requirement that sales personnel make upfront investments in inventory, the absence of a return-and-refund policy, and compensation based on number of people recruited are the marks of fraudulent scheme, or Pyramid scheme. Legitimate Direct Selling under Chinese laws does not permit such practices, and have adequate consumer safeguards in their operations. Substantially direct selling is a type of business model in which direct selling companies recruit sales promoters to sell products directly to end consumers outside the companies’ fixed outlets.
What are the requirements to initiate direct selling?
It is necessary to obtain the specific “Direct Selling License” from the Ministry of Commerce, which will issue the license to engage in Direct Selling activities only if the company meets the following requirements:
1. The applicant shall have sound business credit, and has no records of serious illegal operation during the past five years before filing the application; the company shall also have undertaken direct selling business for at least three years outside China;
2. The paid-in registered capital must not be less than RMB 80 million;
3. The deposit has been paid in full amount in the designated bank according to the provisions of the Regulation on Direct Selling.
What is the procedure to obtain the Direct Selling License?
The applicant for the Direct Selling License has to set-up a FIE (i.e. Foreign Invested Enterprise) in the form of a WFOE, thus it is necessary to get the approval of the MofCOM for this proposed investment. The investment is going to be approved only if the investor meets all the requirements listed above.
The procedure is the same as for setting up a WFOE:
Examination and Approval Department: Municipal bureau of commerce
Time limit:Within 100 working days
Required documents:
Documents and certificates to show the enterprise is capable of doing direct-selling;
Marketing plans reports, and service network plans in direct-selling area authorized by at least a local people’s government at county level;
Instruction of the products according to the national standards;
Samples of sales promotion contracts to be singed with salesperson;
Credit certificates issued by accounting firms;
Agreements between enterprises and banks in using deposits according to law;
Any other requirements by the Bureau of Commerce.
What are the permissible product categories?
The Direct Selling Regulation limits the products Direct Selling companies can sell to just five product categories: 1) cosmetics, 2) dietary supplements, 3) cleaning products, 4) health and exercise equipment, and 5) small kitchen appliances.
International practices only set restrictions within the following categories: restricted goods (e.g., firearms, prescription drugs), perishable goods (e.g., foods, fresh produce), goods whose value cannot be easily determined by the average consumer (e.g., gemstones, investment packages), and bulk commodities (e.g., metals, crops). Other than in these specific categories, product approval for Direct Selling should be consistent with current regulatory requirements for all products across all retail industries.
Direct selling involves special legal regulations from many perspectives, If you want to conduct direct selling in China, Lehman, Lee & Xu is able to provide professional legal service based on our past successful experiences as one of the foremost Direct Sales law firms in China.