The Chinese government has opened an investigation into allegations that Nu Skin Enterprises, the US direct sale skincare and dietary supplement company, operates an illegal pyramid scheme in China.
The accusations, first published on Wednesday in the People’s Daily, the official mouthpiece of the Communist party, were followed up yesterday with a statement from China’s State Administration of Industry and Commerce.
“The SAIC is paying close attention to this matter and has immediately required relevant industry and commerce authorities to conduct an investigation to verify [the claims],” the administration said. “If the situation is verified then industrial and commercial departments will deal with the matter according to laws and regulations.”
A government investigation preceded by an attack in state media fits a pattern that has become familiar to global companies in China including Apple, GlaxoSmithKline, Volkswagen, Samsung, KFC and Walmart over the past year.
In early 2013, Apple was hammered by a series of articles in the People’s Daily that forced the company to change its product guarantee policies and issue a humiliating apology.
On Wednesday, People’s Daily published an in-depth report on Nu Skin, in which it described the company’s direct marketing practices as “pyramid schemes” and “brainwashing”.
It also said the company’s distributors were marketing products they were not licensed to sell in China.
Nu Skin released a statement on Wednesday, before news of the official investigation, saying the article “contains inaccuracies and exaggerations” and “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.”
Nu Skin’s New York Stock Exchange-listed shares fell nearly 16 per cent by the close of trading on Wednesday, and another 22 per cent by midday yesterday.
Chinese government sanctions or restrictions could be devastating for Nu Skin, which derives 42 per cent of its revenue from China, its biggest market, compared with just 12 per cent from all of the Americas.
The company reported a jump in revenue of 76 per cent to $927.6m in the third quarter of 2013, mostly on the back of a revenue surge of 240 per cent in China.
The Utah-based company sells its anti-ageing skin creams and dietary supplements in 53 countries. Before the latest scandal in China it was projecting global revenues of between $3.9bn and $4bn in 2014, up by as much as 25 per cent from 2013.