Nu Skin 2010 Annual Report - Direct Selling News

These declines could continue or increase. Factors that could impact
our results in the market include:
• continued or increased levels of regulatory and media scrutiny
and any regulatory actions taken by regulators, or any adoption
of more restrictive regulations, in response to such scrutiny;
• significant weakening of the Japanese yen;
• increased regulatory constraints with respect to the claims we
can make regarding the efficacy of products and tools, which
could limit our ability to effectively market them;
• risks that the initiatives we have implemented in Japan, which
are patterned after successful initiatives implemented in other
markets, will not have the same level of success in Japan, may
not generate renewed growth or increased productivity among
our distributors, and may cost more or require more time to
implement than we have anticipated;
• inappropriate activities by our distributors and any resulting
regulatory actions against us or our distributors;
• improper practices of other direct selling companies or their
distributors that increase regulatory and media scrutiny of our
industry;
• any weakness in the economy or consumer confidence; and ;
• increased competitive pressures from other direct selling companies
and their distributors who actively seek to solicit our
distributors to join their businesses.
Heightened regulatory scrutiny of the direct selling industry in
Japan could harm our business if we are not able to successfully
limit the number of general inquiries and complaints regarding
our business received by consumer protection centers.
We continue to experience heightened regulatory scrutiny of the
direct selling industry in Japan. Several direct sellers in Japan have
been penalized for actions of distributors that violated applicable
regulations, including one prominent international direct selling company
that was suspended from sponsoring activities for three months
in 2008, and another large Japanese direct selling company that was
suspended from sponsoring activities for six months in 2009. In addition,
some Japanese lawmakers have experienced increased political
pressure to discontinue supporting the direct selling industry.
We also continue to experience a high level of general inquiries and
complaints to consumer protection centers in Japan and have taken
steps to try to resolve these issues including providing additional training
to distributors, and restructuring our compliance group in Japan. We
have seen improvements in some prefectures, but not in others. We
have received warnings from consumer centers in certain prefectures
raising concerns about our distributor training and number of general
inquiries and complaints. Although we are implementing additional steps
to reinforce our distributor education and training in Japan to help address
these concerns, we cannot be sure that such steps will be successful.
If consumer complaints and inquiries escalate to a government review
or if the current level of complaints and inquiries does not improve, there
is an increased likelihood that regulators could take action against us,
including a suspension of our sponsoring activities, or we could receive
negative media attention, either of which could harm our business. In
2009, Japan implemented a national organization of consumer protection
centers, which appears to have resulted in a further increase in the
scrutiny of our business and industry.
If we are unable to retain our existing distributors and recruit
additional distributors, our revenue will not increase and may
even decline.
We distribute almost all of our products through our distributors
and we depend on them to generate virtually all of our revenue. Our
distributors may terminate their services at any time, and, like most
direct selling companies, we experience high turnover among distributors
from year to year. Distributors who join to purchase our products
for personal consumption or for short-term income goals frequently
only stay with us for a short time. Executive distributors who have
committed time and effort to build a sales organization will generally
stay for longer periods. Distributors have highly variable levels of training,
skills and capabilities. As a result, in order to maintain sales and
increase sales in the future, we need to increase our retention of existing
distributors and continue to successfully recruit additional distributors.
To increase our revenue, we must increase the number of and/or
the productivity of our distributors.
We have experienced periodic declines in both active distributors
and executive distributors in the past and could experience such declines
again in the future. For example, over the last several months we
have experienced some softness in our active and executive distributor
numbers in the United States. If our initiatives for 2011 do not drive
growth in our distributor numbers, particularly in the United States and
Japan where our distributors numbers have been down, our operating
results could be harmed. While we take many steps to help train, motivate,
and retain distributors, we cannot accurately predict how the
number and productivity of distributors may fluctuate because we rely
primarily upon our distributor leaders to recruit, train, and motivate new
distributors. Our operating results could be harmed if we and our distributor
leaders do not generate sufficient interest in our business to
retain existing distributors and attract new distributors.
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