The Background

� India - fastest growing economies in the world� Expected to be the 12th largest economy by 2015

� Growing Consumer Market� India ranked 12th largest consumer market in 2007, expected to be the 5th

largest by 2025

� Different distribution channelsare evolving, modernretail growing –� Different distribution channelsare evolving, modernretail growing –India has become an attractive destination for foreign retailers andmanufacturers, entry of Indian corporates into retail

� Many store and non-store formats have evolved

� Direct selling: one of the fastest growing non-store format

Direct selling refers to selling of goods and services to theconsumersaway from a fixed retail outlet, generally in their homes, workplace,etc., through explanation and demonstration of the productby directsellers

� One of the most labour-intensive segment 2

Objective of the Study

� To examine the socio-economic impact of direct selling in India, focusing onhow the benefits can be leveraged through appropriate policies

� Methodology: Primary survey of over 2,500 individuals covering direct sellingcompanies, direct sellers, consumers, supply chain agents, manufacturers,policymakersand legal experts. The surveywasconductedin 2009-10 and itpolicymakersand legal experts. The surveywasconductedin 2009-10 and itcovered 24 cities

3

Structure of the Report

� Chapter 1 covers definition of direct selling and its difference from other multi-level marketing schemes

� Chapter 2 presents the global overview of direct selling � Chapter 3 presents an overview of direct selling in India� Chapter 4, 5 and 6 summarize the survey findings � Chapter 7 presents the key conclusions and the way forward

Structure of the Report

� Chapter 1 covers definition of direct selling and its difference from other multi-level marketing schemes

� Chapter 2 presents the global overview of direct selling � Chapter 3 presents an overview of direct selling in India� Chapter 4, 5 and 6 summarize the survey findings � Chapter 7 presents the key conclusions and the way forward

What is Direct Selling?� No uniform definition

� Wholesale, retail or a separate line of distribution?

� UNCPC Version 2 (code 624) classifies it under non-store retail format

� Key components :

� It involves B2B and B2C operations

� Sales made through personal explanation and demonstration by salesrepresentative Multi -level marketing (MLM)representative

� Different models of direct selling:

4

Company

Direct Seller

Customer Customer Customer Customer

Multi -level marketing (MLM)

Company

Direct Seller

Customer Downline (DS)

Downline (DS)

Customer Downline (DS) Customer

Customer

Downline (DS)

Customer Downline (DS)

Customer Downline (DS)

Customer Customer

Customer Customer

Customer Customer

Single-level marketing (SLM)

Direct Selling versus Other Fraudulent MLM Schemes

Direct Selling Pyramid SchemesDirect sellers at all stages have equal opportunity tomakemoney

Money is made largely by early entrants

• Pyramid schemes emphasize on vertical expansion of network, wherein a person receives commission irrespective of converting a sale.

• Ponzi schemes involves money laundering across a network of people and does not involve a sale component.

5

makemoneyCompensation is based on sale of goods and/services Compensation based on recruitment rather than on

salesReturns are dependent on motivation and come slowly Returnsare easy and quick

The price of the product is according to the value ofthe product

“Push competition” is encouraged as products aremostly overpriced and may not justify their intrinsicvalue

Products are supplied to meet genuine demand anddirect sellers are encouraged to hold minimalinventory and replenish as and when need arises

“Front loading” is encouraged. Therefore, productsare thrust upon the direct sellers, irrespective of theirabilities to sell the product and the actual marketdemand

The initial cost incurred is low The initial cost incurred ishighBuy-back facility is offered Buy-back facility is not offered

Global Overview

� Started in the US in 1900s, grew in the 1970s and 1980s

� Globalised in the 1990s

� Major markets – US, Japan, Germany

� Fast growing markets – Brazil, Korea, Russia

� India’s rankingin termsof sizeof the sectorimprovedsignificantly:� India’s rankingin termsof sizeof the sectorimprovedsignificantly:18th in 2009-2010 from 25th in 2008-2009

� Despite global slowdown, number of direct sellers in India increasedbetween 2008-09 and 2009-10, ranked 11th in 2009-2010

� Sales revenue per direct seller is low for India – ranked 47th

� Global Slowdown� Less impact on direct selling as compared to retail

� Even in countries like US, the number of direct sellers has increased

6

Global Overview Contd.

ThailandTaiwanFranceRussia

ItalyGermany

MexicoKoreaBrazil

AustraliaJapan

United States

2,013

MexicoIndia

BrazilJapan

PhilippinesKorea

MalaysiaTaiwanRussia

IndonesiaThailand

United States

7Sector is globally evolving – technological innovation, different operating models

1062.7

0 5000 10000 15000 20000 25000 30000

PhilippinesUkraine

IndonesiaSpain

South AfricaPoland

PeruIndia

VenezuelaMalaysia

ArgentinaColombia

United KingdomThailand

Size of the Industry, 2009-10 (US$ mn)

0 5,000 10,000 15,000 20,000

PeruItaly

EcuadorGermany

SingaporeVenezuela

TurkeyCanada

ArgentinaPoland

ColombiaSouth Africa

UkraineMexico

Number of Direct Sellers, 2009-10 ('000)

Global Regulations� Varies across countries

� Code of conduct (largely voluntary), formulated by Direct SellingAssociations

� Regulations: US, Malaysia and Singapore

� Some key features of regulations:� Identify genuine direct selling companies

� Differentiate between legitimate and non-legitimate practices - banfraudulent practices

� Consumer protection

� Product-specific regulations – additional clearances required

� Licensing and/or registration of direct selling companies

� Sector-specific regulations – Malaysia

� Treatment of direct sellers – self-employed

8

Overview of Direct Selling in India� Started in 1980s – gained momentum in 1990s with the entry of foreign

companies

� Size of the sector has grown by 60% between 2003 and 2010

� Products diversified from consumer durables to health and wellness, cosmetics, personal and 33300

41200

30000

35000

40000

45000

9

wellness, cosmetics, personal and household products

� From Tier I cities penetration into Tier II and III cities, now targeting rural areas

� Growing at 20% – expected to reach 71,200 million by 2012-13

� Number of direct sellers increased from one million in 2001-02 to three million in 2009-10

� Genuine direct selling companies in India – only 30 (excluding insurance companies)

21900 22410 2315025200

28500

33300

0

5000

10000

15000

20000

25000

30000

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Regulatory Structure� No Nodal ministry

� DIPP – FDI policy, Ministry of Consumer Affairs, Food and PublicDistribution – internal trade and consumer welfare

� A ‘State’ subject under Indian Constitution

� Governed by over 30 regulations at the centre, state and local levels

� No sector-specificAct� No sector-specificAct

� Consumer Protection Act, 1986 and the Consumer Protection(Amendment) Act, 2002:protects consumers of both goods and servicesfrom unfair or restrictive trade practices, redressal of grievances ofconsumers

� Prize Chits and Money Circulation Scheme (Banning) Act, 1978: checksprize chits and similar financial schemes based purely on money circulationwithout any sale of goods and services

� In states like Andhra Pradesh, Sikkim and Kerala, direct sellingcompanies were mistaken to be ‘money circulating companies’ and werecharged for violating the Act 10

Survey Findings: Direct Selling Companies� Primary survey of 16 direct selling companies

� Majority of the companies have pan-India presence and long-termcommitment in the Indian market

� 80% foreign companies have wholly-owned subsidiary

� 75% follow multi-level marketing structure

� Presencein Tier I (43% share),Tier II (38%) andTier III (19%) cities

11

� Presencein Tier I (43% share),Tier II (38%) andTier III (19%) cities

� Investment: 70% in equipment, followed by manufacturing facilities

� Investment in R&D is low� Survey found that if a stable operating environment is provided, companies could

invest in R&D and develop India as a R&D hub

� Majority of expenditure in organising events and product promotion

� Own manufacturing facilities - account for 30-35% of the products sourced,rest contract manufacturing largely through SMEs

� Average spending on training of direct sellers – 8.6 millionper annum andon training of employees – 1.5 million per annum

Employment� Direct Employment – direct sellers and employees of direct selling companies

� Indirect Employment – in sectors like manufacturing, packaging, etc.

� On an average, a company with pan-India presence employs 200employees� Majority are in urban areas at non-managerial positions

� Majority of the employees are skilled and have permanent employment contract

� Self-employmentoption– directsellers

12

� Self-employmentoption– directsellers

� 13 companies had more than 3 million registered direct sellers of which 1.07million are active direct sellers

� Direct sellers are compensated through commissions, bonuses, non-cashequivalents, etc.

Other Benefits• Tax contributions• Reduction in intermediaries in supply chain• Training and skill development• Sourcing from SMEs leading to technology percolation

Survey Findings: Direct Sellers

� Majority are graduates, fall in the monthly income category of40,000-70,000, fall in age group of 35-49 years, followed by

18-34 years

� Over 68% have small families - convenience of working fromhome

13

home

� Around 64% take it up as their sole activity, 26% haveadditional job

� Network expansion; essential part of their operations – almost80% work in close contact with their downlines

� The 180 direct sellers surveyed had 1.28 lakhs downlines, out ofwhich over 10,000 joined in 2007-08

� Margins are around 25%

Survey Findings: About Direct Sellers

To have my own business

To get a major income source

To have more flexibility

To become independent

To earn additional income

45.56

49.44

53.33

60

60

Reasons for Becoming a Direct Seller (in %)

45

22.7817.22

9.44101520253035404550

Occupation before Taking up Direct Selling Activity

14

Incentives to direct sellers- receive commissions, foreign and domestic travel and awards and recognitions

No major start-up cost

0.00 10.00 20.00 30.00 40.00 50.00 60.00

Others

To earn for a specific purchase( car, gifts, etc.)

To learn something new

To meet new people

To buy products for my own use

11.11

13.33

28.33

28.89

41.673.89 1.67

9.44

05

10

Worked as a full time employee

Never worked before

Self employed

Worked as a part time employee

Worked before, but

was unemployed

Other, please specify

Percentage

Impact on Direct Sellers

10

20

30

40

50

60

70

80

9088

93

80

15

3.75 1.25 0

Male Female

Level of Satisfaction - Gender wise (in %)

88

88

88

85

84

84

84

80

69

69

67

68

69

65

66

64

Earn more money and household …

Have flexibility

I am my own boss

Improve family's quality of life

Have independence

Meet and socialise

Have own business

Keep myself busy

Benefits of Direct Selling (in %)

15

0

10

Very Satisfied

Somewhat satisfied

Neutral Somewhat unsatisfied

Not satisfied at all

3 0 03.75 1.25 0

Build self esteem and confidence

Build better sales skills Build business management

skills

Feel more at ease in front of an audience Work better with others

Better organize your agenda Take more initiatives

Improve performance on other jobs Equal Status

0

1

2

3

4

5

6

7

8

9

10

Professional Benefits of Direct Selling

89

84

88

70

71

70

0 20 40 60 80 100

Able to take better care of family

Buy products at lower price

Develop new personal and business …

Female Male

Survey Findings: Consumers

� Out of 2079 randomly selected consumers, 698 used direct selling. Total consumers – 698+178 (in-depth interviews) = 876, from SEC A and B

68.62

58.3160.00

70.00

80.00

Aided Awareness Spontaneous Awareness

61.87

58.6860.00

70.00

16

48.42 47.03

38.11

50.2954.44

9.60 11.17

31.09

7.74

2.44

9.746.73

4.872.29

58.31

12.61

19.9117.77 18.91

13.61

0.43 0.57

5.30

0.29 0.00 0.00 0.29 0.29 0.140.00

10.00

20.00

30.00

40.00

50.00

60.00

Level of Awareness Buyers

16.1021.80

18.7220.32 19.18

3.54 2.74

11.19

1.83

5.481.26 1.48 1.26 0.68

14.04

22.0320.43

16.6713.24

0.57 0.46

9.59

0.23

5.02

0.00 0.34 0.23 0.110.00

10.00

20.00

30.00

40.00

50.00

Level of Awareness Buyers

Survey Findings: Consumers Contd.566

187

316 332

130 112100

200

300

400

500

600

Num

ber

of R

espo

nden

ts

100

150

200

250

Num

ber

of R

espo

nden

ts More than Once a Month Once a Month1-3 Months 3-6 Months6-12 Months Once in a Year

Frequency of Purchase of Selected ProductsPlanned Purchase Behaviour across Selected Products

17

0

Personal Care

Products

Food Products

Health Products

Household Products

Children's Products

Service Products

Willingness to Pay a Premium on Products (in %) 0

50

Personal Care

Products

Food Products

Health Products

Household Products

Children's Products

Service Products

Num

ber

of R

espo

nden

ts

• Expenditure on purchase through direct sellingis less than 10% of total expenditure

• 53% of total expenditure is for householdconsumption, rest for personal consumption

46.00

13.36

27.5124.66

8.116.16

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.0050.00

Personal Care

Products

Food Products

Health Products

Household Products

Children's Products

Service Products

Survey Findings: Consumers Contd.

Willingness to try New Products

35.73

39.21

Will Definitely Try

May Try

Pre

fere

nce

Ran

king

Level of Satisfaction across Selected Parameters

82.87

84.88

92.47

Wide Variety

Convenient

Good Quality

Par

amet

ers

18

3.02

5.92

16.13

35.73

0.00 20.00 40.00 60.00

Will Definitely not Try

May not Try

May or May not Try

Percentage

Pre

fere

nce

Ran

king

49.94

78.32

81.72

82.23

82.87

0.00 50.00 100.00

Opportunity to Buy New Products Frequently

Personal Touch

Saves Time

Well-Trained Direct Sellers

Wide Variety

Percentage

Par

amet

ers

Consumers’ Survey Findings: Benefits

of Direct Selling

� Convenient, time saving

� Discounts and offersDiscounts and offers

� Personalized service

� Good quality products

� Can take joint family purchase decisions

� Increased brand awareness

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Concerns and Policy

Recommendations

Concerns and Policy

Recommendations

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A Recap

� Direct Selling is one of the fastest growing sectors - companies areexploring smaller cities and rural markets, diversifying products

� Is labour-intensive, number of direct sellers doubled between 2001-02 and 2008-09

� Has positive socio-economic impact

� Benefitted allied industries

� Has benefitted women – but the impact is different from that of therest of the world. It has helped them to have financial independencebut Indian women have not yet achieved equal status with men

� Women empowerment

� Provided a safety net during global slowdown

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Concerns� Lack of a proper definition of the sector – wholesale, retail or separate line of

distribution

� Lack of clarity of the concept of direct selling and regulations pertaining to this sector - Limited knowledge among government and consumers

� Misinterpretation of existing regulations by different governing authorities

� How to identify a genuine direct seller?

� How to protect the interest of consumers from fraudulent multi-level marketing � How to protect the interest of consumers from fraudulent multi-level marketing companies?

Others: Direct Selling Companies

� Setting up of manufacturing unit is not easy, difficult to operate on a hub and spokemodel

� India is not a homogenous market

� Competition from store formats/retailers

� High import duties, multiple taxes, lack of single-window clearance procedures,etc.

� Quality of direct sellers – lack of skilled manpower, internet penetration,low brandawareness, multiple languages, etc.

22

Concerns Contd.Direct Sellers� Authentication of direct sellers

� Lack of product marketing and advertising

� Lack of adequate training for direct sellers

� Uncertainty about the sector

� Grey market problems – retailers are also direct sellers

23

Consumers� Products are costly and may not be available in varied sizes

� Delivery takes long time

� Tester/sample may not be available

� Only few products are available and variety is also limited

� Direct sellers can be persuasive

� Lack of knowledge about this business model

� Inability to locate a genuine direct seller

� Grey market problems – retailers are also direct sellers

What Companies should do?

• Offer more variety

• Better product marketing

• Streamline supply chain

• Makebasictrainingmandatory• Makebasictrainingmandatory

• Product customization

• Knowledge sharing

• Follow certain procedures for appointment of direct sellerssuch as the person should have PAN card, no criminal record,etc.

24

What Government Should do?

• Clear definition of retail and wholesale

• Transparent FDI policy and entry route

• There will be benefits if:• 100% FDI in single brand retail

• PartialFDI in multi-brandretail• PartialFDI in multi-brandretail

• Regulation is needed – delink regulation from FDI policy

• There should not be a discriminatory regulation

• Formulate a governing legislation – centre can have a modellegislation

• The legislation should lay down mandatory guidelines foridentification of genuine companies

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What Government Should do?

Contd.

• Streamline multiple legislation, regulation should focus ondevelopment of pan-India supply chain/sourcing network

• Modify ConsumerProtectionAct, 1986 and the Consumer• Modify ConsumerProtectionAct, 1986 and the ConsumerProtection (Amendment) Act, 2002 : guidelines for consumerprotection

• Need for an “Industry Status”?

• Regulatorversus Nodal Agency

26

Any policy decision should take into consideration the impact on employment in a country where unemployment rates are high

27