Mannatech decides against multilevel marketing in move to enter mainland China market

Like some other multilevel marketing companies, Mannatech in the past has experienced wide fluctuations in financial results based on the timing of company events. Corporate meetings, where new products are launched and the distributor sales force is energized, typically result in those distributors flooding back into the marketplace with renewed fervor. That can bump corporate financial results in the short term, but that fervor then fades over time, and financial performance does, too. Smaller network marketing operators like Mannatech are more susceptible to this phenomenon, and the company had a record second quarter that followed on a global sales meeting in April. The mechanics of this phenomenon are similar in other companies, but are muted for some of those competitors because of their much higher overall revenue and the number of markets they operate in.

Mannatech in the past has been devoted to selling the benefits of its ‘glyconutrient’ technology, an idea based on mannose, a saccharide derivative of aloe vera. The company has taken out many patents on its technology but seems to be de-emphasizing the approach in recent years.  In the most recent earnings call with analysts, no mention of the technology was made.

Emphasis on new products​

Rather, the company has placed an increasing emphasis on its TruHealth line of fat loss products, which include shakes and capsules. In addition to energy provide by the corporate meetings, potential new distributors need a reason to choose Mannatech over other network marketing opportunities involving nutritional products such as Amway, Herbalife or Usana, and that means new products and a fuller line of products to sell.  CEO Scott Bala said the investment the company has made in the new product line is starting to show results.

“While our second quarter seemed exceptional, as we saw the highest revenue numbers in seven quarters, we are endeavoring to have fewer big revenue swings quarter-to-quarter and create consistent revenue numbers that reflect a strengthening position in a market,”​ Bala said in an earnings call that was posted in transcript form on the financial website seekingalpha.com​.

China initiative​

Another development that will drive that consistency, Bala said, is the launch of a cross-border e-commerce platform aimed at China.  Mannatech already has operations in Hong Kong, but has chosen to enter the mainland market in this way rather than try to set up a network distribution effort proper within the country. The rules that govern direct selling operations within China are complex and potentially fraught with risk, as evidenced by the high profile troubles of NuSkin in 2014.​ Whether Mannatech will subsequently decide to set up a network distribution model within China remains to be seen. Cross-border sales of nutritional products has been a complicating factor for companies that try to do both in China. Usana recently moved specifically to restrict the practice, as mainland distributors for that company were buying product online to sell to their networks at a discount, undercutting the company's own direct distribution efforts within the country.

Bala said investments in the new product lines and in scaling up for the mainland China initiative resulted in higher costs in the quarter as part of the company’s ongoing strategic reinvention.

“As we prepare to open business in China later this year, with a non-direct sales business model, we invested in hiring personnel and staff that will help lead our international effort in China,”​ Bala said.

“Through our planning product international expansion and field program, we believe our investments has taken the company to a consistent place, continued heavy investments in the company, as well as operating costs directly related to our strategic transformation effort, affected our bottom line results,”​ he added.

Earnings details​

Third quarter net sales for 2016 were $48.1 million, an increase of $4.2 million or 9.8% as compared to $43.9 million in the third quarter of 2015. Net sales increased 6.8% on a constant dollar basis. Income from operations was $0.5 million for the third quarter 2016, as compared to $2.2 million income in the same period in 2015. Net income was $1.3 million, or $0.46 per diluted share, for the third quarter of 2016, as compared to $0.1 million net income, or $0.03 per diluted share, for the third quarter of 2015. During the third quarter, operations outside of the Americas accounted for approximately 60.5% of consolidated net sales.