This article first appeared in The Edge Malaysia Weekly on September 25, 2023 - October 1, 2023

MALAYSIA’s multi-level marketing (MLM) industry performed well during the recent pandemic, particularly those dealing with health and wellness products, as consumers turned to health supplements and wellness-related foodstuff in their effort to stay healthy.

One example is Amway (M) Holdings Bhd, which derives about 40% of its revenue from health supplement products. The company saw its revenue rapidly increase from RM966.3 million in its financial year ended Dec 31, 2019 (FY2019) to RM1.51 billion in FY2022.

The prognosis does not look good for the industry this year, however. Most of the MLM companies listed on Bursa Malaysia have reported weaker revenue and earnings year on year, bogged down by softer consumer demand as higher inflation and a weaker ringgit tightened consumer purse strings.

There are currently four MLM companies listed on Bursa — Amway, Beshom Holdings Bhd, Zhulian Corp Bhd and recently listed DXN Holdings Bhd.

One question that could be on investors’ minds is whether the companies that dole out steady dividends each year can sustain their payouts. It is worth noting that while the MLM companies are cash rich, their dividend payouts vary.

Beshom’s dividend per share (DPS) has moved in tandem with the decline in its earnings over the last five financial years. The company paid out 13 sen per share in FY2019 but only five sen for FY2023.

Amway held its DPS steady in FY2019 and FY2020 at 27.5 sen, even though net profit fell to RM46.9 million in FY2020. However, as its net profit dipped further to RM36.8 million in FY2021, the DPS fell to 24 sen. For FY2022, it increased the dividend to 38 sen per share as its net profit increased to RM76.9 million. TA Securities Research forecasts a DPS of 35 sen for FY2023.

Zhulian kept its DPS consistent at 17 sen for FY2020, FY2021 and FY2022, despite its declining net profit. In its 2022 annual report, the group said it had strong cash reserves of RM200.61 million to back the dividend payout DXN, which made its debut on Bursa’s Main Market in May, paid out 1.6 sen per share for the first quarter ended May 31.

Notably, what the MLM industry is experiencing is consistent with the MIER Consumer Sentiment Index for 2Q2023, which continued to see a negative trend — decreasing 8.4 points quarter on quarter to 90.8.

“The survey reveals that consumers displayed greater pessimism towards this year’s economic environment. This trend is reflected by the respondents’ negative outlook on their future finances, incomes, jobs and inflation level,” says the Malaysian Institute of Economic Research (MIER) in the report.

With the MLM industry, the key factor lies in the size of a company’s distribution force — the bigger the force, the higher the sales.

“Recruitment of distributors is key for the MLM industry. The more people are recruited, the more sales will increase. The nature of the industry is not ‘fast money’ because members who intend to grow their MLM business do need to spend time building their customer base and convincing others to sign up. It’s essentially a sales job and it’s hard work,” says a person well versed with the industry.

“Those who do not have the patience to build the business will likely give up and choose to make money on the side as a delivery rider or e-hailing driver, which gives you an immediate ‘reward’.”

Looking at the distribution force of Beshom and Zhulian, they have shrunk significantly over the last few years.

Beshom has three core business segments — wholesale distribution, retail and MLM. The main revenue generator is its MLM segment. In FY2019, the segment made RM224.9 million in revenue with a distribution force of 121,000 people. However, in FY2023, the segment made only RM70.7 million in revenue, while its distribution force fell to 41,681 persons.

Beshom, which concluded its FY2023 on April 30, saw its net profit plunge 48% from a year earlier to RM16.3 million on weaker revenue of RM174.2 million.

In a report, CGS-CIMB Research cites Beshom’s management, which said the average MLM member spend as at 2Q2023 had fallen to RM400 to RM500 per month from about RM1,000 per month in 2021. The research house is of the view that the lower member spend is attributable to declining consumer spending power, the lack of Employees Provident Fund withdrawal programmes and the end of Covid-19 stimulus measures.

“We note that the sharp decline in MLM sales in recent years may pose a risk to future sales growth, with MLM members potentially having a negative perception of Beshom’s products [that is, being difficult to sell], resulting in members being unwilling to hold Beshom products and/or moving to its MLM competitors,” says CGS-CIMB Research.

Penang-based MLM player Zhulian, which derives over 60% of its revenue from Thailand while more than 20% comes from the local market, has also seen a decline in its distribution force. According to its 2022 annual report, its distribution force stood at 223,347 persons, about 30% less than its distribution force in 2019.

Zhulian reported a net profit of RM16.29 million for the six months ended May 31 (1H2023) — half of what it recorded a year ago. Revenue fell 7% to RM65.97 million during the period. The group’s financial year ends on Nov 30.

Perhaps the biggest surprise came from Amway. While its 1H2023 financial performance was within market expectations, it did warn that the outlook would be challenging for the MLM company and was expecting to see a reduction in revenue and profit in FY2023.

For 1H2023, Amway’s revenue declined 3% to RM716.51 million while its net profit increased 6% to RM37.31 million from a year earlier. The group has not disclosed the size of its distribution force in FY2023 yet, but indicators such as revenue from sign-ups, renewal fees and other service fees declined 7% to RM9.45 million in the first half of the year.

TA Securities says in a report that it believes the group will continue to face headwinds from the weaker consumer sentiment and softer demand for its health supplements in the endemic phase of Covid-19. “Despite the company’s continuous digitisation efforts and marketing mix to spur higher sales volume, we are inclined to believe that the earnings outlook for the MLM industry would be slowing due to normalising spending patterns within the health supplement category.”

If annualised, Amway’s revenue for FY2023 will amount to RM1.43 billion while its net profit would come up to RM74.62 million, falling short of the revenue of RM1.5 billion and net profit of RM76.88 million in FY2022.

Among the MLMs, the recently relisted DXN seems to be the least affected. The group, which ends its financial year on Feb 29, saw its first quarter ended May 31, 2023 (1QFY2024) net profit relatively flat at RM80.79 million, slightly lower than the RM80.86 million a year earlier, while revenue increased 17% to RM424 million.

Notably, the group said in its 2023 annual report that it had 3.5 million active members. The sizeable number is likely due to the fact that it has a global presence. Additionally, it manufactures most of its products in-house and manages its own cultivation farms and R&D facilities.

DXN has a strong presence in South America, where 42% of its FY2023 revenue was derived. Fortified food and beverages, including Lingzhi Coffee, Spirulina Cereal, Cocozhi and Morinzyme, contributed more than 60% to its sales.

Maybank Investment Bank Research says in a report that it expects the group’s sales in South America to remain a key driver of its top-line growth as it continues to grow its presence in the region. The research house adds that the group’s margins are expected to remain consistent due to its value chain efficiencies. 

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