Amway UK's Near Death Experience

In an interesting 69 page official judgement , Judge Norris details his thoughts and concerns about the case of Amway UK.  I find it curious that despite the "positive" judgment, I cannot find a full copy of it on  the Amway Blog and other pro-Amway sites.. 

Judge Norris makes no beef about it and states that he was ready to wind up (shut down) Amway UK, it it were not for the last minute ditch efforts by Amway to clean up and reform their business after the fact that they were under investigation in the UK. 

"On the facts as I have so far found them I would have considered it just and equitable to wind Amway up.  I wold have done so on a narrow ground which it is necessary to identify."

Paragraph 54 on page 40 is interesting to read since the judge said he would have chosen for winding up Amway because the vast amount of IBOs who join are seduced by the a dream and find the reality of the Amway business very different from their expectations.   So many rational people would not join the business and then do nothing if their expectations were not significantly different from what they found in reality.   He decided to set aside the fact that there were only two recent formal complaints about deception in the presentation of the Amway business opportunity. 

The judge stated: "I think the inference is fairly raised that the disparity between expectation and the experience arises from a failure to make a fair presentation of the actual chance of success."   "The evidence suggests to me that the large numbers would not have joined Amway to achieve the actual outcome; and that whilst the opportunity they acquired was not totally illusory, it may well have been oversold, because IBOs are sold a dream which in reality they have no genuine prospect of attaining." 

The judge went on to say that the Amway materials had sufficient disclaimers although the promotional material produced by the IBO organizations or spoken to at meetings it is clear that substantial actual misrepresentations were made to prospective IBOs.    Although Amway cannot be responsible for the acts of others, it however should not be able to benefit from those acts, as in the case of IBO organizations making serious misrepresentations about the opportunity.   "When Amway disapproves, it does not enforce that disapproval."   "So much is admitted in Amway's evidence."  "The BSM material made serious misrepresentations in relation to a key part of Amway's business."

I have long presented this idea on my website.   I would hope possibly that the judge might have read my site before making his decision.

"The relationship between the corporation and its top king pin distributors is unique.  The Corporation could not survive without the misinformation and false income claims spread by the kingpin's systems introducing people to Amway/Quixtar products business. "

"It usually takes about three years before distributors realize that the real money is in the tools business and not the Quixtar products business.  Quixtar is happy to play the game with the king pins since Quixtar will sell some products along the way."  Amquix.info

It will be interesting to see what from the UK experience flows around the rest of the Amway world.  My guess is that things will only proceed slowly and with great caution.  A win, or at least not getting shut down in the UK was far more important than the money they could ever make from the UK market.   If you can believe the Amway UK accounting that there was a long string of losses in the UK, averaging £2,9 million per year from October 2000 to December 2005, then one would have to ask why they wanted to stay in that market at all.  These losses might even increase with the recent product price reductions there.   If the DTI investigation would have no effect on Amway in the rest of the world, Amway could have had their doors closed for them, cut their losses and left the UK.   But, Amway knows if the UK kicked them out it would set a precedent for other countries to investigate their practices.  Amway had to stay and fight.   Even if they came out crippled from the battle, with a new business model that won't grow, and losing more money than before, it still provides a protective media shield from regulatory inquiry in other markets where Amway still directly benefits from the deceptions of the IBO organizations.  

A perfect example of Amway's "active inaction" exists today in the North American market.   Amway doesn't have the guts or the integrity to publicly say that the Perfect Water claims, which by the way are still circulating in IBO organizations and are still being shown to customers are false.  They have only stated the IBOs are not to make "unsubstantiated claims" about the product.  By not actively discrediting the claims and saying they are false, which would go against their "always positive face", Amway is the unwittingly beneficiary of those nonsensical false claims and selling more water because of them.  Amway knows the cat is out of the bag and they only way to combat such misrepresentations is to go on the offensive and say the claims are false until otherwise proven with scientific studies.  The claims have been out long enough that if there were any provable scientific fact to them that the studies would already be performed and published by now.  I guess such studies will never be forth coming.  

I would think the price reductions, which came in the UK will not be implemented across the product line and across other markets.   I don't think Amway simply could afford to slash their margins that much and still stay in business.   Amway UK is small enough that the losses that it can be a loss leader market to keep their reputation in tact. 

To reform the tools business and possibly cut out the income from the tools business will take way too much incentive for the top performers who can put the average foot soldier in the business.  The top performers expect to be compensated from either the product bonuses or from tool money.  I suspect many of the top US distributors that left or got kicked out last year knew the winds at Amway were changing direction and the tools system golden calf sooner or later was going to be slaughtered by Amway, due to Amway's reaction in the UK to the DTI investigation.   I think the real tools king pins like the Yager, Puryear, Miller, and the Britt are set and they have made their fortunes and careers already.  If their tools businesses were taken away now, it would not matter to them.   However, removing the tools business income now for those up-and-coming Diamonds and EDCs would have a serious impact on the future of the business.    Without the subsidy from the tools and motivation business and considering the business expenses and the time of usually two people (husband and wife) working   the business full time, you have to wonder if the gross income from Amway at the diamond level alone is confirmation enough of the "Amway dream".

It will no doubt be interesting to see what other proactive "reforms" Amway rolls out before other regulators start snooping around like they did in the UK.    

The judgement states some other interesting facts.   Amway UK had 33,000 distributors but sales of only £10 million.  Assuming $2 to £1, that implies an average sales volume of just $606/distributor. 

It was stated that 9% of the UK distributors were actively involved in retailing Amway products, accounting for 40% of sales.   60% of sales were sold to the remaining 91% of the distributors for self consumption.  Those self consuming spent about £1000 per year on products.

In paragraph 42 on page 33, the judge states that "the Secretary of State's case is that the reality of the Amway business is that the nature and rewards of becoming an IBO and participating in that business are such that only a very small number of IBOs make any significant money from their participation.  In its Points of Defense Amway does not assert that this is not so, nor does it run any positive case.  

The Secretary of State proves the case by statistical analysis.   For the period from 2001 to 2006 (a) 95% of all bonus income was earned by less than 1.5% of IBOs.    In 2005-2006 there were 39,316 IBOs who shared a bonus pot of £3,427 million.  Of this total 27,906 IBOs (71%) earned no bonus at all, and 101 IBOs (0.25%) shared £1,954 million between them.  That leaves a group of 11,309 IBOs to share a bonus pot of £1,473 million.   Within that category there was a group of 7,492 IBOs (earning the lowest 3% commission level) who between them shared £101,400.    This gave them an average annual bonus income of just over £13.50, a sum less than the annual renewal fee of £18.00.  (not including any possible retail margin) 

In 2004/5 only 75 out of 25,342 IBOs earned over £10,000 by way of bonuses.  In that year only 4,06 IBOs earned enough bonus to cover the annual renewal fee.  (excluding any possible retail margin)

It was noted that some of the oldest and highest ranking IBOs such as Trevor and Jackie Lowe, in the business since 1979 earned £141,000.  The Stranneys (joined in 1979) earned £59,142, and the Melvilles (1980) earned £32,058. 

In the period from 2000 to 2005 Chris and Sharon Farrier's bonus income ranged from £21,495 to £7,971 and average £12,850.   Over the same period the income of Dr. Anup Biswas ranged from £137 to £433 and averaged £306.   These are the people whose testimonials said respectively that they were earning "the equivalent of good executive size income", or was deriving and income that "continue[d] to climb to replace my full professional salary".

However for fairness examples of an IBO called Hardy earned £34,275 (ranking 16th overall) and had only been in the business for 6 years. 

Another was in the business for just 3 years and had bonus payments of just under £29,000.  Another with lost of direct sales earned just under £19,000 after being in two and a half years.  On called Grant earned £15,000 with very substantial direct selling.  These were two in a group of over 30,000 that joined in that period.  

In paragraph 47 it was written that "the existing IBOs effectively act as gang masters, the gang master being rewarded under a system which rewards him or her more highly for the assembly of a gang (the "downline" with the aggregation of the group volume to produce ever higher commission rates) than for the direct selling of product.

In paragraph 52 Amway UK has consistently ran losses ranging from £1,48 million to £4,31 million, and averaged a loss of £2,9 million from October 2000 to December 2005.    Amway UK is subsidized by Amway Europe which derives most of its income dividends paid from Amway Korea. 

53.  What this case has been about is the disparity between the dream that is sold to and the reality of the opportunity that is gained by an IBO:  and the key issue is whether the manner in which that comes about poses such a risk to the public that, even having regard to the private interests of the shareholders, emplyees, exisiting IBOS and customers of Amway, the company should be compulsorily wound up.