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Sector Analysis: Global Market Slowing & Fragmenting Further; Ample Opportunity for Successful Concepts

Investment Summary 

 2017 direct selling statistics were recently released, showing a slowing in the growth rates of both direct sales dollars and representatives globally.  However, an already fragmented market is fragmenting further and per capita consumption trends remain low, particularly for emerging markets, providing ample opportunity for successful direct selling concepts to sustain above average growth over the long term.

Key Points:

·       2017 Global direct sales were $189.6B, up +1.6% vs 2016 in constant dollars, according to recently released data from the World Federation of Direct Selling Associations (WFDSA).  This is a slowing from the +2.1% reported last year and the 3-year Compound Annual Growth Rate (CAGR) of +3.7%.  Total representatives participating in direct selling increased +2.0% to 116.7MM, a slowing from +8.7% growth last year and the 3-year CAGR of +8.1%.

·       While there was no specific reason given for the slowing we would note the following:  A) 3 of the top 10 markets, USA, Korea & Brazil, which combined account for 33.7% of the global total, declined in 2017.  The top 10 markets in aggregate were up only +0.7% in 2017.  B) 6 of the top 10 Direct Selling companies had either flat or down sales last year, which combined we estimate account for nearly a quarter of global direct sales.  The top 10 companies in aggregate grew sales just +0.3% last year.  The big companies and the big geographies, in aggregate, are losing market share.  The top ten geographies accounted for 78.9% of global sales last year, down from 80.4% in 2014.  We estimate the top 10 companies account for about 1/3 of global sales last year, down from over 40% in 2014.

·       Not surprisingly, emerging markets are key drivers of growth.  Among the Top 10 markets, China (+7.7% 3-yr CAGR), Malaysia (+7.4%) and Taiwan (+6.2%) have grown the fastest. Using the BRIICs (Brazil, Russia, India, Indonesia & China) as a proxy for emerging markets, the 3-yr CAGR there has been +5.5%, comfortably outpacing total direct sales.  The BRIICs have gone from accounting for 26.0% of total direct sales in 2014 to 27.4% in 2017.  All 5 BRIICs are regularly called out on several of the public company reports and conference calls, with either Brazil or China already the #1 market for each of the 5 direct sellers we follow that have an overseas presence.

·       But, judging by per capita consumption trends, we believe we are still in the very early days for the emerging markets contribution to direct selling sales totals.  Direct sales per capita for the BRIICs at $14 are a little over half as much as the global total at $25 and about ¼ the $60 rate of the Top 10 markets. Even within the top 10 markets, per capital direct sales are over $100 for 6 of the markets, including over $300 in Korea. 

Douglas Lane
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