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Is Not For Resale a viable international strategy today?

First of all, what does Not For Resale (NFR) mean and where did this concept originate from?

Originally, NFR programs or allowance of such activity existed in most countries of the world, in part, to provide access for domestic residents to foreign-made, pharmaceutical drugs that might be vital to health, but had not yet received local Health Ministry approval in the home country. Today of course, NFR spans the full spectrum of product border clearance, on a limited basis. In most countries NFR also means that only limited quantities (usually 60-90 days for one person) can be shipped in and can never be resold.

In the MLM industry, to the best of our public knowledge, this little unknown fact of 'not for resale' was uncovered and exploited around 1995. The frustration and cost associated with product registration in most countries of the world, particularly in Japan, led certain individuals and companies to find a way to get around 'the system'.i.e. NFR. Japan had and still has in many ways, very bureaucratic regulations for nutrition and personal care items registration. I t still can take thousands of dollars per product and months and months of time to get the simplest product approved for sale. These bureaucratic regulations could be argued to be nothing less than non-tariff barriers to entry.

So, rather than having to go through that process, U.S. based MLM companies discovered they could go around the system and still get their products to the consumers. By shipping directly from the United States to the distributors/representatives who have signed up with the parent company, business was able to transact. However, this exploitation quickly led to abuse, and many countries (customs and tax agencies) around the world started to take note, and began to add additional regulations. The abuse by U.S. companies were in activities such as disregarding limiting quantities to 30, 60, or 90 day allotments (which is the typical regulation) or by not policing the resale of the product within the country, etc. This government enforcement can came in many forms: 1) seizure of product shipments 2) adjustments of country regulations 3) other government agency involvement to 'red flag' the U.S. company for taxes or stopping altogether that company from ever coming to the country and obtaining product approvals.

In the mid to late 90s many companies tried this method of entry and enjoyed some measure of success...limited but nonetheless some short-term success. It was, and rightfully so, used as an entry strategy, in which shortly thereafter the good companies would take a local presence and begin operating with full services. However, many companies did not make the transition, which caused irreparable damage to themselves and to the industry. The success was short lived and today the strategy of NFR carries a very negative connotation in many countries of the world.

The distribution of goods (NFR) is only one aspect of successful International Direct Sales and those companies who can only see this aspect will soon find, they have been sucked in by the LURE of quick entry, fast growth/profits, but have fallen into a TRAP requiring significant efforts of costly correction. In some cases the damage to the market may be significant enough, or the cost of clean-up so great, that the market opportunity in that particular country is permanently lost.

One of the gravest mistakes made by MLM companies using NFR as an entry model is to not request, obtain and file the correct taxation information on these consumers for purposes of them receiving commissions. Additionally, many do not adjust their legal documents correctly to allow such business activities across international borders. The inability to legally control the resale of products is a serious threat, and not being able to track and remit monies internationally could violate many U.S. laws for which there are extremely stiff penalties.

There are innumerable examples of U.S. based MLM companies that have made serious market presence mistakes using NFR, and have caused significant embarrassment and damage to themselves. Even if the MLM company is lucky enough to survive the risk, the complications within the internal structure of the home office can be devastating and risk the domestic business base as well.

Bottom line is that Not For Resale programs have a number of HIDDEN TRAPS that are rarely discussed or realized when starting such a program. These traps must be understood.

With NFR programs, the following issues/problems exist (partial list only):

Proper product registration and labeling. Without this, products cannot be resold for a retail profit, which in most countries is not only a vital business activity to the network marketing process, but also considered a legal aspect. Additionally, sharing product with others violates consumer protection laws.
Control of distributor importation and customs value declarations. If the company can send in product -- so can the individual distributor after purchasing in the U.S. This so-called gray marketing is guaranteed to occur, and puts custom officials wondering what is happening when product value swings from a few dollars to several hundreds.
Individual payment of import duties and taxes. This is a very bothersome and uncertain activity to the consumer. Sometimes taxes and duties are charged, other times they are not, and still other times the amounts vary from the prior occurrence. This leads to a variety of distributor declarations with no consistency, which leads to pricing variations on the street.
Distributors Interference. Distributors will register the product whether allowed or not. Such activities occur as individuals seek to gain an advantage over others. Individuals will attempt to legalize sales in their own countries which leads to unsubstantiated claims or making statements contrary to the company’s position.
Advertising and Promotion. There can be no advertising of promotion of products that are not registered, nor can there be any public promotion for recruitment. In almost all countries this can and will cause government regulators to shut down the company and individual distributors will be fined, even jailed.
MLM regulatory compliance for cooling off periods/notification requirements. Most MLM companies are clueless as to the existence of such laws and how they differ from one country to the next.
Payment of commissions. Paying these foreign representatives becomes a challenging task. Most companies just send over U.S. bank drawn, dollar-denominated checks, which are costly to cash and difficult to clear. This is particularly hazardous if the company has failed to collect correct documentation which exposes them to the new Federal Patriot Act.
Product Liability or Recalls. What actions can or should be taken if heaven forbid there is a product liability issue or a need to recall the product.
Parent company reputation. Quite often before the Home Office has a chance to correct the problems and open an office, the publicity of certain problems circulated by maverick distributors, is devastating and can completely shut down the market opportunity. Overnight some countries have gone from sales of millions per month to a few thousand when such problems are unresolved quickly. MLM company owners must always remember that the distributor can change companies quickly and easily, but they generally only have one chance per market. There is generally no ability to re-enter a market once it is fouled up.

For these reasons stated above, plus many additional distributor management issues not discussed, NFR today is viewed with a very skeptical eye by most professional business builder distributors. Business builders are looking for companies that are willing to commit to their country, not just take advantage of short-term opportunities. The marketplace offers a variety of choices today vs. even just five years ago, and the wise distributor looks for the solid company that is willing to do more than NFR.

In today’s modern MLM world, NFR still has some isolated utility, but it is definitely not a long-term solution. In case you were wondering, there are much better ways to enter international markets today, while meeting all requirements and providing a structure to support rapid expansion. R&R International Consulting assists MLM companies in doing so. For further information, please contact us at rwade@infowest.com.

R&R International Consulting is a division of EDGE Consulting Inc.