More turn to direct selling for income

By DAVID TAN
davidtan@thestar.com.my

Association sees 5% growth in collective revenue

GEORGE TOWN: Direct Selling Association of Malaysia expects its collective revenue to exceed RM3.6bil this year, representing an increase of about 5% from a year ago. Its president Paul Yee told StarBiz that the association was aiming for a single-digit growth as the country's gross domestic product (GDP) was projected to expand by 5.5% this year compared with 7.2% in 2010.

Yee said that last year, collective revenue stood at RM3.48bil, which surpassed the association's target of RM3.1bil. “We were able to surpass the target because there were more direct sellers making direct selling their main source of income rather than just doing it on part-time basis. “This shift in mindset has encouraged more people to join the industry. Exclusive and quality products offered by our members as well as aggressive marketing and sales programmes also contributed to the rise in revenue,” he said.

Zhulian staff working at a costume jewellery production line at the company’s factory in Penang

On whether the association is able to generate RM8bil revenue by 2015 as targeted by the Government, Yee said it was on course to achieve the target. 

“Dietary and herbal supplements are the biggest contributors to the sales of our members. “These products made up 36% of 2010 turnover, followed by cosmetics at 19% and home appliances 17%,” Yee said. Currently, there are about 4.25 million direct sellers in the country compared with four million in 2009.

“This year, it should remain at around 4.25 million, as the number has stabilised. “In fact, the number of direct sellers in Malaysia hovered around the 4 million-mark for the past few years and only in 2009/2010 that it rose to 4.25 million,” he said.

Yee said the association was targeting four new member companies by the end of 2011 and this would increase the membership to 60 from 56 presently. “The recent DSAM Convention 2011 with the theme Direct Selling Beyond Malaysia', which provided an insight for direct-selling companies to venture beyond the Malaysian market, was very well attended.

“This indicates that there are many direct-selling companies ready to expand abroad,” he said.

Meanwhile, Zhulian Corp Bhd managing director Teoh Meng Keat said the company was now doing a feasibility study to establish distribution networks and warehouses in new markets such as Laos, Vietnam and the Philippines.  Some 50% of the company's revenue is generated from overseas.

“For our first quarter ended Feb 28, 2011, we registered a flat growth over the corresponding period in 2010. We will increase selling prices to offset the impact of a stronger ringgit to protect our margins. “We expect to register single-digit growth in sales for the financial year 2011,” Teoh said.

He said Zhulian would launch three types of health supplements in the second quarter for overseas and domestic markets. He said the central region of Malaysia still generated the bulk of the company's sales, followed by the north and south. “Our warehouses in Kuching and Kota Kinabalu are also contributing to the growth,” he added.

Franchising a less risky deal

PUTIK LADA
By DAMIAN YEO SHEN LI

There is a very fine line between licensing and franchising, and even slightly more control over the way the business is run can make the difference.

I HAVE always been fascinated and impressed with the power of branding and in particular the dynamism and vitality of franchising. When one talks about franchising, marks like McDonald’s, Old Town come to mind. It is, however, not known to most people that these marks which are seen everywhere may not be as a result of franchising.

It is also possible to have such marks through the good old licensing system: licensor grants licensee the right to use its mark; licensee sets up shop under such mark, which also typically comes with a concept designed by the licensor Although franchising and licensing sound similar, there are actually differences between the two systems.

For a start, franchising is regulated in Malaysia, and one would have to be registered (be it the franchisor or franchisee; except that there are more regulations with regard to the franchisor). The history of franchising goes back to the mid-19th Century when Isaac Singer made improvements to an existing model of a sewing machine and wanted to increase the distribution of his sewing machines.

His effort was among the first franchising efforts in the United States. Thereafter, many other franchises were developed such as John S. Pemberton’s Coca Cola, Roy Allen and Frank Wright’s A & W Root Beer Restaurant Chain and Ray Kroch’s McDonalds.

The primary difference between a licence and franchise situation is the amount of control that the franchisor or licensor exercises over its franchisees and licensees, respectively. Pro-franchisors have always argued that a franchisee is much like the purchaser of a security. This is so as the franchisor usually sets out all in relation to the business and the franchisee usually only has to do all that is stated in the franchise agreement and operation manual, and it will be profitable.

It is in this regard that franchising be registered, and under the law there must be disclosure of risk to the potential franchisee. A licensor does not tell the licensee how to accomplish his goal of making profits. The licensee is an independent contractor who can do anything he wants, i.e. run his licensed business in the manner, time and equipment of his choosing to make profit. As such, the profit onus is on the licensee and not the licensor.

It should be noted that the line here is very fine – if there is even slightly more control over the way the business is run, a licensee/licensor may slip into the franchising area, and in this relation there would then be the possibility that franchising laws have not been complied with. Another difference between a franchisee and a licensee is that franchisees can expect to have a much closer relationship with their parent company than their licensee counterparts.

As franchisees are the public face of the franchisor company, franchisors usually provide a certain level of training and support to franchisees and their employees.

Franchisees can also expect a certain amount of territorial exclusivity as well as control over the products and services they offer.

Whereas in most cases of licensor/licensee, the licensee does not retain rights to use the company’s trademark; instead, the licensee is expected to establish its own identity in the marketplace.

Also, licensees usually do not receive exclusive territorial rights. This means that the licensing company is free to sell similar licenses and products to other people in the same geographical area.

On the upside, licensing businesses are often less expensive than franchising ones in both upfront investment and ongoing fees.

Once the licensee launches the operation, the relationship with the licensing company is frequently limited to purchasing products, whereas franchisees are usually expected to pay royalties – franchising fees. It may help to know that our authorities have set aside RM300mil to develop the franchise industry. Just last week at the opening of Franchise International Malaysia 2009, the Domestic Trade, Cooperatives and Consumer Minister remarked that Perbadanan Nasional Bhd (PNS) aimed to produce 50 franchisors and 1,000 franchisees by the end of the year.

So far, the authorities, through PNS and other franchise agencies, have supported 18 franchisors and more than 380 local franchisees in Malaysia.The minister acknowledged that the amount set aside to develop the franchise industry had not been fully utilised as there was a lack of knowledge and awareness among the entrepreneurs in the country, and in this relation, he highlighted that it would work on dissemination of information on the industry.

For those thinking of becoming a business owner, there is all that challenge of new roles and responsibilities in the change from employee to owner. In addition to issues such as managing employees, maintaining records, new business owners are faced with the hardest challenge – that of having to market their product/services.

There is always the possibility that if it is not done well, and if the product/service is not welcomed by the public and there goes one’s life savings.

As for franchising, although it costs more, the concept and the business techniques are ready. Owing to the franchising laws in Malaysia, as there must be disclosure made by the franchisor, the risk for the new business owner is somewhat calculated. The writer is a young lawyer. Putik Lada, or pepper buds in Malay, captures the spirit and intention of this column – a platform for young lawyers to articulate their views and aspirations about the law, justice and a civil society. For more information about the young lawyers, visit www.malaysianbar.org.my/nylc.