Amway a Ponzi scheme? ’Buyer beware’ won’t do

News: Recently, the Enforcement Directorate (ED) froze assets of Amway India worth ₹758 crore. The federal agency issued a statement, alleging that the company was perpetrating a “scam” by running a pyramid “fraud” in the guise of direct-selling MLM network.

The new members, it said, are not buying the products to use those, but to become rich by becoming members as showcased by the upline members.

In December 2021, the Central govt had banned direct-selling companies from promoting pyramid and money-circulation schemes as it notified new rules for the direct-selling industry.

How Amway’s scheme was similar to a Ponzi-scheme for direct sellers in India?

In a Ponzi investment scam, money from new ‘investors’ is not put to productive ends, but used instead to pay higher-ups large and loud ‘returns’ as the pyramid’s base expands with gullible incomers.

Amway’s new joinees had to put in some money for a bagful of stock items (for on-sale or self-use), while they were advised to go sign up others on the logic that enrolling more and more recruits they would also get a share of sales.

Amidst all this, the fate of the new recruits down the order was left unclear, as the market for Amway’s stuff got saturated.

Eventually, many sellers left using up more volumes at home than they could sell.

By its pyramid design, upper layers were to earn more than the bulk of its agents. To the extent this inequity caught most of its direct sellers unaware, the company can be accused of misleading people if not a financial scam.

Do such schemes actually give profit to its direct sellers?

At least one study of such schemes has shown that only 1% of the sales force can expect to profit.

By ED numbers, its local unit made a profit of ₹27,562 crore over a span of 2002-03 to 2021-22 and paid all its distributors about 27.5% of that as their cut.

– If it’s a “ ₹2,000 crore business” (as its chief said late last year) with over half a million sellers just within the country to share an annual ₹550 crore or so, most awaiting payback lower down the order would’ve likely got less than ₹1,000 per month.

Even if this raw deal had their legal consent, the gap between Amway’s claims and their real prospects ought to have forced an ethical rethink at the very least.

Source: This post is based on the article “Amway a Ponzi scheme? ’Buyer beware’ won’t do” published in the Livemint on 25th Apr 22.