An Analysis of Approaches regarding the Regulation of Parapharmaceutical products sales through the network marketing system in Ukraine

Viкtoriia Mishchenko¹, Viktoriya Nazarkina¹, Olena Vynnyk¹, Vitaly Chernukha¹, Yuliia Kurylenko¹, Svetlana Breusova²

¹Department of Organization and Economics of Pharmacy, National University of Pharmacy, Ukraine

²Department of Commodity Science, National University of Pharmacy, Ukraine

*Corresponding Author E-mail: viktoriamischenko@ukr.net

ABSTRACT:

The aim: To analyse approaches regarding the regulation of parapharmaceuticals sales through the network marketing system. Results. The system allows any person to conduct independent commercial activities (social status, education, experience, gender and age do not matter). Network companies exist in 125 countries around the world .There are over 800 network companies working in Asia Minor .In Europe, there is more than 700, and in Russia, more than 70 of only large ones, in Ukraine there are only 50.Today in Ukraine, more than 100 companies sell their products in this way, which, along with cosmetics, offer parapharmaceuticals: Amway; Herbalife; Mary Kay; Oriflame. Today, in Ukrainian market there are more than 50 companies using the direct sales method, but most of the turnover is concentrated in the hands of organizations that are members of the Ukrainian Association of Direct Sales, the best of which are Avon Cosmetics Ukraine, Amway Ukraine, Mary Kay (Ukraine), Oriflame Cosmetics Ukraine .These companies mainly promote cosmetics, but in their assortment there are vitamins, dietary supplements (DS), including parapharmaceuticals. Their share accounts for 88% of turnover and 94% of distributors of the given branch of sales. With the above-mentioned companies, about 685,000 Ukrainian citizens cooperate. It was investigated that in order to regulate the functioning of MLM companies which deal with parapharmaceuticals, Ukraine has formed the Ukrainian Association of Direct Sales, which functions at this time. As of January 1, 2017, it only consisted of the five largest corporate members: Avon, Amway, Mary Kay, Oriflame, Faberlic, and, as of January 1, 2019, they were ten : Herbalife Ukraine (Herbalife Line No. 60), Tiens Ukraine (Samin Glucosamine Capsules No. 60), Nu Skin Enterprises ( MarineOmega No 120), Forever Living Products (Forever Lin No. 120).The share of companies such as Avon Cosmetics Ukraine, Amway Ukraine (Omega-3 and DOUBLE X ™ Complex, or Daily No. 60), Mary Kay (Ukraine) accounted for 88% of the turnover and 94% of distributors of the sales. All of them offer together with cosmetics parapharmaceuticals- DS for the prevention of diseases. In Kharkov today, there is also firm Dr.Nona International .In the structure of its distributors, the following social groups predominate (73%): 33% are occupied by entrepreneurs (mostly cosmetologists), 30% are civil servants (economists, medical workers), 20% are housewives, and the rest of social groups accounts for 27%.Distributors-cosmetologists, recommend to use parapharmaceuticals at home skin care: Mud face mask 75 ml. Dr. Nona, Salt for bath of patchouli, ylang-ylang and anise 300 ml, Dr. Nona and others Today, the company has 162 names of goods, which are divided into 7 groups, with parapharmaceuticals being 42 units, (26% of the total ).The pronounced therapeutic and prophylactic effect of parapharmaceuticals is due to the presence in the composition of the bioorganomineral complex (Halo Complex ™ formula - includes derivatives of archebacteria), which consists in the fact that all components enhance the actions of each other. Responsibility for the quality of the products provided, the conditions of storage, transportation and information about its proper use lies with the network company. The imperfection of the normative legal base of domestic legislation, as for the issue of regulating the sales of parapharmaceuticals through the system of multilevel marketing, which needs further elaboration, has been established.

KEYWORDS: Network Marketing, Distributor, parapharmaceuticals, parapharmaceutical products, use only for the prevention of disease.

In the course of research various common (system analysis, content analysis, comparative methods, analytical, descriptive) and special historical methods (problem-chronological, retrospective, source-analysis etc.) were used.

RESULTS AND DISCUSSION:

In Ukraine, a lot of attention is paid to pharmaceutical aid to the population, which is carried out through branched pharmacy networks¹. Currently, in pharmacies, along with medicines, dietary supplements (parapharmaceuticals) are sold, which are used only for the purpose of prevention. However, in the country, as well as in other countries of the world, there is a different channel for the distribution of parapharmaceuticals - through network marketing. Network Marketing (NM) or multilevel marketing (MLM) - is a type of marketing that provides trade through multilevel network of agents (distributors) of manufacturer. Each agent establishes contacts with potential buyers and earns money from the direct sale of goods. The distributor receives profit in the form of additional payments from the sale of products by all or a part of his subordinate and self-generated network of sales agents that stimulates individual entrepreneurship. The system allows any person to conduct independent commercial activities (social status, education, experience, gender and age do not matter. NM is a marketing method that allows one independent commercial representative to recruit other commercial agents and receive commissions from deals of the involved commercial agents².

In the 70 years of the last century, MLM began to be called a special system of distribution of goods and services associated with a special system of remuneration for this work. In the 80's the system received the modern name - Network Marketing, but its essence has not changed. The system has, until this time, gained a solid place in the global economy, with an annual turnover of several tens of billions of dollars and many millions of people involved in this business. In the late 80's MLM had also come to Ukraine³.

In the world, there are more than 700 companies operating in the NM on a direct sale basis, with the direct sale of the widest range of consumer goods offered, among which a significant place occupy parapharmaceuticals. Sales volumes of all goods amount to more than 88 billion US dollars. There are 49 million people working in the NM. The largest markets of direct sales in the world are the United States, Europe and Japan⁴.

In Japan, more than 2 million distributors sell products for $ 30 billion a year. In Taiwan, every twelfth resident of the country is a network marketing specialist. Sales in Taiwan and Korea are approaching $ 2 billion a year .In Malaysia, more than 1 million MLM professionals have brought sales up to $ 1 billion in 1998.In Australia, the volume of sales through network marketing has exceeded $ 1.5 billion per year⁵. In EU countries (Germany, Italy and France) sales have exceeded $2 billion per year, and in the UK the volume is much less - $1 billion⁵. Currently, network marketing is expanding rapidly in Eastern European countries, but significantly slower than in the European Union. Only one year after the American company AMWAY has entered the Romanian market, more than 1% of the country's population joined it⁶. Rapid growth has been detected in Slovenia, Poland, and the Czech Republic. In Spain, networkers sell products worth more than $ 700 million a year, sales in Austria are much smaller, reaching only $ 300 million, in Switzerland - $ 200 million, hundreds of millions of dollars are estimated the network sales in Sweden, Norway and Finland. In Brazil there is almost 1 million distributors, which sell products worth more than $ 3 billion a year. In Argentina, the annual sales volume is approaching $ 1 billion. Sales in South Korea reach 400 million $ 7.

Approximately 500,000 people in the world have become millionaires, working with the MLM system. In Japan, the volume of sales of goods through MLM reaches 90%, which is what Japan is obliged to its rapid economic growth⁸.

Network companies exist in 125 countries around the world. There are over 800 network companies in Asia Minor. In Europe, there are more than 700, and in Russia, more than 70 of only large, in Ukraine there are only 50 (Fig.1).

Fig. 1. Analysis by countries for the number of network companies

Today, many different companies are interested in MLM structures to be engaged in the sales and promotion of their products, as the trade turnover is increasing. Vitamins, DS, parapharmaceuticals, cosmetics and detergents are the most popular lines of MLM. Every day in the world more than 100 thousand people become independent distributors of companies. As predicted by economists-analysts, in the XXI century, about 70% of goods in the world will be sold through MLM⁹.

Today, more than 50 companies using the direct sales method operate on the Ukrainian market, but most of the turnover is concentrated in the hands of organizations - members of the Ukrainian Direct Sales Association (UDSA). The Ukrainian Direct Sales Association came into being in Ukraine in 2001. According to UDSA reports, members of the Association may be legal entities that use the method of direct sale of goods or services in their activities in Ukraine, share the principles and purposes of the Association, and recognize and adhere to the Code of Professional Ethics of the UDSA¹⁰. Today, UDSA members are the following companies: Amway Ukraine LLC, Avon Cosmetics Ukraine, Faberlic-Ukraine, Forever Living Products Ukraine LLC, Herbalife Ukraine LLC, and LR Health & Beauty systems Ltd.", LLC "Mary Kay (Ukraine) Limited", "Nu Skin Enterprises Ukraine" LLC, "Oriflame Ukraine" LLC, "Tiens Ukraine" Ltd. With the above-mentioned companies, about 685,000 Ukrainian citizens cooperate. As of January 1, 2018, the UDSA has five largest corporate members: Avon, Amway, Mary Kay, Oriflame and Faberlic. These companies mainly promote cosmetics, but in their assortment, there are vitamins, DS, including parapharmaceuticals. Their share accounts for 88% of turnover and 94% of distributors of the given branch of sales.

Benefits of UDSA membership:

• consolidation of efforts to defend the interests of the direct sales industry in relations with state authorities, mass media and public associations;

• access to information on the best world and domestic practices in the industry;

• establishing interactions with other direct sales companies;

• direct participation in the activities of the Association;

• Participation in the development of self-regulatory mechanisms for the development of the industry and fight against "pyramids";

• confirming the company's positive reputation, its high standards of doing business and customer service

We have analysed and found that for today in Ukraine there are only 10 branded MLM-companies that promote on the domestic market health-improving products and products, which are designed to solve health problems - vitamins, DS and parapharmaceuticals (Table.1).

For all companies, the characteristic features of direct sales are direct contact with the consumer in a convenient place, product demonstration, comprehensive salesman counselling for it and direct sales business opportunities. The main role in the mediation between the manufacturer and the end-user is performed by independent sellers or distributors, consultants, representatives, etc. Direct sales can be done by an independent seller one by one or by organizing a group presentation. Any product or service can be sold by direct sale. The largest share have cosmetics and products for personal care, household and health goods (unfortunately, quite often distributors do not have a medical or pharmaceutical education and attribute the medicinal effect to the advertised product, which should be used only prophylactically, what is misleading the end user and negatively affects the advertised product). A slightly smaller segment is occupied by food and beverages, jubilee products, clothes, books, toys, durable goods and much more. Most direct sales companies sell their own products.

Table 1 Brand MLM companies that promote healthcare products, DS and parapharmaceuticals in the Ukrainian market and are part of the Ukrainian Direct Sales Association

The company name	Founding country	Quantity the company in countries of the world	Achievements and rewards of the company
Nature's Sunshine Products, Inc. (NSP)	founded in 1972 in the USA	50	- the best according to independent expert "Nutritional Outlook" 2002 manufacturer in the USA; - the author of high internal quality standards of products, which are ahead of the world practice, according to some parameters for 5-10 years; - The package of internal standards of quality of 1993 became the basis for ISO 9000/2000 in 2001.; - Every year, the company spends more than $ 2 million on improving laboratories that carry out a closed cycle of quality control from raw material production to final products; - Produces products that meet all existing standards of Food and Drug Administration (FDA), Australian Drug Administration (TGA)
Herbalife International of America, Inc. \| \| Herbalife Ukraine Ltd	founded by Mark Hughes in 1980 in the United States	95	- the products are certified and approved by the Ministry of Health of Ukraine and the Institute of ecohygiene and toxicology of L. I. Medvedev - meets the requirements of the food safety management system "Hazard Analysis and Critical Control Point"(HACCP), - production conforms to the requirements of International Manufacturing Practices, including GMP, - Clinical trials are carried out in accordance with the ethical principles of the Helsinki Declaration, the Good Clinical Practice (GCP) Rules and the current regulatory requirements - founder of the International Alliance of Diet / Food Producers Associations (IADSA), a member of the World Association of Direct Sales, the Ukrainian Direct Sales Association, the Association of EBA (European Business Association) and AmCham (American Chamber of Commerce in Ukraine) - in 2012, the company becomes a partner of the National Association of Nutritionists
Amway Ukraine Ltd.	founded in 1959 by Rich DeVos and Jay Van Andel in the United States	50	has all relevant certificates and Declaration of Conformity issued by the State Enterprise "All-Ukrainian State Scientific and Production Centre for Standardization, Metrology, Certification and Consumer Protection" (SE "Ukrmetrteststandard")
Tiens Ukraine LLC	founded in 1995 in the city of Tianjin, China, by Mr. Li Jinhuan	190	International ISO 9000-9002 Quality Certificate, Most of the products are certified by the US FDA system. Production is supported by the Government of China, the Academy of Sciences, the Ministry of Health and the Institute of Food Technology of China
Coral World Ltd.	founded by L. Lapp in 1998 in the Russian Federation	60 cities in the CIS countries, and since 2005 it has been operating in the EU countries	International certificates: EU Organic Bio Certificate, QAI (Quality Assurance International) Certificate NSF Certificate (American National Institute of Standards) Certificate of Ecocert Organization and ECOLABEL (certification of cosmetic products), GMP Certificate (standard that includes the standards and requirements needed to ensure the proper manufacturing practices of pharmaceutical companies)
LLC "LR Health & Beauty Systems"	founded in 1985 in the city of Alain (Germany)	28	The company is certified by the Technical Control Association (TUV) in accordance with the standard ISO 9001-2008 (international quality management standard) The quality mark issued by the Fresenius Institute is of particular respect due to its impeccable reputation, both nationally and internationally.

Currently, in Ukraine there is a firm Dr. Nona, which distributes DS and parapharmaceuticals via MLM (unfortunately, it is not a member of UDSA). The firm dates back to August 1994 in Israel (25 years on the market).As of 2015, Doctor Nona's offices were organized and operated in more than 40 corners of the planet. Dr. Nona has already secured the deserved status of a successful international brand in more than 40 countries of the world. Currently, about 300,000 distributors represent Dr. Nona International. The range of products, which includes the Dead Sea salt, today has more than 162 names (among them, parapharmaceuticals are 42 units, (26% of the total))¹¹. It should be noted that currently Dr Nona's manufacture, including the production of parapharmaceuticals, is carried out in accordance with the requirements of GMP and ISO 9001 standards. GMP Standard (Good Manufacturing Practice) is a system of norms, rules and guidelines for the production of drugs, medical devices, diagnostic products, food, dietary supplements, and active ingredients. The ISO 9000 certificate is required for consistency and objectivity in the performance of the supplier's quality control system¹¹.

In the course of our research, we have analysed the work of parapharmaceuticals distributor on the example of the network firm Dr. Nona in city of Kharkiv by means of questionnaires (180 questionnaires were received in the sample). The head office of the company is located at the legal address on the street. Sumska, 39, office 160, Kharkiv, Kharkiv region, 61000. Currently with Dr. Nona International work more than 250 distributors in the city, accounting for 0.083% of the total number of distributors in the world.

The products of the network company "Doctor Nona" are developed according to the exclusive advanced formulas of Halo Complex ™ - the unique properties of archebacteria living in the Dead Sea. The unique structure of archebacteria has an extraordinary vitality and is a powerful inexhaustible source of proteins, amino acids and antioxidants. All these derivatives are present in the prophylactic and recreational products of the network firm¹¹. The main components of the parapharmaceuticals are quarts of the Dead Sea (salt). Disease in which the company's parapharmaceuticals are used: encephalopathy, to improve blood circulation, increase the body's tone, emotional background, working ability, in colds, food poisoning; surgery - at fractures, wounds, injuries;

proctology - at hemorrhoids; at acne rashes; dentistry - in stomatitis, parodontosis, toothache, and others¹¹. The company has 162 names, which are divided into 7 product groups (cosmetics and perfumes, DS etc.).

When questioning the company's distributors, we have found that the main age of the firm's distributors is - 36-45 years - 54% (46 to 60 years - 25%, 21 to 25 years - 10%, over 60 years - 10 %, under 20 years are only 2%).

It was investigated that at present one of the main channels of parapharmaceuticals distribution in Dr. Nona International are social networks (dominate with 62%) - VKontakte - 22%, Facebook and YouTube by 20 %% respectively. The social network "Classmates" and medical staff occupy the lowest rates of 6 %% respectively (Fig. 2).

Fig. 2. Ranking of the main channels of parapharmaceuticals promotion in the network company Dr.Nona International , Kharkiv

Of distributors working with the network firm Dr.Nona International in Kharkiv, 78% are women. Also, the vast majority live in Kharkiv - 74% of them all have higher education. In the structure of distributors, the following social groups predominate (73%): 33% are occupied by entrepreneurs (mainly cosmetologists), 30% are civil servants (economists, medical workers), 20% are housewives, and the other social groups account for 27%. Pensioners occupy 13%, and workers and students make up only 2% respectively. Cosmetologists who work with Dead Sea Natural Salts recommend using them at home skin care. The line is represented by salts for complete home spa treatments. (Mud mask of beauty 75ml. Dr. Nona, Salt for bath of patchouli, ylang-ylang and anise 300 ml, Dr. Nona, etc.).

When analysing parapharmaceuticals of firm Dr. Nona for dosage forms it has been found that prevailing - 75% are capsules, drinking gels make up 20%, and teas only 5%.

The analysis has revealed that on some sites where cosmetics of the company "Doctor Nona" are sold, it belongs to the range of cosmeceuticals. It must be admitted that in Ukraine at this time, the term "cosmetics" is not legally available. All biologically active products and parapharmaceuticals for internal use are referred to as DS.

It should be noted that in Ukraine activity through a network of distributors, has no legal grounds, which calls into question the legality of the activities of the relevant economic entities and creates opportunities for various types of abuse and the creation of structures such as financial pyramids¹². In Ukraine, a statutory ban on financial pyramids has been established¹³.

For the first time the question of settling this concept was reviewed in 2001. The Verkhovna Rada was introduced a draft law of Ukraine dated 04.07.2001 "On trading activity through multi-level network marketing and distribution activities", but to this day it remains unadopted¹⁴. The bill for the first time provided the concept of multi-level NM, defined as "the activity of a legal entity or individual, consisting in the creation of multi-level networks of distributors on the basis of civil law agreements for the purpose of selling goods or services, distributing rewards for the sale of such goods and services to the end user or the provision of incentives (discounts, promotions) for personal consumption and/or for the construction of multilevel distribution networks, as well as activities for attracting potential distributors to a multi-level network of goods or services distribution that is carried out in accordance with the marketing plan of such persons"¹⁵. Also, in the above-mentioned draft Law the interpretation of other necessary terms was given, such as: "multilevel networks" (MLN), "MLM distributor", "MLM company", "marketing plan", "distributor contract", etc. The approach to the registration and taxation of distributors was declared¹⁵.

We support the opinion of many Ukrainian scholars that for the effective implementation of the MLM system in Ukraine, the legislature has to adopt a special law "On trading activities through multilevel network marketing and distribution activities" that actually legalizes this system of distribution of goods and services and a law that will strengthen the role of the above-mentioned law. However, the adoption of this Law in the proposed wording will not solve the existing tasks, because the project has a number of shortcomings - there are no rules that directly stipulate and specifically regulate the obligatory reverse purchase of products by the company from the distributor in case of its improper quality or termination of distributorship ¹⁶ .

Fig. 3. The legislative approaches that need to be put in place to effectively implement the MLM system in Ukraine

In the NM scheme, the distributor in Ukraine does not pay any sales taxes, since the VAT has already been paid by the registered company itself. Consumers are "recruited" distributors, the goods are sold directly to them and the tax on this sale is paid. Some distributors, who regard NM activities as the main source of their income, do not have any social guarantees¹⁷. The relationship between the company and the distributor does not provide for participation of the latter in the system of compulsory state pension insurance, social insurance against unemployment, from work accident and temporary disability. Also, the issue of protecting consumer rights - the "end" buyers of products - has not yet been resolved, because, as a rule, no receipt or other document certifying the fact of purchase is not given to them. Sales are "hands-on" and are based on trust¹⁸.

CONCLUSIONS:

Multilevel marketing provides the circulation of any goods (including parapharmaceuticals) through a multi-level network of company's distributors. At present, the number of company distributors in the country is approximately 72,000 (the total number of independent entrepreneurs in the world - more than 10 million people in 168 countries). Currently, there are 10 branded MLM companies operating in Ukraine that promote health-improving products and products, aimed at solving health problems - parapharmaceuticals at the domestic market. Responsibility for the conditions of storage, transportation, information about the correct use of the advertised product is the network company. The share of these companies accounts for 88% of turnover and 94% of distributors of this branch of sales. Today in Ukraine, more than 100 companies sell their products in this way, which, along with cosmetics, offer parapharmaceuticals: Amway, Herbalife, "Dr.Nona International , founded in 1994 in Israel. The company is present in 40 countries of the world. In Ukraine, it was registered at the end of the twentieth century, in the city of Kharkov. The first office was founded in 2000. At present, approximately 300,000 distributors in the world represent the company. In the city of Kharkiv there are more than 250 distributors (0,0 83% of the total number of distributors of the company in the world).The product range, which includes the Dead Sea salt, today has more than 162 names, which are divided into 7 groups (cosmetics and perfumes, DS, parapharmaceuticals), of which parapharmaceuticals make up 42 names (26% of the total). The survey has found that 78% of the distributors of the company "Dr. Nona International" in Kharkiv are women, the vast majority live in Kharkiv - 74%, and 26% live in suburbs. The structure of distributors is as follows: 33% entrepreneurs (mostly cosmetologists), 30% - civil servants (economists, medical workers), 20% - housewives, and the other social groups account for 27%. Distributors, cosmetologists, offer to apply parapharmaceuticals for home skin care: Mud mask of beauty 75 ml. Dr. Nona, Salt for bath of patchouli, ylang-ylang and anise 300 ml, Dr. Nona and others. Currently, one of the main channels for distributing information about parapharmaceuticals is social networking (62%) - VKontakte - 22%, Facebook and YouTube - by 20 %% respectively. The social network "Classmates" and medical staff occupy the lowest rates of 6 %%, respectively. The main age of the company's distributors is - 36-45 years - 54%. It was observed that in order to effectively implement the MLM system in Ukraine, it is necessary to adopt special laws "On trading activities through multi-level network marketing and distribution activities" and "On the prohibition of financial pyramids in Ukraine" that actually legalize the system of distribution of goods and services.

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Received on 21.07.2019 Modified on 25.08.2019

Research J. Pharm. and Tech 2020; 13(3): 1204-1210.

DOI: 10.5958/0974-360X.2020.00222.X