Fancy smearing mashed insect guts on your lips? If the red dye in your lipstick is ‘carmine red’ (or if you’ve kissed someone wearing it), then you probably already have. The cactus-chewing cochineal insect has been big business since the days of the Mayan and Incan empires, and with more Chinese women (and men) wearing makeup than ever before, it’s only getting bigger.
That should be good news for the direct-selling cosmetics giant Avon. But it has been struggling to get its act together in China, reporting sales down over a third on last year. The company also announced a loss of nearly $11 million (versus a profit of $22 million the year before).
Avon was one of the earliest direct-sellers to get into the China market – as far back as 1990 – but that headstart hasn’t paid dividends. Its model works by recruiting salespeople (mainly women) who sell to their friends and acquaintances. That method is cheaper than paying rent for retail stores, and has the advantage of friends making more trusted marketers than conventional advertising.
And that’s just the problem. In 1998 direct selling was banned in China. Officially authorities say the restriction was designed to prevent ‘pyramid scheme’ sales frauds. Unofficially, it’s thought the blanket ban was also motivated by government fears about the mobilisation of new mass organisations, specifically religious groups.
To stay in business, direct-sellers like Amway, Nu Skin and Avon were forced to go the traditional route – and open retail stores. Avon grew quickly nonetheless, putting together a network of roughly 6,000 franchised stores.
Eventually the government relaxed restrictions and gave Avon one of the first new direct-selling licenses in February 2006. But there was a catch: Avon was only allowed to recruit salespeople directly – and ‘team payments’ (which encouraged the sales staff to go out and recruit people for themselves) were banned.
Five years into its recruitment drive for door-to-door Chinese Avon ladies, the US firm is ditching its retail network. CEO Andrea Jung reportedly estimates it will take another year and a half to switch over completely to the preferred direct sales model, and it’s this transition that she is blaming for the company’s recent red ink.
Naturally, store owners are not happy about Avon’s strategic switch. Nor at the company’s requirement to sign up customers for Avon products as future salespeople (turkeys being forced to vote for Christmas comes to mind). “There have been new policies coming out all supporting direct sellers,” Avon storeowner Lin Yueqin told CBN Weekly, “and the company seems to be slowly killing us.”
On paper at least, that recruitment drive has been effective – as many as a million people have become agents, compared to around 200,000 for Amway). The real number may be lower as storeowners have played their own game – they get a better discount if they say an order is from a salesperson, so phoney recruits have flourished. Lin admits that, of the 300 people she’s ‘recruited’, “only 3 of them are working in any real sense.”
Avon has also struggled to control how its products are priced in China. Previously, storeowners have bulked up on Avon’s monthly special offers, and used them to pursue a discounting strategy . But the practice hits the direct sales agents particularly hard, who then can’t compete with store prices. The gradual closing down of the store sales channel should see an end to more of these pricing anomalies, at least.
One other piece of bad news from last year: Avon was forced to suspend four employees. The People’s Daily reports that the employees were alleged to have breached the US Foreign Corrupt Practices Act and were told to take a leave of absence while being investigated. The Wall Street Journal reckoned the probe related to the executives paying for foreign trips for Chinese officials.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.