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1705
On 9 April 2005, seven ycars alter the ban was enforced, Avon Products Inc. ("Avon"), the
global leader of dtrect sales in cosreetie products, becarne thc first to win an approval from
the Ministry of Commerce for its direct sales operations in China. The approval was granted
in order tu test the most suitable direct-selling model for the Chinese market.' The test bogan
in three provinces = Beijin,g, Tiaajin and Guangdong and would undoubtedly be an
excelle-nt opportunity for Avon ta expand its business in China. Over the pass few <leudes,
rol only liad the demand for cosmetic products surged in China but the Chinese markct han
also bccome the ]argest driver of Avon's growth in Asia. However, hidden in thiS tare
oPPortunity for Avon was a serious business dilernma. How should it allocate its sales
resaurces arnong its multiple distribution channcls?
The concept of clirect sciling was not new to China as it was prevalen:: during the early 19905.
However, in 199S, fearing socia! Invest and instability duo t reporta of rioting that had been
triegered by the collapse of pyramid sehemes, thc Chinese government ordered a ban on alt
dtrect-setring schemes, This was a buge blow to Avon's operations in China and it was Torced
to find an alternative business mode]. Likc other direct sales cornpanies, Avon encountered
sorne diffienitues when it first switched ta retad sales by serting up cuunters at departmenr
storw and opening its own boutiques. 1-lawever, its business thrived and by 2005 the comparty
was already operating about 6.300 beauty boutiques and more than 1.004 depa.rtment stores.2
Despite thriving sales, the company Paced a dilemme_ On hand, the tradicional direct sales
model had worked well for the cornpany for a long time and in almost all the ocher markets in
the world, hui on the other, the new retail sales model had proved tu be successful in China.
Avon had in decide which inodel to facas on for ¡Le Chinese market, The issue was further
complicated by factors such as e growtng demand and intense cumpenrion in the Chinese
cosrnetics tnarket.
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07131ge Fuiuna zif Avon C:rsina: Direct Salas, Retad Soles or
Globalisat1on
In its early stages, Avon had a limited global presence, eatending mainly to Latin America,
the UK and Mexico. The appointment of James Prestan as CEO in 1998 rnarked a new
chapter in the company's history. Prestan saw the future of Avon lay in glohalisation and
reiterated that Avon would be the company that best understood women worldwide and
satisfied their needs for self fuifillrnent through its products and services (see Erhibit 21. In
arder to bctter control its global operations, Avon appointed a manager to cech country in
which it had a presence,. Each country manager would have to mett certain performance
targcts and was granted considerable authority in making decisions, The cornpany's trama of
sales representatives were managed by salaried sales managers, who were norrnally local
residents, 13y 2004, Avon's sales operations covered sixty countries or territories aeress four
geographic regions — North America, Latin America, Europe and Asia Pacific,
Direct Sales
The deor-to-door marketing or direct-scIling modcl was deeply ingrained in Avon's corporatc
cultura and Avon was an early charter member of the National Association of Agency
Companies, now called the Direct Se tling Association—a trade association devoted to hclping
direct-sales companies. In fact, so important was rhis modcl to /vic -Connell that he would
rejcct al! inquiries from drugstores and other retailers hoping ta set] his products while
encouraging thern to buy products for themselves lar ()trent their customers ta Avon's sales
representa.tives.
Severa] sales offices were established across the narion to recruit and train sales agents who
would be compensated mainly through their own sales of Avon's products, with occasional
reward programmes for new sales agents they recruited_ Howevcr, unless you could be
prometed te management levet, opportunity for further develoemenr was scarce_ Albee,
Avon's first sales representativa, had formed the 'Marketing Woman-to-Wornan" culture
since the company's inception, Opportunities for women were high ar a time whcn labour-
market jobs were rare for women. Until the 1980s, for more than 1.00 years since Avon was
startcd in the I 830s, individual earnings from sales commissions in Avon had beca quite
appeal mg.
In the 1980s, mane new sales rnethods were introduced by other direct-seiting companies,
including multifevel marketing, Avort provided a variety of incentives te its agents in addition
to commissions, m'eh as management skills training and commissions based en sales malle by
al] agents recruited under a representativo. Aware that ir lagged behind other direct-selting
companies, Avon decicied to (estructure its sales approach with the help of a direct-sales
consultant, John Ilenung, who proposed an innevative selting structtare known as "Sales
Leadersiiip Programme”.
Under the Sales Leadership Pregramme, Avon's sales representarives (fi.rat-tier sales agents)
were compensated for recruiting new sales agents and training thern in addition to their
normal sales cernmis.sion_ First-tier sales agents would raso earn bonu,ses from sales brought
by agents they liad recruited tic, second-tier sales agents) and by Mose recruited by their own
recrutts (le, third-tier agents)_ and so en,
3
07;3190 Fututo d'Ano Chioa: Direct Sabes. Rola 5eles or BoIN
There were four levels of leaders in lis programe: Unit Leaders, Advanced Unit Leaders,
Executive Una Leaders and Senior Executive Unit Leaders. (Figures given in the example
heiow pertain to the early 1990s.) 6
Utgt Leaders: Each sales representativo was required lo recruit and train ut feas% five
sales agents and achieve a minimum personal sales target of US$250 per catnpaign
(selling period),.7 In arder to earn commissions from her recruits, total sales from her
entire team would need lo bc aTtbove US$1,200. Cornmission rate from arst-tier reeruits
(sales agents) was 5% if the amount was USS150-299, 6% for sales of US$300-599 and
7% if sales were US5600 or more. Each would also receive 1% of her second-ber
agent's sales.
Advanced Unit Leaders: They should have twelve recalas, arnong whom at lea.st three
necded to be unit leaders. Each had to achieve US$300 in personal sales and US$4,000
in tcam sales per carnpaign, The. commission rete from flrst-tier sales agents was 6% for
sales of US$150-299, 7% if sales were US$3004599 and 8% for sales valuing US$600
or more. In auldition_, each advanced unit leader would also reccive 2% from their
second-ticr agents and I% frorn the third.
Executive Unit Leaders: Each should have twenty representatíves under her, seven of
whom must be unir leaders. Target personal sales were US$350 and that for her entire
team was USS 7,5010 per carnpaign, The commission tate from first-tier agents was 8%
if sales were LTS$150, 10% if the amount was US$315 and 12% if it was US5625. From
her second-tier agents, she could also saín 3% of their sales if the value was US$150,
if it was US$315 and 5% for sales of US$625. The commission she could earn from
third-rier sales agents was 2% of the [atter' s sales,
Senior Executive Unit Leaders: They naeded to recala twenty agents, among whom
seven must be unir leaders and timo rnust be at the exceutive unit leve]. Their personal
sales target was US$400 and that of the entire team was US$40,000 per campaign. The
commission rases were the same as die executive una leaders', but senior [izadas could
earn an additional 2% from sales made by each execubve unit leader at the first-tier
leve]_
This prograrnme cicarly provided strong incentives for Avon's sales representatives to expand
thcir downline.11 In 2003, Avon had 4.4 rnillion representatives worldwide, compared m 1.5
million in 1990.
Direct Sales Worldwide
The success of .Avon's sales approach in its hometand inevitably ied its management to apply
the same model lo the other markers. Since its expansion to Latin A rrie ilea in the 1950s, Avon
had 'estahlished its direct-selling networks in many more countries, such as the UK, Canada,
Ukraine, Cerrnany and Fraoce.
After the success in the US, Avon exported the Sales Leadership Programme to its global
triarket. Although some adjustments had bern made to adapt to local cultures, the Progariltne
was kept as el osc to irs original blueprint as poss i bl e.
Moreover, upan venturing lato developing markets, ie, Potand. China and Vietnam, Avon had
found lis basic door-to-door model quite adaptable to thern. In fact, it was difficult to entice
traditional retailers ro disribute Avon's products which consumers in tbese markets ware nos
familiar with yet. With low fixed investrnent initially, Avon bec ame very flexible and was
4
KLepacts, L. (2005) o_ ce.
Eanh cumpaign luseed sor evv 1LS thred weeks I dime vxela in A4iujduring which a neulbIlKhUrC prixtuccid by Avon and
pu/chalo:1 by ,ack sales rcprcymunvt, who ihen ibvribuxed ano. La nwir Mentid Qlatzlinerh.
A dawniine refers LO 3110acr nena nIcruirtd by a sales Ttormanta-ovt.
_../■••■•
4
1:17/3 t9C Future of Avon China: Direct Sales, Fletad Sa4ee pf Boh
able tv malle profits very quickly. Aceording ro Robert Toth, executive vice-president, "Avon
could become profitable in a new country within two ycars of its investmenc, compal"ed to the
normal period of tbrce ro fine years-.'
Avon China
The Chinese cosmetics market llegan flo-urishing after China's economic reforms began in the
late 1970s. Attracted by the great potential of the Chinese market, Preston, CEO of Avon,
strongly backed Avon's decision to enter China in the early 1990s_
Sales managers earned commis.sions ouly on their sales and chale of their first tier recruits. In -
tbc beginning, the rases were ] 5-25% commission and 2-()% uf the cornmission of their first-
tier rec rúas,
Inidally, Avon recruited 800 sales managers and franchise dealers (as Avon's sales agents
were called in China) betwcen 20 and 40 years old. New recruits were given ten lessons
stressing on communication skitls, goal-setting and !curling more about their target
c onsumers.
The new wage system introduced by Avon generalcd great inoentives for its agents in China
who were more accustorned to a fíat wage. Seventy percent of the first batch of sales
managers reached thetr first monthly sales targets in just ene week. Sales exceeded USS3
million by 1991." More and more franchise dealers were recruited, gradually expanding its
nerwork to other orovinces besides Ouangdong_
However. over the next arce years. Avon's expansion encountered a slawdown, with only
3,500 newly recruited franchise dealers and ten additional branches nationwide. En order to
add incentives for sales and to boost moralc. Avon underwent furcher changes in 1995.
Franchise dealers could be promoted to sales manaszers if they proved ttieir ability in selling
Itwd.
" Paint. L.S. and Gui, J B. 119991 -Aven Produciá Chi 112 1. 1?", Harvárd Salnos Cale, No. 9-301:1-1)53.
4
5
Wiat 9C Future af Avon China: Dinad. SaSe3., Retal' Sales or Boli
antl recruiting new sales representatives while sales managers tOlatd earn COF11.111i8Si011S from
al1 the sales agents directly or indirectly recruited by them. More branches were opened,
training system was strengthened and customer service was improved. Moreover„Avon began
to sQUICe raw neaterials for manufacturing its products from local, Chinese suppliers.
By the end of 1996, it had esta.blished 72 branches and the number of Avon China franchise
dealers had ncarly tripled competed to 1995 (28 franchise dealers).
Concerned about the rising social problems associated with direct-sales in China, the Bureau
of State Administration for Indostri and Commerce conducted severa' reviews oa the
approach. On 21 April 1998, the Chinese government made an officio!. announcemen• 11)1 is
neeessary ro stop the operarions of pyrarnid sales since ti-Ley havc begun to hurt socialsubility
and economic development",12 Since then, direct-selling companies were ordered te elose
clown immediatclyo settle their debts and appropriately manase their staff
According to a report by the China Perfumes and Cosmetics Association, the total sales value
of cosineties in China had grown by 311 average of 23.8% cach ycar from 1982 te 1998,
peaking at 41%. Cosmetics production in value terma had grown by 40% annually on average
from 1990 to 2002, scaling a peak of 200% in 1993—even higher than that of the national
economy." Cosmetics sales in China had grown more than 200 times from around US$25
million in 1994 ro USS6 hillion in 2004' [see Exhibit 3]. In 2004, China's cosmetics industry
was ranked fourtlt in terrns of consumption expenditure, after real cuate, autornobile and
tourism."
1.12. May 1993) "China Sales Firma keehect Strategy". Firmada! Trato. Ama iruelbgence Wire
/ aunareis+ Takailigeoug Unir 120111.5-"CernIng uf Agt: Mukinatiaual Companies le Chirla", p. I
' ebee, p. arel Xue,. L. 37 Februnry MOS) "Berro, Sector Benefits ChirNeaa Eeceiorny-. www.crienlish.corn 'Luc !mesad 21
Oeurber 2003).
Ginbal Ca~rm hertuerm Ne'a York Apr 20C14. Vol. 112, p. 24:
Chen, D. and. Xue, L. (7 February 212{111i•ep eh_
G7/31SIC. Fulana oí Aston China: Direct Sales, Renal' Salas or Both
Despite there high figures, the market was far from saturation point. In 2004, China's per
capita annual spenning on costnetics was only USS4, 17 which was far behind that of other
mejor markets.' According ta CAFFers" estimates, annual sales were expectcd to hit US$10
billion by 2011" Meanwhile, China's commitment E0 opening up its market in compliance
with the World Tradc Organization's rulos woutd further stimulate market demand, with
greater participation from both international and domestic players.
Consumers
ilrban Resldents
In 2002, there were a total of 660 cities in China, of which 621 had a population exceeding
200,000.1' Although cosrnetic products were still considered as luxuries by rural residents,
they were widely used itt urban arcas, particularly in large and medium-sized cities. The
leading markets for cosmetic products in China were Shanghai, Nanjing and Flangzhou in
castern China; Beijing, Tianjin and Dalian in the northern and north-eastern regions;
Shenzlien and Guangzhou in southcrn China; and Chongqing, Chengdu and Xi'An in western
China," With the increase in disposable Ineonic, urban residents fiad hecome a dynamic
consumption force for the Chinese cosmeties market.
There were two major target cusiomer groups arnong the urban residente, While higlt income
earners in large and medium-sized cities constituted the major portion of customcrs of well-
known, up-market brands imponed from Europe, the US and tapan, rnost of whorn were
whitc-collar wornen, those in the rniddlc income group exhibited a marked preferente for
established, dornestic brands.
A lot of the big and medium-sized cities in China had a large fernalc immigrant pOputaitidin, a
majority of whom were in the 113-30 age group and from poorer provinces. They rernitted part
of their mcome to their farnilies back home and retained some for themselves, These
customers were generally lees knowledgeable about costrietic products and their purchases
were lorgely based on price concems rather than brands, Titerefore, they preferred dorneatic to
internacional brands. This was a large potencial customer base that had yet to be rapped.
" aun, Y 131 July 2043i -Cosca:nes and Toiletna Idorkot &nerin Cllina", Su-uelps Canada, http wtivtic. ratexi.a vc ee Note
ihtedssed 2 I October 2015 r.
I«
The ¿Yetrige Ixt capeta yeárly Spendihg easrhellei in d.C4T14)1Xd contarles vas abont US .5 id.
1
" CAFFCT refers to "Chino Association of Fra/mucc. Flavo and eljánactjes Eadwury.
atour Coonerir Indory, New Yotk: No-e 2CO3. Vol.; 71. M.S.
Nutior41 Borran uf Scatistie112005) Churro Suei•itni? reorbook, Cluna Stanstics Pre.ss: China
Li. S. I5 May 21)031 -Chino Cosinetic Marte", Strattgis Canada, luto ./Pororar.strategis.se.e,,-. (dime aecessed 21 October 1095)
National aureau uf Siatislies t20031 op. ei1
7
071319C Future of Avon China: Oled Sales, Retail Sales or Both
The local brands, however, targeted mostly the lower-end market. .As a result, 80% of the
cosmetics industry's profits were pocketed by internati❑nal brands even though local
brands liad a 60% rnarket share» This was best illustrated by the fact that total sales revenues
of all domestic cosmetics companies combined were Iess than that of L'Oréat's alone.25
In contrast, foreign companies liad successfully established a brand presence in China and had
been netting handsome profits over the pass two decades, Some of the largest players in the
Chinese cosrnetics market were American companies, However, an increasing numbcr oF
non-US companies, mostly from France, Japan and Switzerland?' liad also entered the market.
Arrned with stron financial capability, extensive experience in brand management, strength
in product research and development, advanced marketing strategies and long-tem
cornrnitment to the Chinese rnarkets, internacional brands s-uch as L'Oréal, Avon and Amway
dominated the high-end segments of the market in China [see Exhibit 4], Aware of the
significanc potencial and increasing demands for high-end cosrn.etics, more and more Chinese
enemicals and pharrnaceuticals manufacturers turned to high-end cosmetic products, Such
developments liad rnade compctition in the industry more intense,
In 1998, Avon was among the first direct-selling companies authorised by the aúnese
government to set up cosmetic counters in clepartment atores and to have its 09111 franchised
boutiques. Avon set up its first counter in May 1998 in Dongpan in Guangdong province,
and its first boutique in Mareh 1999 in Guangzhou, capital of Guangdong province.21 Avon
then established its own distribution centres, and more boutiques and counters across the
country. Within the next five to six years, Avon had set up neariy 6,300 Avon boutiques and
1,700 deparnnent counters across 74 cities.'9
e
07/319C Future in( Avon China: Direct Sales, Retad Saleta al. Bath
for consumers and sales representative,s. In addition,Avon's products could also be purchased
onlinc3°
Sales continued to mercase, as Avon had expeeted„ reaching US$157 million in 2003. It was
expected that sales would excced US$200 million by 2004,"
Buyout
Ffre are looking for a strategy Mai places China t7f the centre of aur growth_
Shoukang Gao, president of Avon Chinal2
In March 2004, Avon proposcd to acquire the remaining shares of Avon China from Masson,
Goungzhou-based private company, at US$50 miilion thus acquiring ownership of
Avon China." Tbe acquisition was an indicator of Avon's fila in the Chinese market.
Further Expansion
iffe still have many other apportunities te penetrate more sities and more
Éawns, and we will be apening at least 500 beauty boutiques a year for the
foreseeable future.
- Andrea Ring, chau and CEO of Avon 34
Expressing confidence in the potential pf China's market, Avon announced its plan in
late 2003 to add another 500 boutiques each yeár in the next few years to its sales
network, which already covered almost al! thc Chinese provinces, including Tíbet.
Options
The decision by the Chinese government to lift its han an Avon's direet-selling operatioos
brought both opportunities and chultenges to the company, especially at a time when thc
Chinese cosmetics market was expanding rapidly. On the cine hand, Avon coutd adopt its
traditional selling rnethod again lo rneet the growing dernands of Chinese consumers. This
would be more economiza] compru'ed to eounters and boutiques which would involve a largo
invesiment and higher fixed costs_ On the other hand, the direct-selling model that would be
usad in China would be unstable. It would be at a trial stagc everseen by the Chinese
government, meaning that there rnight suddenky be another han, Furdierrnore, adopting the
door-to-door seIling approach again would inevitab/y divert management's anention and
inight even affeet thc development of Avon's retad business via eounters and boutiques,
which still needcd improvernent.
Alternatcly, Avon's existing beauty boutiques could act as service centres for the company
under the current regulationsi offer after-salcs cervices lo sales representatives, including
order pick-ups, product returns, credits, product trials and billing assistance; and provide
beauty consultation services to consumers.
Selecting the best operations mode' in the next few months would involve a loe of trade-offs
for Avon China_
1
Avon (luna webei
"
n We will rely with fuli confidente on Associates and Representatives, reectgnizing that
our corporate success depends on their individual contributions and achievernents.
Source: Peine, L.S. and Cut, .LB, "Avon Products China (A)", Hapvard Business Case,
1999, 4o. 9-304-051
'4
O71319C Future Af Avon [;pina; [leo Salen, Reiail Sales or Both
Wc will build a unique portfolio of Beauty and related brands, striving to surpass our
competitors in quality, innovation and value, and elevating our imago to become the
Beauty company most women turn te worldwide.
We will becomc the destination storc for women, offering the convenience of multiple
brands and channels, and providing a personal high touch shopping cxperience that helps
creare lifelong customer refationships.
We will expand our presence in direct selling and leal the reinveation of the channel,
of ering an entrcpreneurial opportunity that dclivers superior carnings, recognition,
service and support, rnaking it easy and rewarding to be afrdiated with Avon and
elevating the image of our industry.
We will be known for our leadership edge, through our passion for high standards, our
respect for diversity and our cormnitment te create exceptional opportunities for
professional growth so that associatcs can fulfill thcir highest potential_
We will be a committed global charnpion for the health and well-being of wornen
through phi lanthropic efforts that eEiroinate brea.st canear frorn the facc of thc earth, and
that ernpower women bo ach leve econornic ir:depende/ice.
Wc will deliver superior returns ta our sharehoiders by tirelessfy pursuing new growth
opportuniries while continually unproving our profitability, a socially responsible, ethiesi
company that is watched and erriulated as a model of success.
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