In 2010, Avon was still in the process of rebuilding its marketing operations in China after the turmoil caused by the Chinese government’s ban on direct selling in 1998.

The imposition of this ban had been totally unexpected. The company had no way of knowing when or if the ban would be lifted. In the period from the imposition of the ban to its eventual lifting eight years later, the company had critical decisions to make. With the lifting of the ban in 2006, and the granting to Avon China of the Chinese government’s first license for a direct selling operation, the company faced a new set of decisions about organizational structure.

These included deciding upon transitional structures and the relative emphases to be placed upon direct sales activities and the distribution methods that had been used from 1998 to 2006.

Responding to the crisis

With the imposition of a ban on direct selling, Avon had the choice of changing its marketing model or withdrawing from the Chinese market. The company chose to go ahead immediately with developing plans to convert to new types of operation, pending Chinese government approval. It would operate as a wholesaler to Chinese retail stores, convert its 75 distribution centers into retail outlets to serve regular customers, and conduct limited direct selling activities. For the latter, representatives would not purchase and resell the product, but would work on commission. In short, sales representatives would become employees of Avon.

In early June 1998 Avon received government permission to resume operations as a wholesaler and to open retail outlets. They did not receive permission to resume any direct selling, though they could use sales representatives for delivery and service. The company was planning to apply for permission to use sales promoters or representatives on a commission basis when Beijing clarified how sales representatives would be allowed to operate. Amway did not receive permission to operate as a retail business until mid-July, but they also received permission to operate through representatives at that time.
As of mid-July, Mary Kay still had not received approval of its application.
Avon was optimistic about the future. Since resuming operations in June, they had run a ‘preferred customer’ program under which individuals purchasing large enough amounts of products would receive substantial discounts. A number of former representatives were buying enough to become preferred customers, thus maintaining contact with the company. Avon was investing in advertising and point-of-sale material, and recruiting retail specialists in order to adapt to the new system.

Avon had a network of 80 sales centers in 14 provinces, but the sales centers were not designed and built for retailing so they presented some problems. Stores could be closed or added as appropriate, though government regulations regarding employment and facility openings and closures might present some legal and financial difficulties.

Building a new marketing structure

Avon (China) opened its first retail store in March 1999, and a flagship store in Beijing in October 2000. It followed with a group of concept stores in Beijing, Shanghai, and Guangzhou in 2002. It began Internet marketing, with primary coverage in Beijing’s outer areas, in the same year. By 2004 Avon (China) Company Limited had 5,000 franchise stores (beauty boutiques) and plans to add 500 more each year. It also had almost 2,000 beauty counters in malls, shopping centers and hypermarkets in 74 large and medium-size cities.
Avon (China) uses its web page to communicate with the public. In addition to product information, the company includes its history, press releases, and franchisee success stories. Businessweek’s selection of Andrea Jung, Avon’s CEO, as one of the best managers in the world was reported. Other activities featured included Avon’s donations to fight SARS, a modern dance program sponsored by Avon, and their annual Miss White Angel pageant (see below). Information about the company’s corporate culture, guiding principles, operational objectives, managerial doctrines, and management styles is also posted. Avon lists its guiding principles as ‘high quality, leading technology, and diversity, designed for Oriental women,’ with the motto ‘A Company for Women.’ Potential new franchisees can find information on Avon China’s web page about capital requirements, store size, applicant qualifications, and the type of lease that prospective franchisees are required to sign.
Currently Avon offers a wide range of products on the market in China, including skin care, cosmetics, personal care, fragrances, underwear, health foods, and others.
The company incorporates both Asian and western components in projecting its product image. It uses a research laboratory in Japan, a country known for its advanced technology, to make it more convincing that Avon products are made for Asian skin. At the same time, it selected a trendy English name, ‘Up2U,’ for a cosmetics line developed by that lab and intended to appeal to the mindset and attitude of younger Chinese women. Recognizing that the traditional concept of beauty in China favors fair, light skin, Avon offers a line of whitening products. It also sponsors an annual ‘Miss White Angel’
pageant in which a young lady is selected to be the spokesperson of the year. The program is broadcast on regional television channels. Additionally, since Caucasian women have features that are admired by many Asian women, most of the models used on Avon (China)’s web page are Caucasian. This also serves to present a prestigious image of Avon as a US company (that provides products suited to Asian skin).

Permission to again use direct selling

Avon China had eventually been successful in using the new marketing and distribution approaches it used from 1998 to 2004, with sales in 2003 reaching over twice what they had been in 1997. However, the company still desired to return to the direct selling model they used in the rest of the world.
In April 2005, seven years after the Chinese had placed a ban on all direct selling operations, the Chinese Ministry of Commerce and the State Administration for Industry and Commerce officially approved a test of direct selling by Avon Products (China). The testing sites included Beijing, Tianjin, and Guangdong. The president of Avon China, S. K. Kao, said that this was a test to help the Chinese government find a direct selling model that would suit the Chinese market and promote social stability. As a part of the test, Avon China was to develop a program to educate consumers as to what is right and responsible so as to protect consumers from illegal direct selling.
Mr Kao said that Avon China was extremely honored to be the only direct selling company authorized to conduct a test. It was viewed as demonstrating the trust and confidence the government had in the company, and the company indicated it was committed to cooperating with the government. The results of the test were to be used as the basis for developing legislation covering direct selling.
In March 2006, Avon China received the nation’s first direct selling business license from the Ministry of Commerce. It provided for a single-level selling model nationwide. A new sales force of 114,000 (direct) sales representatives was added to the 6,000 franchised Beauty Boutique stores the company had added since direct selling had been banned. Approximately 90% of the Beauty Boutiques qualified to act as service centers under the government regulations, indicating that the Beauty Boutique owners want to be involved in direct selling. The Beauty Boutiques offer after-sales service (order pick-up, product returns, product trials, billing assistance, etc.) to sales representatives, and beauty consultations to consumers, while continuing to sell products at retail. According to Avon, their direct selling model now brings together the best features of retail and single-level direct selling.

Avon China’s limited investment in storefront operations enabled local competitors, and international companies willing to make large investments in joint ventures and retail operations, to gain market share. In the market for high-quality makeup, Maybelline gained 20% of the high-quality market nationwide and 60% in some second-
tier cities. Avon China suffered a sales decline in its Up2U makeup brand for young ladies, and withdrew that brand from the Chinese market.

The heavy advertising expenditures, reorganization costs, and hiring associated with the launch of direct selling caused heavy losses in 2006. In 2007, however, these began to pay off and Avon China reported a 44% increase in sales in the first quarter of the year, with most of the increase coming from its direct selling operation.

The hybrid model, and further commitment to China

Avon has continued to use the hybrid sales model in China, with both store operations and direct sales, but continues to use only direct sales in the rest of the world.

Even in China, it has increasingly emphasized its direct sales effort. Total revenue in China increased in 2008 and again in 2009. A greater number of field representatives increased direct sales by 24%, while the revenue from Beauty Boutiques decreased by 40%. The increasingly important direct sales effort was supported by television advertising and the provision of additional incentives for the direct salespeople.
A news release from Avon on March 18, 2010 stressed that Avon Products, Inc. in the US was demonstrating its commitment to China by opening a state-of-the-art research facility in Shanghai. It will include continuing developmental work on Anew anti-aging skin care, Avon Color cosmetics, and the whitening category. Though designed primarily to serve China, it will also support other markets in the Asia Pacific region. Avon China also has a regional R&D facility in Guangzhou that will continue to work on nutritional supplements.

Additional comments

Avon is the world’s largest direct sales company with sales of $10 billion per year, and approximately 80% of that revenue comes from outside the United States. During the 2008–2010 recession, ‘where others saw only challenge, Avon saw an opportunity to grow our representative and consumer base’ (Andrea Jung, Chairman and Chief Executive Officer, in the 2009 Annual Report, March 2010). The company carried out the most massive recruiting campaign in its history. It has also continued and increased its restructuring program designed to improve global supply chain operations, move some local business support functions to a more regional basis, streamline transaction-related services, and do some selective outsourcing to reduce costs and improve organizational relationships and effectiveness. The result has been stronger growth. It appears to the authors of this case that the opportunity for China to become the hub of Avon’s manufacturing as well as its primary R&D center in Asia was lost because of 

(1) the nation’s initially disapproving Avon’s direct selling model; 

(2) the nation’s slowness in approving direct selling; 

(3) Avon’s concern that the Chinese government might take other unilateral actions adversely affecting the company without consultation.

Additional information

Avon’s web page http:/_/www._avoncompany._com/_ about/_index._html and its associated English language and Chinese language websites, its Annual Reports, and Company News Releases.

Questions

1. Does it appear that the marketing strategy that Avon used in China from 1998 to 2006 worked well? Might some other strategy have been more effective?
2. Discuss the usefulness of the ‘preferred customer’
program in the short term and the longer term for Avon. How do you suppose the program might have been used by some of the ‘preferred customers’?
3. What might be the advantages and disadvantages of Avon applying some of the marketing models it developed in China to other markets?
4. Should Avon continue to experiment with new marketing approaches? What are the possible costs and benefits?
5. Was it wise of Avon to return to a direct selling method when the Chinese government allowed it to do so?