Export Marketing Assignment 15

Aleena Amir Section G

25 Marks

This case study was written by Edwin Duerr, Yim-Yu Wong, and Mitsuko Duerr, all of San
Francisco State University.)
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 (see
Case 4.1, Avon Products, Inc. (A)) 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 5000 franchise stores (beauty boutiques) and plans to
add 500 more each year. It also had almost 2000 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. Anew 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 hirings
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 transactionrelated
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; and
(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 (5 Marks for Each Question)

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?

The strategy has apparently worked well since Avon has received permission to open retail
outlets. They also obtained permission to use sales promoters who do not take title to the
merchandise, but are paid commissions on sales to retail customers. The company also was
fortunate to be able to develop a ‘preferred customer’ program. Alternatives of delaying the
cessation of the original operations, being more confrontational with the Chinese government or
trying to get the US government to bring more pressure on China, would probably have soured
relations with Chinese officials. This would have been a mistake in a country where personal
relations are often more important than the laws and regulations. Withdrawing from the Chinese
market would have meant the loss of long-run opportunities. Cutting back on manufacturing
there would likely have resulted in seriously damaged relations.

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’?

The ‘preferred customer’ program has both short- and long-term benefits. In the short run, it
allowed for sales to some of its former representatives at substantial discounts, thereby enabling
them to resell the products at retail for their own account. It thus provided Avon with additional
sales, continued contact with some former representatives, maintained goodwill, and identified
individuals who might make worthwhile employees. In the long run, it provides a possible base
for an additional marketing channel as well as identifying potential employees.

3. What might be the advantages and disadvantages of Avon applying some of the
marketing models it developed in China to other markets?

In the increasingly competitive marketplace, a company cannot rely on the same marketing
approach to succeed. Applying some of the marketing models it developed in China to selected
other markets will give Avon an opportunity to test the applicability and effectiveness of these
models elsewhere. It may, in the long run, prove advantageous to use these new models in
combination with or to replace their traditional direct selling model.
The primary disadvantages are (1) possible loss of focus and identity and (2) possible alienation
and loss of the traditional direct sales representatives in markets where other approaches are
introduced.

4. Should Avon continue to experiment with new marketing approaches? What are the
possible costs and benefits?
Avon should continue to experiment with new marketing approaches. Their direct marketing
approach may not continue to work effectively in the present markets as competitive pressures
change, and may not be appropriate in some additional markets that may be entered. The
potential benefit is developing knowledge and abilities that help them remain competitive. The
potential costs, aside from the actual expenses of instituting new marketing methods/channels,
are (1) possible loss of focus and identity and (2) possible alienation and loss of the traditional
direct sales representatives in markets where other approaches are introduced.

5. Was it wise of Avon to return to a direct selling method when the Chinese government
allowed it to do so?

Avon may not actually have a choice. It appears from the case that the Chinese government
wants Avon to provide a model of direct selling that they may use in drafting new regulations.
Thus ‘permission’ may really mean a recommendation for action that Avon should not ignore.
In any event, it appears that the return to direct selling will be successful since direct sales are
now increasing without reducing the sales through the Beauty Boutiques.
There is, however, a potential for serious conflict within the organization if the direct sales
people (sales promoters) believe that they are losing sales to the Beauty Boutiques. Most
Beauty Boutiques want to become involved in direct selling while selling in their stores and
offering after-sales service to sales promoters, so the threat is real. Avon will need to find a way
to resolve potential conflicts.