China's green light for direct sales heats up cosmetics and toiletries race, by Euromonitor International
The Chinese government's decision to lift its ban on direct sales has been long awaited by cosmetics and toiletries giants keen to profit from Asia Pacific's second largest market. Euromonitor International investigates which global players are best placed to profit from the direct sales channel and how it could permanently alter the country's cosmetics and toiletries industry.
The return of Avon calling
While selected global direct sellers had identified the potential of China's cosmetics and toiletries market as early as 1990, the government's decision to ban direct door-to-door selling in 1998, as part of an effort to crack down on pyramid schemes, presented a threat. Despite this, early entrants, including Avon Products and Alticor's Amway, were quick to adapt their business models, opening standalone retail outlets through which they could continue to expand sales coverage and maintain a significant brand presence. Being attached to a store meant that staff were considered to be deriving their income from retail rather than direct sales. It was largely down to the efforts of these companies that specialist stores and direct sales maintained growth between 2000 and 2005, despite the ban. The two distribution channels increased their shares from 2% and 5% respectively to 4% and 9% of total cosmetics and toiletries value sales over the period.
China's entry to the World Trade Organization in 2001 brought with it an obligation to open up its economy to direct-selling companies within three years, but disagreements over how to regulate the business resulted in delays. A breakthrough was achieved in April 2005 when Avon won the Chinese government's approval to begin a tightly controlled door-to-door sales trial, promoting its cosmetics, skin care and personal care products directly to consumers in the Beijing, Tianjin and Guangdong provinces, ahead of full legislation.
As of December 2005, companies have been granted permission to apply for direct-selling licences, although they are subject to strict criteria and disclosure requirements. Additionally, China remains the only major market where multi-level compensation systems – seen as too similar to pyramid schemes – remain illegal, meaning that sales people can only profit from their own work.
Battle heats up among direct-sales giants
In March, Avon became the first firm to be granted a direct-selling licence. A formidable cosmetics player that entered China in 1990, Avon has since established over 6000 beauty boutiques and a presence in over 1000 department store counters. As part of its long-term commitment to the market, Avon Products announced it was purchasing the remaining 6% equity interests in its Chinese subsidiary from its Hong Kong partners in November 2005. While Avon is China's sixth largest cosmetics and toiletries player, the company has made no secret of its ambitions to become a market leader. Having already recruited a sizeable sales force since its trial last April, it seems Avon is perfectly positioned to make the most of its door-to-door operation and achieve its long-term goal in China. Indeed, the company's track record in other developing markets, namely Russia, has proven just how influential the Avon direct sales method can be.
Avon will not have the Chinese direct sales channel to itself for long however. Other players to watch include Swedish direct-sales giant Oriflame which has so far thrown its investments into large-scale Chinese manufacturing operations. The company aims to commence direct sales in the first half of 2006, and is expected to expand rapidly in the market. A similar approach is being taken by US-based cosmetics and healthcare products firm Day Light, which is preparing to restart direct selling, open more retail outlets and invest further in research and development and production facilities. Mary Kay, which has been making money in the country since the mid 1990s, is another contender, with China representing its second-largest market.
As China's fourth largest player in cosmetics and toiletries, Amway is undoubtedly best placed to benefit from the lifting of the ban. Owned by Alticor, the multi-billion-dollar US corporation began operating in China in 1995. As an early innovator in China, the company has much to gain from door-to-door sales of its cosmetics, cleaning goods and nutritional products. As with all other foreign companies, however, Amway will be hoping that the government allows a multi-level payment system in the near future so that staff will not have to rely solely on commission made from their own sales.
Winning over Chinese consumers
Despite the potential in the new retail channel, foreign direct sellers should continue to maintain investment in their Chinese retail operations, at least until Chinese consumers adjust to the idea of door-to-door cosmetics sales. While not completely unfamiliar with the concept of direct sales, Chinese consumers' perceptions of the channel have likely been affected by the 1998 ban. Consumer associations say there is confusion about the differences between direct-sales methods and pyramid schemes, something which could seriously impact the credibility of the former.
Yet lessons from the recent past suggest Chinese consumers are likely to be attracted to the convenience of at-home shopping and some may even see it as an opportunity to make money by signing up to cosmetics firms' new sales forces. Mary Kay has proven particularly successful at encouraging Chinese women to explore their entrepreneurial side in a country that not so long ago rejected the very idea of private enterprise.
Spreading the product net far and wide
The greatest impact of direct sales may be its ability to deliver products directly to consumers in every corner of this expansive market. Much of China's population lives outside primary and economic zones, and with badly managed distribution networks and the logistical problems of covering the country's vast stretches between urban and rural dwellings, a significant proportion of the population has no access to cosmetics and toiletries. Direct sales provide the ideal solution for reaching China's untapped millions.
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