In the decade of the 2010s, the plans and operations of Avon Inc. in marketing, research, and manufacturing throughout Asia are still being affected by actions taken after a 1998 meeting. The US cosmetics giant had considered China the keystone of its marketing effort in Asia. Years of effort and the development of a large direct marketing organization in that country had made operations in China its most profitable and most rapidly growing market in Asia. On 21 April 1998 senior company officials from the New York headquarters and throughout Asia had gathered in Guangzhou for what was supposed to be a festive occasion. During the meeting William Pryor, Avon’s head of China operations, was called away from his table to take a phone call. When he returned, it was with devastating news. The Chinese government had just announced an immediate ban on all direct selling.

In 113 years, Avon had used only direct selling and had no experience in traditional retailing. Thus the large financial investments they had made in China beginning in 1990, and the expected potential for growth in the Chinese market, were in immediate and very serious danger. While Avon had enjoyed eight consecutive years of profit in China, the implications went beyond the possible loss of the Chinese market itself. Avon had planned to use China as a manufacturing base for its export activities, thus strengthening its status as a global company.

At corporate headquarters in the United States the ban not only demonstrated that regulatory and bureaucratic uncertainty continued to be a major problem for foreign businesses in China, but also provoked reconsideration by Avon of its strategic approach to the global market.

The company and its competitors

Avon Products, Inc. was founded in 1886 by David McConnell as the California Perfume Company. The name was officially changed to Avon Products, Inc. in 1939. In the late 1990s the company was operating in over 135 countries with a sales force of more than 2.3 million independent representatives. These representatives, called Avon Ladies, handled 650 million customer orders and generated more than US$2 billion in commissions per year.
The company is the world’s largest direct seller of beauty and related products. A leader in skin care products, it is also a manufacturer of costume jewelry, and markets an extensive line of apparel, gifts, decorative items, collectables, and family entertainment products.
Of these products, cosmetics account for over 60% of total sales. With US$4.8 billion in annual revenue, Avon was ranked 293 among Fortune 500’s list of the largest US companies in 1998.
The vision of Avon is: ‘To be the company that best understands and satisfies the product, service, and self-fulfillment needs of women – globally. The vision influences the company’s research, product development, marketing and management practices’ (www.avon.com).
Avon is in some of the most competitive consumer-product markets in the world. Their target market is women in a wide age range, from teens to the over 40s, in two different market segments. The Avon Skin Care line, targeted at the lower end of the mass market, offers modestly priced, daily-use-type products. This line is designed to be ‘simple’ and appeal to customers who prefer a ‘less involved’ skin care regime. It is expected to be a beginning step for some consumers to skin care, and Avon hopes that these customers will eventually move to its higher-scale products. The major competitors in low-end skin care products are Oil of Olay (Oil of Ulan in China), Neutrogena, Ponds, Biore, Almay; there are many others. In coloring products, competitors include Maybelline, Cover Girl, Almay, Revlon, L’Oréal, Oil of Olay, among many others. Other products, such as Anew, target the lower end of the premium segment, where competitors include Estée Lauder, Lançome, Christian Dior, and Clinique. Two major direct marketing competitors, at both the domestic and international levels, are Amway and Mary Kay.
The high-end products have been developed through an ongoing research effort that has resulted in a number of innovations and new products. Avon scientists developed Anew, a skin care cream containing alpha-hydroxyacid, which provided anti-aging benefits beyond what was available in other products. Its Bio Advance was the first product to use stabilized retinol, a form of vitamin A, and Collagen Booster facilitated the use of vitamin C. In the late 1990s the company obtained US Food and Drug Administration approval of the use of Parsol 1789 to fight damage caused by UVA rays. It used this material in a new Age Block Daytime Defense Cream. The company has 19 laboratories worldwide that develop products and packaging. In addition to its own research staff and independent experts, Avon uses focus groups in evaluating potential new products, and has company employees use the products.
In 1996 Avon spent US$30 million on an advertising campaign, which focused on the Avon Lady, the core of the company’s success, and a new product image. Avon is now projected as having a contemporary product with a consistent, high-quality image in all markets. Its advertising program uses celebrities, such as fashion designer Josie Natori and Olympic athlete Jackie Joyner-Kersee.
Avon moved away from mature, matronly appearance to updated, sophisticated, and glamorous images. The result is a more vibrant beauty image, similar to other US brand names such as Revlon, Mabelline, and Cover Girl. Also under this campaign, Avon advertised on television for the first time in 20 years, and began direct selling on the Internet in April 1997. Its website now attracts 300,000 visitors per month.
Avon credits the maintenance of its competitive position to several factors including attractive product designs, high product quality, reasonable prices, company and product image, innovative products, guarantees, and commitment to product satisfaction. The personalized, friendly customer service offered by Avon Ladies is considered a key competitive strength.
Avon does not require its sales representatives to spend money in advance to purchase a starting kit and inventory. As a matter of policy, the company attempts to avoid having representatives use a hard selling approach or hard-core pressure tactics. There is an effort to create a relaxed, approachable, and friendly image through the Avon Ladies and a few gentlemen. The ability to attract and hold an effective direct sales force has been an important factor in Avon’s success. For those who like interacting with customers, Avon Lady positions provide opportunities for women to be their own bosses in jobs with flexibility, simplicity, and low stress. For women who wish to move on to more responsible jobs, the company offers career positions and opportunities to move up in the organization. Avon is one of the few companies in the Fortune 500 that has six women on the Board of Directors.
The company emphasizes its international character.
Under the Chairman and CEO, policy is developed by a senior management team called the Global Business Council. Members of the Council include the top executives of Avon’s Operating Business Units (OBUs), the chief financial and administrative officer, and the president of global marketing. The company groups its operations, by region, into five OBUs: the United States;
Asia-Pacific;
Mexico-Central America-South America; Brazil-Colombia; and Europe. Each OBU has a headquarters within its respective region.

Avon overseas
Avon’s first overseas operation was in 1954 in Venezuela.
Its success there motivated the company to continue expansion. It went to Europe in 1957, Australia in 1963, Japan in 1969, Malaysia in 1977, the Philippines and Thailand in 1978, Taiwan in 1982, and Indonesia in 1988.
From 1990 to 1998 Avon entered 18 new markets, mostly in Asia, including China. Avon’s products are distributed through subsidiaries in 45 countries and through other marketing channels in 89 additional countries.
Over 65% of Avon’s sales earnings come from overseas operations, and the growth of overseas production and sales outpace those in the United States. Rising incomes in Asia during the 1980s and early 1990s led to a greater demand for beauty products there, and encouraged expansion in that area. Additionally, the importance of appearance to the increasing number of Asian women in the workforce added to the number of customers. Analysts also attribute Avon’s success in foreign markets, particularly those in developing economies, to the earning opportunities the company offers to women who have little chance to work outside the home or even find a job.
Increasing demand had been combined with an expanding number of women interested in direct selling, a key strength of the company.
Overseas operations continue to be Avon’s first priority for growth. The economic crisis in 1997 in Asia did not frighten the company. Instead it planned to take advantage of the favorable exchange rate to invest between US$65 and US$75 million to construct manufacturing plants in the Philippines and China. Avon believed that the financial problem in Asia was short term whereas the company is in Asia for the long term.

Global strategies and products

Avon is an example of a company that ‘thinks globally and acts locally.’ That is, it pursues economies of scale and scope in manufacturing, logistics and marketing by selecting the most cost-effective facility locations and scales of operation on a worldwide basis. Product variations, which increase costs, are limited to those demanded by the various markets served. Overall, it balances the cost-saving potential of standardization with responsiveness to individual market needs in pursuing both profits and market share. Avon has production facilities in 45 countries and a market covering over 135 countries.
Beginning in the 1990s, the company developed ‘global product’ lines that could be sold in multiple markets, with only limited variations in packaging and marketing to meet differing national requirements. Avon’s global products are first developed in the United States and tested in the mass US market. Next, the potential of the product’s marketability is validated by Avon’s Global Product Council and global market research.
Some of the criteria for creating successful global products include market viability in at least six of Avon’s major markets, the potential to be among the top three brand names in each market, and the potential to generate at least $75 million in annual sales. Most of Avon’s global products are actually sold in 50 to 60 markets simultaneously.
The eight global product lines introduced in the 1990s (Avon Color, Far Away, Rare Gold, Millennia, Natori, Josie, Anew, and Avon Skin Care) have been highly successful.
They accounted for 26% of Avon’s total sales of cosmetics, fragrances, and toiletries in 1996 and 39% in 1997. Developing global products will continue to be a major emphasis of Avon.

China’s overall market and business climate

The Chinese market has grown rapidly since China began its open door policy in the early 1970s. During the following two decades, foreign businesses increased investment and marketing activities in an attempt to attain first mover advantages in this nation of 1.2 billion consumers. The suppression of student protestors in 1989 at Tiananmen Square resulted in the cessation of almost all new foreign investment, but within two years both foreign and domestic investment were again booming.
Although there was a lack of accurate, reliable information on which to base economic forecasts, many economists and businesses believed that China was a promising consumer market in the long run. When Avon was considering a substantial commitment to marketing in China in the early 1990s, the per capita income was below $400 per year. However, there was a growing middle class with a high level of discretionary income. By the mid-
1990s consumers in big cities, such as Shanghai, spent up to 80% of their disposable income on entertainment, clothing and cosmetics. According to US Department of Commerce statistics, retail sales in China reached US$297 billion in 1996 as many entrepreneurs, professionals in private companies, and workers in township enterprises became more affluent.
The common cultural background of Chinese people allows, to some extent, product standardization and coordination. Yet regional differences in levels of economic development, infrastructure, consumer purchasing power, distribution, and transportation logistics result in very different levels of market attractiveness in various parts of the country. Fortunately for foreign firms, the Chinese generally regard foreign-made products to be of better quality and a symbol of prestige and status.
One major challenge to foreign business in China is the regulatory uncertainty. New laws, reinterpretation of laws, disagreements between arms of the central government, and differences in national and regional regulations present continuing hazards. In 2001 the State Postal Bureau claimed a law gave them the exclusive right to deliver international express mail. The Ministry of Foreign Trade and Economic Cooperation indicated that a 1995 order by the State Council granted foreign freight forwarders, such as DHL, FedEx, and UPS, the right to do so. In the meantime, postal offices in some parts of China set up roadblocks and confiscated deliveries. In another example, as an inducement to capital investment, the government had offered tax breaks on imported capital equipment at one point, abolished the incentives in 1996, and then restored them in 1998.

The cosmetic and skin care market

Skin care products have a long history in China, but their use was discouraged, and at times prohibited, during much of the Communist period. But with reform and modernization women again began using make-up and skin care products. Cosmetics sales in China grew 40% from 1990 to 1995, reaching a level of US$1.5 billion annually. A department store in Shanghai found that sales in a 100,000-square-foot cosmetic department space were: 10–18% for fragrances, 60–70% for skin care, 20% for color cosmetics, and 0.5% for body care products.
In 1996, 70% of cosmetics were sold through stateowned businesses or selling cooperatives. In 1998, 80%
of women living in big cities bought cosmetics at large shopping malls and 16% at general department stores or supermarkets. One important factor in the growth of cosmetics sales was the introduction of more expensive, up-scale international cosmetic brands into China.
In spite of the inroads of foreign brands, high-quality local brands still dominate the market. There are around 2800 local cosmetics manufacturers in China, of which over 90% are small in size. Of these companies, 470 now have partial foreign direct investment. The official record of cosmetics imports is around US$23 million per year, but there is a large and unrecorded smuggling operation in southern China. Altogether, there are about 300 brands sold in China, of which the 28 largest dominate the market.
Yue-Sai Han, a Coty-backed joint venture, is important in the cosmetic and skin care product market. Kan, the Chinese partner in that joint venture, is a television celebrity and is known as China’s ‘Barbara Walters.’ A Hong Kong-based brand, Cheng Mingming, has also done well in China. Foreign brands are mostly the choice of the younger consumers whereas older or more conservative people prefer domestic brands. Other best-selling foreign brands include Estée Lauder, Christian Dior, Lançome, and Clarins.
Marketing tactics for foreign brands are similar to those used in the United States including the offering of free gift sets. However, while a five-piece gift set is commonly offered by cosmetic companies in the United States, seven-piece gift sets are offered in China. The primary advantage of Chinese-made cosmetics is their lower prices. China levies duties amounting to 120% of the landed price on imported cosmetics.

Direct selling in China

Direct selling is a relatively new concept in China. Avon pioneered direct selling in China beginning in 1990, and was followed by Amway and Mary Kay. The Chinese government knew very little about direct selling and therefore had virtually no control of or regulations on it. China appeared to be a promising opportunity for direct selling for several reasons:

● Direct selling is labor intensive, and China has an abundant supply of labor.

● Direct selling relies on personal contacts for promotion instead of extensive mass advertising (mass advertising does not reach the majority of Chinese consumers).

● Unlike traditional retailing, direct selling does not rely heavily on a well-developed infrastructure for transportation and delivery; China lacks a well-developed infrastructure.
● Direct selling allows China’s long-suppressed entrepreneurial spirit and opportunity to develop and creates earning possibilities, especially for women.

● Direct selling is very flexible and the financially conservative Chinese do not have to risk their primary jobs.

● Direct selling relies on personal networking, which is already built into the Chinese culture.

● China has a very large group of financially stable people who are retired by the State in their early 50s but who are interested in seeking more activities that would improve their retired life.

Entering the Chinese market: Ya fang daojia (Avon calling home)

Although Avon had over 30 years of experience in a number of countries internationally, entering and operating in China offered new problems as well as successes. The company had experienced an indirect relationship with China since the late 1970s when it had established a regional headquarters in Hong Kong that sourced a wide variety of gifts and decorative products in China. In the mid-1980s, Avon’s first attempt to open the Chinese market via official channels in Beijing failed due to a commonly cited problem: Chinese bureaucracy. In 1990, Avon adopted a cautious, short-term approach to China.
Going through its Hong Kong connection, the company established a joint venture with the state-owned Guangzhou Cosmetics Company factory. Avon purchased 60% of that joint venture. It was estimated that 60 million people lived within a 100-mile radius of the factory, making it a convenient location for Avon Ladies to order and deliver products. Business in China was an overnight success.

Avon sold what was estimated to be six months’ supply of inventory in the first 30 days.

In the first year of its operation, 1 million units of cosmetics and skin care products were sold. Sales reached US$4 million in 1991, far beyond Avon’s original US$1.5 million target. In 1992, sales grew to more than US$8 million, and 8,000 women were working for Avon. Many of them earned 12 times more than typical Chinese women. At that time, Avon operated through a chain of 10 branches in the vicinity of Guangdong, but the area the Avon Ladies covered extended south to Hainan Island and northeast to Fuzhou. China became Avon’s first priority in terms of market growth.

In 1994, Avon’s sales in China grew to US$20 million.

At that time Avon was building and training a 70,000-

woman sales force with 15 sales branches in China’s southern region. It was also the year in which Avon opened a distribution center in Shanghai as its first move into central China. In 1995, Avon’s sales in China climbed to US$40 million and were expected to continue growing.

In 1996, Avon had 40 branches and 27,000 sales representatives, and a total of US$35 million invested in China. Nearly all of the products sold in China were made in China using local materials. Avon also planned another US$35 million investment for a new joint venture with a state factory, which would triple its production capacity in China. On 16 August 1996 Avon opened a branch office in Beijing, signifying further success and commitment to the Chinese market. China was now one of the most important markets for Avon in Asia, and Avon was enjoying government support at both provincial and local levels. In 1997 Avon’s sales in China reached US$75 million.

By 1998 Avon had approximately 150,000 sales representatives and over US$200 million invested in China. The representatives in China recruited friends and colleagues,

bought in bulk, and distributed products themselves. In the same year Avon extended its operations to Urumqi, the capital of Xinjiang, which later became Avon’s fastest-
growing market.
In China, Avon’s target was the mass market consisting of teen to middle-aged women with adequate discretionary income. It succeeded in China, up until the April 1998 ban, for the following reasons:
● Avon had brand recognition throughout Asia. Many Chinese had learned about Avon from its television commercials in Hong Kong.
● In China, Avon was synonymous with direct selling.
Its reputation also came from how it treated sales representatives and employees and its ethical business practices. Avon also taught hygiene, proper dress, and other values to the sales representatives and district managers. More important, Avon taught them personal empowerment and a balance between work and family responsibilities. The company was even able to attract college-educated women into becoming Avon Ladies.
● Avon distinguished itself from other direct selling companies.
It used a single-level structure. There was no expensive starter kit that the sales representative had to buy. Avon district managers trained the sales representatives, and then the sales representatives functioned semi-independently afterwards. That is, they took orders, picked up products, and distributed them.
There was no product-introduction party necessary or large motivational training conference involved.
● Avon in China specifically promoted the idea of using skin care or make-up products to bring fulfillment and self-confidence to women. Other marketing techniques included a nationwide talent contest. By Chinese standards, this was a rather bold approach. Although it was first greeted with suspicion or even rudeness, the public later accepted it. Avon also reached its goal of raising public awareness of the company.
● Avon in China had strong leaders and talents. For example, Bill Pryor, the former president of Avon in Japan, came out of retirement to work with the company’s China sales effort. Andrea Jung, Avon’s current President and Chief Executive Officer, was named eighth among Fortune magazine’s list of the 50 Most Powerful Women in the United States.
● Avon in China had modern offices and facilities. The company imported modern technical and management know-how in production, packaging, computer, and delivery systems to manufacture and distribute products in China. Some of the company’s operations incorporated offices, production workshops and warehouses to promote efficiency.
● Avon’s ability to build businesses in the markets of developing economies was a key to its success.
● Avon provided enticing export opportunities for the Chinese government. The company planned to export products and ingredients from China to other Asia-Pacific countries, the United States and Europe.
● By manufacturing in China, Avon avoided paying high tariffs, which amounted to 120% of the wholesale cost. Other foreign brands did not always seek a similar advantage.
The company had to meet several challenges in developing its business in China. In its initial years in China, Avon was able to source only 10% of its suppliers from local manufacturers and had to absorb the resulting high import tariffs. Because direct selling was new to the Chinese, extensive training had to be provided. Due to the underdeveloped and unreliable nature of the Chinese transportation and postal systems, Avon had to use its own trucks for transporting supplies to the branch offices.
These problems hindered Avon’s business development.
Another problem was the limited supply of qualified managers, and their fast turnover. Foreign companies in China often struggled with compensation problems for expatriates as demand for executives in China grows rapidly. Last but not least, bureaucrats at local, regional, and national levels had to approve company actions, and the various levels of bureaucracy were not always in agreement. The ground rules for doing business were frustrating and subject to unexpected changes.
Avon did enjoy great success in China, up to the 1998 crisis, as a result of a combination of business approach, attitude, appealing products, good timing, and an appropriate marketing strategy.

The 1998 crisis and its background

Because foreign direct selling companies were doing well in China from the early to mid-1990s, many local direct selling activities cropped up. The Chinese government gradually recognized the need to control this type of business. In 1995 China ordered all direct selling companies to register with the government, but this order was ignored by most of the indigenous companies. The unregulated market continued to concern the Chinese government because unscrupulous direct selling companies were deceiving the public. A number of companies started pyramid schemes. There were also schemes in which dealers sold products to distributors at inflated prices. A herbal-
medicine ‘dealer’ cheated 2,300 peasants out of US$170 each in a direct selling operation. In an incident in Hunan Province, 10 people died and more than 100 others were injured when disgruntled representatives in some direct marketing companies rioted. Many indigenous direct sellers went out of business, leaving their dealers with overpriced goods of no interest to consumers.
There were other reasons that the government was concerned about direct selling. First, the government thought that direct selling provided supervisors and district managers with too much freedom to travel around the country. Second, the Chinese government was concerned that there were individuals using the pyramid method to exercise influence on the public and perhaps engage in a scheme to establish sects and cults that could be a threat to the social order. Motivational seminars given by direct selling companies were criticized as superstitious and as encouraging ‘excessive hugging.’ Mary Kay had to eliminate the word ‘God’ from its promotional slogan in China and had to stop hiring teachers, soldiers, and party members. Third, the position of sales representatives was perceived to be of relatively low professional status in China. Pursuing such a job lowered the overall image of the primary professions of individuals holding other positions. Fourth, direct selling was enthusiastically received by women who worked in the traditionally more highly respected professions in China, such as education, health and medical care, and the civil service. The notion of earning extra income seemed to reflect dissatisfaction with their current income, and the desire for more money contradicted Communist economic ideology.
These events culminated in a State Council’s decision to ban direct selling on 21 April 1998. The new regulation also required that these companies change into conventional retailing and that their distribution centers be converted into retail outlets by 31 October 1998, or they would lose their business licenses. An apparently contradictory existing government regulation, however, prohibited foreign companies from conducting retail business in China.
Charlene Barshefsky, the US Trade Representative, discussed the problem with both company executives and Chinese government officials on a visit to China shortly after the ban was issued. The US companies hoped that Secretary of State Madeline Albright would also discuss the subject with Chinese officials when she visited China, but this did not happen.
The Chinese government did subsequently indicate that it might again allow direct selling in the future. But this did not alleviate the immediate problem, and it is estimated that the ban against direct selling would cost US direct marketing companies a total of US$2 billion in sales.
In the meantime, the US direct sellers had to decide on both immediate courses of action and longer-run strategies in response to the ban. Avon chose to cease sales operations in China immediately, and concentrate on planning for a new approach. One of its competitors decided to continue its direct sales efforts temporarily, perhaps until the October cut-off date.
It was not until 2006 that the direct-selling Avon model was authorized in China. By then, the effects of the 1998 ban and Avon’s reactions to it had determined the options still open to the company to pursue in the decade of the 2010s (as discussed in Avon Products, Inc. (B) in Chapter 7).

Questions
1. In what way does Avon follow a global strategy?
Does this experience indicate that it should pursue a different strategy?
2. What options did Avon have in responding to China’s ban on direct selling?
3. What effects will the use of traditional retailing in China have on Avon’s overall marketing strategy?
4. What actions and organizational changes are required by Avon’s new marketing strategy in China?
5. What are some other tactics and strategies that Avon could pursue in China?
6. What cultural dimensions of the Chinese people would affect the future success of Avon in China?