Avon Goes Throttle in China

The international makeup giant Avon firstly introduced the direct sales pattern into China. But now the company is placed under query. What happened to Avon?

As the first enterprise to gain the license of direct sale in China, Avon’s operating pattern of distribution stores and direct salesmen used to be the standard in China’s direct sales industry. However, such an exemplary company was reported to have the possibility of being involved in the pyramid sale in Harbin. This matter has not been confirmed yet, but why was it tipped off?

According to the report from National Business Daily, Avon, after getting the first direct sales license and successful transformation into a qualified direct sales company approved by the Chinese government, has been haunted by the problems in its direct sales channels?

What caused the underperformance of Avon in these years? Can the exclusive franchise stores and the direct salesmen work together? Or are the two sides irreconcilable with each other as the outsiders said? Actually, people can buy Avon products from online stores or “black stores” (stores which are not franchise stores approved by the original producers). Do those illegal actions of those stores play the role of “damaging” Avon’s direct sales pattern? The headquarters of Avon China refused to disclose any information before the settlement of this case.

“Black Stores” and Online Stores: Avon’s Pain in China

The biggest problem of Avon’s direct sales pattern is that many “black stores” and online stores co-exist with the exclusive franchise stores of Avon. There are many contradictions between those sales subjects. The online stores and “black stores” sell a large amount of Avon products online and offline, disordering Avon’s normal sales channels.

The “black stores” are not approved by Avon to sell its products. However, the owners of those “black stores” get Avon products at low prices through abnormal channels and sell those products in their stores. According to the expert, those “black stores” can buy Avon products from the regular franchise stores. The prices are quite low because there are usually too many products in those franchise stores.

The Avon products can also be available in the online stores with the prices 50% lower than regular ones. Those owners also guarantee that those products are not fake.

Take a skin-protection product of Avon for example. This product is sold in the franchise stores at 120 yuan (USD 17.57). But in an online store the price of the same product is only 55 yuan (USD 8.05).

When asked by the journalist, the owner of the online store said that it is a first-tier wholesaler of Avon. “We buy many products from Avon and sell the presents from Avon. That’s why our Avon products are so cheap.”

The owner also confirmed that some franchise stores, which can not run out of their large reserves, sell the products to the online stores or “black stores” with much lower prices. It is said that 80% or 90% discount is also available in the prices of Avon products in some online stores or “black stores”. However, it is not assured whether those Avon products are real or not.

According to an insider of Avon, the company regularly holds some events, in which the products can be bought with low prices. The franchise stores can take this opportunity to buy a lot of goods, which may result in the surplus reserves.

An expert said: “Avon has the rights to investigate and even punish those unapproved non-franchise stores. But if there are too many stores of that kind, Avon may not have enough time and people to do this.” Actually, Avon once did establish a department to deal with non-franchise stores.

Subtle Relationship between Franchise Stores and Direct Salesmen

Data shows that Avon has recruited more than 560 thousand direct salesmen in China since its turning to a direct sales company. However, it is said that the direct salesmen should be responsible for the event of Avon distributors’ collectively returning the products to the producer in 2005. The main reason, according to the source, was the conflict between the direct salesmen and franchise stores in business interests.

According to the report from National Business Daily, its reporter used to make an undercover interview in an Avon franchise store in Shanghai in the name of finding a part-time job. Its direct sales director said that there are no actual requirements in becoming a part-time direct salesman for Avon. For example, the direct salesmen of that store can be anyone. There are no requirements in their monthly performances either. They only have to get Avon products from designated franchise stores.

Then what is needed in opening a franchise store? According to the source, to open an Avon franchise store in Shanghai needs 54 thousand yuan (USD 7.91 thousand), consisting of the 6,000 yuan (USD 876.3) as the bail of opening the shop, the 36 thousand yuan (USD 5.27 thousand) to buy the equipments like sales counters, exhibition tables, checkout counters and computers and the 12 thousand yuan (USD 1.76 thousand) to buy the products.

The director mentioned above also told the relationship between the direct salesmen and the franchise stores. “Generally speaking, a single franchise store can only cover an area with the radius of less than 500 meters. There is no larger space for a franchise store to develop its businesses and increase its revenues. However, if the franchise store has some direct salesmen who work in different regions, the covered area is much larger. The franchise stores in Shanghai can averagely earn 35 thousand yuan (USD 5.12 thousand) each month in addition to the income brought by of the direct salesmen.

Meanwhile, she also admitted that the company has no unified standard for the franchise stores and the direct salesmen. Each franchise store owner has his own rules in managing the direct salesmen. Some store owners let the direct salesmen work at their own will and give out no requirements for them; some owners require their salesmen to do businesses near the stores. Both of those two management ways are not efficient enough, which may reduce the profits of the franchise stores.

Experts: Stronger Supervisions Should Be Exerted

“Every enterprise may be suspected of pyramid sale according to the relevant laws and regulations. In contrast, Avon is the one which can not be involved in the pyramid sale,” said Huang Yongjian, Chief Editor of China Direct Sale.

A source knowing the Chinese direct sales industry said: “Those who create profit gap in products are doing direct sale; those who create profit space from the number of people are doing pyramid sale. Though there are many measures against the pyramid sale, the activities of pyramid sale in China will still become more and more frequent and covert.”

The source mentioned above accentuated that the rampant pyramid sales activities are attributed not only to the problematic marketing channels, but also to the defects in supervision. Firstly, the laws about direct sale in China are not perfect and the supervision is not strong enough. “When the Code of Direct Sale was issued in 2005, most of the enterprises do things according to the law. However, those who obey the law can not earn money while those who violate the law can see profit. Therefore, more and more companies choose to do things against the law, which is, you know, the pyramid sale. In addition, the commercial and industrial departments have the right to investigate the pyramid sale, but they don’t have the right to arrest people engaged in it. Therefore, they need the help from the public security departments, who have no right to investigate the pyramid sale.”

Secondly, the ordinary people have misunderstanding about the direct sale. “Many people believe that it is quite easy to earn money through direct sale. But after they really do it, they will realize that the direct sale is not an easy way to earn money. They may turn to get more people into the sales team, which can be gradually changed into the pyramid sale.”

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Avon’s trouble in China

On June 23, Nangang Commercial and Industrial Administration Bureau, Harbin, Heilongjiang, made an abrupt investigation for the Heilongjiang Branch, Avon (China) after receiving the report. Then the leaders of Avon (China) also went to Harbin to tackle this matter. According to the report, the Heilongjiang Branch of Avon (China) might be involved in the pyramid sale.

At the beginning of July, 12 franchise stores in Harbin teamed up to ask Avon (China) to take their goods back. A few days later, the owners of some franchise stores in Wuhan also said that they are anxious about the large reserves and minor possibility of returning goods. The m alignant price-cutting competition between the franchise stores and the direct salesmen made the distributors have smaller possibility to see profit.

Coincidentally, a franchise store owner in Harbin said that Avon gave out no guarantee in returning goods for the franchise store owners like him; in addition, it forcefully increased the requested sales amount of the franchise stores month by month. If the franchise could not fulfill the duty, Avon even cancelled the contract and eliminated the stores’ franchises unilaterally.