Five Keys to Spur Avon Products Global Growth
The following is adapted from “Five Makeover Tips from the Avon Lady with analysis by marketing science professor P.K. Kannan, who researches and teaches (including in executive programs) customer relationship trends and market developments. Contact him at [email protected]
5 Keys to Spur Avon Products Global Growth, from UMD Marketing Science Prof
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
SMITH BRAIN TRUST — Following years of declining revenue and the March 1, 2016, selloff of its North American operations, Avon Products announced on March 14, 2016, that it will cut jobs and move its headquarters to the United Kingdom as part of a three-year turnaround focused on global growth.
“The old model of going door-to-door selling to housewives in the neighborhood is breaking down in the United States,” University of Maryland Robert H. Smith School of Business marketing professor P.K. Kannan says. “But if you look at many emerging markets, that’s still a viable way of doing things.”
As Avon expands its global reach, Kannan says the company can learn from another multilevel marketing organization: Amway, which now generates bigger revenue in China and South Korea. The U.S. market finished third for Amway in 2015, followed by Japan, Thailand, Russia, Taiwan, Malaysia, India and Ukraine.
Kannan lists at least five reasons for the international shift that apply equally to Avon, which is growing fastest in Asia, Europe and Latin America.
1. Maturing markets: For starters, he says, the United States is saturated with beauty and personal care products. By the time direct marketing distributors track down their long-lost friends and relatives, all these potential customers already have heard the same pitch from others.
“The only way that companies can get more market share is by coming up with new products all the time,” says Kannan, who has studied Amway and done consulting for the Michigan-based firm. “It’s tough for distributors to make a sell to the next level if they don’t have new products to generate excitement.” The crowded market leads to frustrated distributors, which leads to high attrition.
All of this takes a toll on the bottom line in the United States. “But there are greener pastures abroad where this model can be adopted at a much lower cost,” Kannan says.
2. Cultural advantages: Direct marketing companies that rely on rapid, word-of-mouth-driven growth also find cultural advantages in many emerging markets. Close-knit communities in places like India remain conducive to the door-to-door approach. Kannan says one well-known neighbor can have significant influence. “People just drop in without even calling,” he says. “Here in the United States, people don’t want to open their door to anybody.”
3. Bypassing store shelves: The direct sales model also solves some of the warehousing and distribution problems associated with traditional retail in emerging markets. “You have small stores in many villages, and you have to fight for shelf space,” Kannan says. “Direct sales is a cheap alternative because your distributors can keep inventory in their homes.” Instead of worrying about the last mile of the supply chain, companies like Amway and Avon can trust their distributors to make in-person deliveries down narrow streets and alleyways.
4. Brand cachet: Another bonus for Amway and Avon distributors is that foreign brands have cachet in emerging markets. “There is an appeal because foreign products carry an aura of higher quality,” Kannan says.
5. Managing risks: On the downside, emerging markets come with geopolitical and economic risks. Amway has taken a hit in China since 2014, following an economic slowdown and unfavorable currency exchange rates. And Avon has suffered in Brazil, where consumer spending has declined amid corruption allegations and other problems.
Kannan says multinational companies also must navigate cross-cultural complexities, such as understanding response bias that varies from country to country when conducting distributor satisfaction surveys. “You need happy distributors,” he says. “But you have to look at feedback in the cultural context of each market.”