SMITH BRAIN TRUST — Remember the Avon Lady? Back when neighbors still talked to each other face to face, she waited until the men went to work and then came calling with cosmetics and perfumes. That business model doesn’t work so well in 2016 — at least in the United States. 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, where it has operated since 1959. The move is 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,” Smith School 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 that grew up in the heyday of Miss America, Boy Scouts and bicycle newspaper delivery. Amway, which made a bid for Avon in 1989, stands for the “American Way” but 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.”