Avon China to operate as wholesaler/retailer under agreement with Chinese government.

AVON CHINA TO OPERATE AS WHOLESALER/RETAILER under a new business licensing agreement between Avon and the Chinese government following an April 21 ban on direct selling in the country. Avon announced June 5 that as part of the new model, the company will "operate as a wholesaler to Chinese retail stores," as well as convert its approximately 75 distribution centers into retail outlets to directly serve customers. The firm is working with the Chinese government to iron out details of the new operating plan, which was expected to be operational by June 15. Avon China's management team has been working directly with Chinese officials to resolve the matter.

In 1990, Avon became the first international direct seller to enter China and today boasts 50,000 representatives. "We are delighted that Avon is once again able to serve the people of China," the company stated. "We have made a long-term commitment to that market and we look forward to working with the Chinese government to ensure that...companies like Avon have the opportunity to build productive, profitable businesses there."

Avon has invested $70 mil. to $75 mil. in China since 1990, including $40 mil. earmarked for the fall opening of a new manufacturing facility in Conhua, located in the southern province of Guangdong. Sales in Avon China were $75 mil. in 1997. While representing only about 1.5% of the company's annual total, Avon said it sees significant "long-term opportunity" in the country.

The Chinese government approved a sweeping and immediate ban on direct selling businesses -- catching up other companies such as those operated by Avon, Amway and Mary Kay Cosmetics -- in response to a number of illegal pyramid schemes that have been plaguing the local economy for some time. Pyramid schemes, which are fraudulent, "multi-level" businesses, encourage sales reps to invest a great deal of money up front, the majority of which is eventually lost.

China passed the decree "to protect the rights of consumers, to promote fair competition, and to protect the economic order of the market and social stability," according to an executive summary of the ban. "Owing to the low developed stage of [China's] market conditions and the not-so-matured consumer mentality," the government determined that direct selling "does not fit into the present characteristics of the country."

The direct selling ban eliminates all "face-to-face contact" marketing, such as door-to-door soliciting. Direct marketing, which includes other non-retail sales, such as direct mail and telephone vending, is still legal in China, according to the Direct Marketing Association.

The U.S. government has been lobbying actively against the ban; the item was on the agenda of U.S. Trade Representative Charlene Barshefsky's meeting with Chinese officials June 9. Barshefsky came out against the ban April 23, saying the Chinese action "has effectively shut down the legitimate operation" of many U.S. companies that have "kept the interest of consumers in the forefront. Obviously, the goal here is to re-establish these companies' operations as soon as possible," the USTR said. It is hoped an agreement can be reached before President Clinton's arrival in China June 25.

Avon's agreement is one of a handful of wholesaler/retailer licenses offered by the Chinese government to direct-sales companies. Ada, Mich.-based Amway Corp. was also offered the wholesaler/retailer license option but has chosen to continue negotiations on another business optimal plan, the company said. Instead of converting to a retail format, Amway is lobbying for a plan that would continue to "provide an income opportunity" for its 80,000 reps in China.

Amway's proposal "builds on several strengths that already exist in the Amway business," including the company's nationwide product service centers and its distributors and trainers in China, Amway said. Under the proposed approach, distributors that "principally purchased Amway products for their own use would continue to have the opportunity to buy those products at a discount." Reps "actively servicing customers would be incorporated into the company's service and training team." Details on the plan are not yet final, awaiting further discussions with Chinese officials.

Until Amway can strike a deal with the Chinese government, the only Amway sales will be those by company employees for personal use. The company has invested $100 mil. in China over the past five years and, like Avon, "continues to believe in the long-term business opportunities" of the market. Amway operates 40 product service centers in China in 14 provinces and four direct municipalities. Plans to build a second manufacturing plant near Shanghai "will be based on the needs of consumers and the market," the company noted.