For Avon, China Is a Beauty

President Susan Kropf explains why the cosmetics giant sees big opportunity there -- even though door-to-door selling is still banned

Avon Products (AVP ) has long derived the lion's share of its sales outside the U.S. About 62% of its $6.2 billion of 2002 revenues came from international markets. Even though China's portion of an expected $7 billion in 2003 revenues is expected to be only about $150 million, the Middle Kingdom is the cosmetics giant's most promising market. Avon is investing heavily to build its presence there, its $40 million factory in Southern China is a big success, and it has even begun exporting some goods made there to Southeast Asian markets.

President and Chief Operating Officer Susan J. Kropf recently talked with BusinessWeek Senior Writer Nanette Byrnes about Avon's hopes for growth in China -- including the possibility that direct selling may be allowed again as early as 2005. The door-to-door style Avon uses around the world is now banned in China, but that hasn't stopped the New York-based company from finding other ways to sell skin cream and lipstick to millions of Chinese women. Here are edited excerpts from their conversation:

Q: How important is China to Avon?


China is the single biggest growth opportunity for this company. It has been and will continue to be for the next decade. Our investment in advertising and building Avon's image in China has been disproportionate to sales. We will do about $150 million in sales in China this year. Our advertising spending is approaching almost 10% of sales. As a direct-selling company, Avon doesn't typically advertise the way, say Procter & Gamble (PG ) does. But we believe that it's only the beginning for Avon in China. One of the most promising things is China's recent accession into the World Trade Organization.

Q: Why is WTO membership important?


A corollary on that bill said China would reestablish the legitimacy of direct selling in the marketplace. It could be in the next couple of years.

Q: So there are no Avon ladies in China today?


We have a mixed distribution strategy in China. Our channels included beauty boutiques, which are small stores. Some are in large cities, others in secondary cities, some are owned by us, some by beauty boutique owners. We use a concept called store representatives. We have 5,000 of these in every province including Tibet. And these boutiques store representatives will deliver to a given customer whatever products she may order.

But there's a fixed location, and the customer is buying from that boutique. We also have counters in hypermarkets and some department stores. So it's a triple kind of channel.

Q: How big is your "single biggest growth opportunity?"


China's cosmetic, fragrance, and toiletry (CFT) market altogether -- including fragrance, makeup, skin care, personal care -- is about $4 billion this year. And that's expected to grow, according to market surveys, at a compound annual rate of 9% from 2003 to 2006. That leaves it at about $5.5 billion by 2006. If you then strip out personal care and hair care, which are important to us, but not as important as skin care and color cosmetics, that's projected to grow faster, 11% or 12%, or something like that.

That growth rate is faster than China's gross domestic product growth overall and is driven by an increase in relatively affluent middle class spending more on nonfood items.

Q: That's faster growth than the U.S.?


The CFT market in the U.S. is growing marginally, maybe flat to up 2%.

Q: But the U.S. is much bigger?


Yes, the U.S. is much, much larger, $100 billion or so. But that's why everyone is so excited about this market. This market's size is still extremely small vs. what we'd expect it to be a few years out.

Q: You've spent millions of dollars and many years building a business in China. Are you worried that the economy there might be overheating? Do you seeing any signs of a slowdown (see BW, 1/19/04, "Worrying About China")?


We really don't. The economy seems to be robust. Even aside from the opportunities we have today for market expansion, there's hope of further penetration. There are a lot of growth vectors that make me feel pretty comfortable.

Edited by Douglas Harbrecht

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