Stories in this section:
Direct Selling: the Wall Street View
Avon Embarks on Multi-Year Restructuring Effort
Alt icor Wins Corporate Citizenship Award
Young Company Focus: Succendo Sets the Home & Body Care Market Afire

Jump to other sections:
Making Headlines
Financial Report
Global Landscape
Roundtable
Perspectives and Innovations

Direct Selling:
the Wall Street View
Continued from page 1

Exacerbating the weaker Japan sales environment is currency. The Yen has softened considerably against the US dollar in the trailing 12 months, despite strong performance across the Japanese financial markets during 2005. The consistent increases in US interest rates have attracted capital back to the US, leading to a stronger US dollar. As of the date of writing (11/18/05), the US$/Yen exchange rate was almost 119 Yen per US dollar, compared to 104 US$/Yen a year ago. The last decade-and-a-half of deflation appears to be slowly coming to a close with most notably GDP rising 1.7 percent year-over-year, despite the 0.1 percent decline in the consumer price index during October. Regardless of the softer sales environment and softer currency, Japan appears to be in a long-term economic recovery. The performance of the financial markets should be viewed as a strong indicator of the improvements.

We believe the weaker than anticipated consumer sentiment in Japan may have contributed to the softer direct selling business trends during Q3 in this market. Investor views of the Japanese direct selling outlook are further affected by the relatively poor performance of Nu Skin, which in addition to the softer consumer sentiment, did not benefit as much as anticipated from the launch of its biophotonic scanner in Japan due to regulatory issues and a halted rollout in anticipation of a next generation S2 scanner launch in 2006.

Given that Japan is the second largest direct selling market in the world at more than $27 billion annually and thus a mature market, macroeconomic influences are likely to impact sales trends as there simply isn’t enough market growth to offset cyclical influences.

The Bloom Is Off the China Rose Temporarily
All direct selling companies interested in capitalizing on the China direct selling opportunity, thought to be the world’s potentially largest direct selling market, are keenly focused on the incremental developments of the last few months. Key advancements have fueled both investor enthusiasm and newly founded China skepticism and confusion—the same issues direct selling companies are facing. China’s State Council officially approved the direct selling regulations (Administration Regulations for Direct Marketing) on September 2, 2005, lifting the seven-year ban on the channel. The regulations take effect in China on December 1, 2005. Additionally, rules rendering pyramid schemes illegal were approved by the Chinese government under a separate statute entitled Anti-pyramid Marketing Regulations. According to the latter legislation, direct selling companies must operate under a single-level compensation structure, rather than a multi-level compensation structure employed by most companies in all countries but China.

Notable industry leaders have gone on record suggesting that the single-level compensation model will ultimately evolve into an approval for a multi-level structure. However, from the outset, direct selling distributor commissions will be restricted to commissions paid on personal product sales only. The change in compensation structure for those already in the market is having, and is likely to continue to have, a negative impact on distributor recruitment and retention, and thus revenue. A high degree of uncertainty in the marketplace has emerged in light of China’s variance from the multi-level model employed in every other market.

This uncertainty caused a number of companies to lose footing around mid-year 2005. Avon Products (AVP) began a massive training effort to ready retail boutique owners for a shift in operation as a result of its direct selling approval. Avon has to manage channel conflict as its new on-the-street sales force competes with boutique owners. The efforts were matched by some disruption and Avon’s China revenue declined to levels significantly below Wall Street’s expectations. Nu Skin Enterprises followed suit, though for somewhat different reasons, negatively pre-announcing its Q3 results and lowering 2005 China revenue guidance. The revision to Nu Skin’s 2005 China guidance resulted from the change to its compensation plan to accommodate a single level structure. While disruption is expected when compensation plans change, Nu Skin’s actions were clearly dramatized by China’s compensation limitations. While not publicly reporting its results, Amway has also discussed an expected revenue decline in China, which is likely to be severe given its level of sales and cessation of the multi-level direct selling model it has been operating.

As is the case with any emerging market, volatility is to be expected. Media reports out of China continue to differ on the issues presented by the regulations, a government-endorsed translation of the regulations has yet to emerge and companies are anticipating the December 1, 2005 implementation of new regulations. We believe direct selling in China continues to be an enormous opportunity and expect licenses, for those direct selling companies positioned to receive them, will begin to be granted in mid-2006. Until then, we continue to expect volatility in both the financial results and share prices of the most developed China direct sellers.

Latin America Is HOT—
Innovative Product Distribution
Methods Drive Growth
The latest data from the World Federation of Direct Selling Associations (WFDSA) indicates that in 2004 Mexico and Brazil generated $3.4 billion and $3.9 billion of direct selling revenue, respectively. The two markets, individually, now exceed the size of the United Kingdom direct selling market. Given the growing consumerism in these markets and the trend toward economic recovery following a widespread recession that began to abate in 2003, the macroeconomic factors at play in America are favorable for direct sellers.

Despite the growth potential, American countries, specifically Brazil and Mexico, are still mid-to-low income economies, creating a challenge for direct selling companies selling premium-quality and premium-priced products. However, consumers in Latin America tend to prefer imported goods, are conscious of popular brands in the United States and seek out differentiated products. This is good news for direct selling companies.

The predisposition to purchasing imported, differentiated goods, coupled with the strong tendency toward developing personal networks, makes the American consumer an ideal target for direct selling. Understanding the purchasing behavior likely to be observed in American consumers is only half the equation, though. As with any developing economy, the financial opportunities of direct selling are a more significant factor. Thus, direct selling in Latin America appears to benefit all—consumers, distributors and companies alike.

Herbalife has capitalized on the growth potential of America by overcoming the challenge of selling to consumers with limited disposable income. The company developed Nutrition Clubs, a derivative of the party plan, whereby distributors sell individually priced, single servings of product as a way to provide consumers with product exposure at a digestible price. The result has been phenomenal, with Herbalife posting 132 percent year-over-year growth in Mexico. While the United States will still represent Herbalife’s largest market in 2005, the 20,000+ Nutrition Clubs operated by distributors in Mexico have driven Mexican revenue to exceed that of the United States during the most recent month (October 2005). The opportunity in Latin America is significant, in our opinion, whether it is realized by innovative product distribution methods such as Herbalife’s Nutrition Clubs or the prospects for incremental income in an economically developing region.

The Financial Outlook
The direct selling industry stumbled on Wall Street this fall and the fourth quarter doesn’t appear to be healthier. Avon announced a major restructuring effort, Nu Skin is trying to settle China and reinvigorate Japan, Tupperware is executing a new business/compensation plan, and many emerging players are dealing with company-specific troubles, such as a complete management overhaul at Natural Health Trends. However, 2006 appears much more promising with the opening of China to spur worldwide sales. While a disruption in at least one direct selling market is almost assured annually, the China direct selling expectations on Wall Street were unrivaled and an improving China outlook can trump any single issue to face direct selling in 2006.

Courtney Coles is a Senior Associate at Adams Harkness, a Boston-based institutional investment bank focused on growth companies in the technology, services, industrial, manufacturing & growth, healthcare and consumer sectors. With a focus on research-driven investment ideas, Adams Harkness offers investment banking, institutional sales and trading, asset management, venture capital investment (through AH Ventures) and corporate wealth management services. Visit www.adamsharkness.com.

> back to top

Avon Embarks
on Multi-Year Restructuring Effort
Continued from page 1

Avon expects to incur costs to implement these initiatives over the next several years, with a significant portion of the total costs to be incurred during 2006. Costs are expected to total $300 million-$500 million before taxes, and the company projects that initial pre-tax costs of $20 million-$40 million, or $0.04-$0.07 per share after taxes, could be incurred in the fourth quarter 2005. Avon said it will announce further details as initiatives are finalized.

The company expects that benefits from restructuring will help to fund a significant increase in consumer investment as well as improve the competitiveness of its direct selling opportunity. Advertising, market intelligence, consumer research and product innovation will be funded at higher levels, with advertising spending projected to more than double by 2008.

These actions are expected to improve revenue growth prospects beginning in 2007. The company projects that revenue will be flat to up slightly in 2006 in local currencies, and forecasts revenue growth in local currencies that will average mid-single digits after 2006.

Additionally, Avon said it expects modest improvement in its operating margin beginning in 2007, after the benefits of restructuring and higher consumer investment.

Andrea Jung, Avon’s chairman and chief executive officer, commented, “With this plan, we’re taking very aggressive action to address the issues we faced in 2005, and to become a far more streamlined global competitor that is closer to its consumers. By taking a comprehensive approach to our enterprise expense base and global value chain, we are identifying more efficient and effective ways of operating. We will, in turn, reinvest much of the projected savings to fuel topline growth and improve our competitive position.

“Avon’s strengths remain enviable, and we continue to believe that we have the right overall strategies and a powerful business model. The actions we announced today are intended to accelerate our transformation, and return our business to a sustainable growth trajectory in both revenue and earnings per share,” Ms. Jung concluded.

> back to top

Alticor Wins Corporate Citizenship Award

The United States Chamber of Commerce Center for Corporate Citizenship (CCC) announced November 9 that Alticor Inc., headquartered in Ada, Mich., won the Corporate Citizenship Award in the category of International Community Service. The award acknowledges businesses and chambers of commerce that have demonstrated ethical leadership and corporate stewardship through a specific community service program outside of the United States.

“Alticor is an example of corporate citizenship at its finest,” said Chamber Executive Vice President and Chief Operating Officer Suzanne Clark. “Alticor is one of our nation’s pillars, advancing important social and economic goals in communities across the country.”

Alticor’s global One by One Campaign for Children has contributed more than $26 million to children’s causes since 2003, providing hope and opportunity to more than 4 million children worldwide.

“We’re honored to win this award,” said Alticor Chairman Steve Van Andel. “Our One by One program means a great deal to our employees and independent business owners around the world who have given so generously of their time, talents and hearts—to make a difference in the lives of children everywhere.”

Winners in five other categories were announced November 8 at the National Building Museum in Washington, D.C. Those awards were for Citizenship in Action, U.S. Community Service, Corporate Stewardship Small Business, Corporate Stewardship Midsize Business, and Corporate Stewardship Large Business. U.S. Chamber President and CEO Thomas J. Donohue, Secretary of Commerce Carlos Gutierrez, and Harvard Business School professor Michael Porter presented the awards. Award winners are selected by distinguished leaders in the field of corporate citizenship, including past winners and the Center for Corporate Citizenship Advisory Board.

The U.S. Chamber of Commerce Center for Corporate Citizenship is a 501(c)(3) nonprofit organization dedicated to improving the environment in which businesses operate. The U.S. Chamber of Commerce is the world’s largest business federation, representing more than 3 million businesses and organizations of every size, sector and region.

> back to top

Young Company Focus:
Succendo Sets the Home
& Body Care Market Afire

The people at Succendo are on a mission to share their passion for excellence with a European flair. With its promise to design products that celebrate creativity and a spectrum of scents, the company has no patience for mediocrity when it comes to home and body care products.
David Stern, Succendo’s President and CEO, had spent more than 10 years working to create some of the most well-known home and personal care products. After experiencing success in the corporate world, he decided to pool his knowledge with some of the world’s best manufacturers and perfumers to create a unique offering in both body care, with body washes, lotions and sprays, and in home care, with candles, room sprays and hand washes.

From the beginning, the company’s focus was on products that people use every day. “We were disappointed with the quality that was available, and genuinely horrified at the prices that were being charged for quality,” Stern says. “So, that was our mission when we started out—to offer a better quality product for a price that everybody could afford and in categories that everybody uses.”

A Ready Market
The Succendo team believed that, in addition to quality and affordability, the American market was ready for the more complex, sophisticated fragrances found on the European market. He also felt that the American market was lacking in personal service. It was with a passion for excellence in products and personal service at a fair price that Succendo—which in Latin means “to set afire”—was born. “They’re products that you use and love every day and they don’t cost you an arm and a leg,” Stern says.

Stern and his team spent two years developing Succendo and began marketing in October 2004. The company works with some of the world’s finest production facilities, formulas are tested extensively in order to meet and guarantee Succendo’s high standards, and all of the products are manufactured internally to allow the company to continually monitor quality. “We do all our product development, manufacturing, quality control—everything,” Stern says.

“We focus on delivering a much higher quality product at a price that everyone can afford,” Stern says. Succendo offers a unique body lotion formula with added moisturizer and significantly less grease than other products on the market. In addition, their fragrances are similar to those offered at high-end department stores but with higher concentration levels, so consumers receive sophisticated fragrances without paying an expensive department store price.

When creating the Succendo line of candles, Stern opted for a combination of soft waxes in a wide variety of popular and refined fragrances. The candles are not only less expensive than comparable products on the market, but they are also manufactured with the highest standards. “We ensure our candles have no lead in them and we use all cotton wicks,” Stern says. “We give our consumers a terrific quality product, and use sophisticated fragrances at twice the level of whatever else you’ll find on the market.”

Core Values
The creators of Succendo products have an affinity for excellence in all facets of business life, from customer service to community involvement. The company’s values reflect the desire to build a company that offers more than just quality products. With a core value of giving, the team at Succendo believes that when people within a company actively give of themselves to others associated with the company, whether they be representatives, customers or charities within the community, the company has the ability to make a significant and positive difference in the world.
“I think our mantra is that everyone has to win,” Stern says. “The Four C’s: our consultants, our customers, our communities and our companies have to win.” And winning comes to each of these groups when the value of giving is put into practice.

Succendo’s pledge is to empower its consultants and offer a profitable business opportunity. “We support the heck out of our consultants with all sorts of wonderful programs, marketing materials, personal service, online training and support,” Stern says. “We do everything we can to make sure that consultants succeed; and they are.”

The gifts of delight and honesty carry the value of giving to the customer level. With a desire to not only create and deliver the perfect products to its clients, the company also works to help its consultants nourish personal relationships with consumers. Recognizing that personal service is a key factor in building a long-lasting relationship, the company has also created a concierge page on its Web site. “Our idea of customer service is best represented by the Concierge at a fine European hotel,” the page reads. The page includes links to frequently asked product questions and invites clients to ask questions about the products and services that Succendo offers.

Succendo also enables its consultants to give to their communities. “Our communities win because we give a percentage of everything we sell to charity,” Stern says, “and we encourage our consultants to partner with their local charitable organizations.” Through fundraising efforts by representatives and by donating both products and profits to people in need through the Succendo Charities program, the company’s consultants and customers are making a difference in their own neighborhoods.

Selecting a Business Model
The Succendo team made the decision to market products using a direct selling approach after testing a variety of different sales models. Exploring the options of a retail setting, the company opened a store. Other sales models tested were to hire retail representatives to take products into retail stores and to offer the products online. Succendo selected the direct selling model because, of all the approaches tested, it offered personal relationships and a level of customer service that the creators value, plus the ability to effectively showcase its products. “Direct selling was far and away the best environment for presenting the quality and the value of our products,” Stern says.

While Succendo began to market its products in October 2004, it was only in April 2005 that the products became available through the company’s direct sales force. With a growing sales force, Stern says, “We’re in 10 states plus Canada. It’s just terrific. The most important thing is the consultants who have joined us are all succeeding.” With a commitment to creating the best quality products available, coupled with a 100 percent satisfaction guarantee, Succendo gives its consultants a powerful opportunity to achieve financial success. “The customers get higher quality products at prices they can afford,” Stern says. “And the reorder rates are well in excess of 30 percent, which tells you how good our products are.”

Succendo has enjoyed an added benefit that many direct selling businesses share. Because the company is free from the costs incurred by retail distribution, it is able to offer superior quality at prices below retail competition. As a pending member of the Direct Selling Association, the company also appreciates the support that the organization offers the industry. “The DSA has been a tremendous asset for us, both in accessing expertise and with general advice as we grow,” Stern says.

“The charm of our business is everybody uses these products, every day, everywhere,” Stern says. To that end, the company continues to create exceptional products at fair prices. “We developed Succendo to do just that,” he says, and with its passion for the extraordinary, the company looks forward to a bright future as it sets the world afire.

> back to top