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Southwestern Company: Building Character for 150 Years
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Direct Selling in Russia
High Tech/High Touch Universe
Young Company Focus: Aihu
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Direct Selling in Russia

Russia is no longer a country of former communists trying to figure out life under the free market system. The populace has firmly embraced the concept, and entrepreneurialism is the spirit of the land these days. While the government attempts to match legislation to the thriving business world, companies and individuals forge ahead. In a land mass almost twice that of the United States, direct selling is uniquely suited to the challenges of this nascent and far-flung market.

Full Speed Ahead

People in Russia are looking for ways to earn money on their own. They have long accepted the idea that government jobs are a generally a relic of the past and are keenly looking to earn a living on their own terms. "That was one of the reasons for us to go there," says Jeff Smith, Director of New Market Development for Nu Skin Enterprises. "It's a very entrepreneurial society. They've been under the wrap of communism for so long, but now there are a lot of people eager to make money. Our business is very leadership focused so that fits very well with our goals."

Research from the Russian Direct Selling Association shows that 73 percent of the 2.3 million direct salespeople in the country today have joined to earn additional income. Many are women excelling in their new avenue. "During Soviet times, women did not have these opportunities," says Ferenc Der, Avon Russia and Kazakhstan General Manager. "I can tell you a lot of stories where a Russian doctor or teacher with a small salary decided to change her life and to become an Avon representative. Now these women demonstrate the best results in sales, not only in Russia, but their sales results are incredible by international measures. Very often a Russian woman has to earn not only to support herself, but to support the whole-her parents, children and husband."

Because of these cultural influences, the growth in direct selling has been huge. Russians have been trading, bartering and selling directly to each other for hundreds of years, as Russian Direct Selling Association President and Mary Kay Executive Director Tamara Shokareva points out. However, the first multinational direct selling company entered Russia in 1992, and the RDSA was formed by Avon, Mary Kay and Oriflame in 1996. Today there are 10 active companies in the RDSA with two more probationary members. Sales from these companies and their salesforces netted almost $1.67 billion in 2005 and will exceed that number for 2006. It's a draw that companies can't ignore, and those who have been in the market for more than a decade are just as excited as the newcomers.

"Russia is a huge market with great potential," says Avon's Der. "It sounds incredible, but statistics show that the growth of direct selling business in Russia from 2002 to 2004 is 380 percent!"

For Oriflame, Russia's top direct selling company, the country is consistently one of its top performers. For the first six months of 2006, sales in Russia increased by 30 percent in local currency, and the salesforce increased by 23 percent. Those sales consultants were diligent and busy, with the help of an extra catalog giving them an overall increase of 15 percent in individual productivity over last year. Sales for the region, which includes the Baltics (Estonia, Latvia and Lithuania) and CIS (the Commonwealth of Independent States, which includes Ukraine, Georgia and Kazakhstan), were up 41 percent. Oriflame's commitment to Russia is evident with its new supply center in Moscow where products are produced and then distributed for a more ready inventory.

The ability to distribute products wherever there is a salesperson is a decisive advantage for direct selling. The country is a sprawling 6,592,771 square miles (17,075,200 sq km) with 21 republics, 48 oblasts (regions) and 11 time zones. Population in some areas is extremely sparse, despite the country's total of almost 143 million people, so traditional retail is not always available. Direct sales companies, however, are only limited by how far their message has spread. In fact, one of Avon Russia's top representatives is a 65-year-old woman in Siberia.

The economy can certainly support the continuing boom of direct selling. The year 2005 was the seventh straight year of growth, with an average increase of 6.4 percent since 1998. Inflation is relatively high because of the rush to build businesses, and unemployment is officially 7.6 percent. Analysts specify, however, that many more people are underemployed than those numbers convey. All of these factors create the perfect environment for direct selling's appeal.

Yield Signs

The budding lures of Russian-bred capitalism are not without their pitfalls, however. Companies must do research carefully before starting up, and once established, must keep on top of changing regulations that are both elusive and imperative.

Current regulations fall under Russia's Civil Code of the Russian Federation, the Law of the Russian Federation "On Consumer Rights' Protection," and the Resolution "Rules of Selling of Specific Types of Goods."

Some components of these laws relate specifically to direct selling because they regulate retail sales that take place outside brick-and-mortar stores. This covers catalog, mail order, party plan and other iterations of these sales. The laws also limit certain goods that can be sold through this retail-alternative method, some of which are foods, medicines, precious metals and stones, weapons and audiovisual products. This affects nutritional supplements to some degree, requiring special certifications and licensing. "There's a huge grey area, and a black market where a lot of people don't comply," notes Nu Skin's Smith.

Other aspects of these laws include requiring a salesperson to wear a badge that shows his or her photograph, full name and name of the company. All products must be on a properly certified price list, there must be a detailed receipt for each sale and a cooling-off period of seven days after delivery of the commodity is required. That time, however, goes up to three months if the consumer is not given information on cooling-off period rights in writing.

Even if the corporate lawyers have read, understood and properly accommodated these Russian laws, the road may not be smooth. "There is uncertain tax legislation, where some provisions can be interpreted in different ways," notes RDSA's Shokareva. In fact, the RDSA has focused a lot of effort on Russia's Value-Added Tax, which is added to the price of all goods. However, the law is cumbersome and it sometimes falls to individual salespeople to collect and remit VAT-a situation that the RDSA is addressing.

It seems many companies are constantly monitoring government regulations, and the RDSA is doing its best to be the liaison between government and the industry. "Ever-changing regulations can be a disadvantage to companies," explains Der. "Avon stays abreast of latest developments and works closely with government regulators to be sure we meet all requirements."

Organized crime, a.k.a. the Russian mafia, is far more daunting than any government's attempt at regulation. The mafia is still actively pursuing its business as well: extorting money, buying politicians and political offices, selling black market goods and assassinating people who get in the way. "If you break the law or try to cut corners, the mafia or other unsavory characters may infiltrate your business," says Smith of Nu Skin. "The problem is decreasing, but when we were first exploring the country in 2004, the editor of Russia's Forbes, Paul Klebnikov, was killed there." (A trial in May of this year acquitted two men accused of the killing and of having mafia ties. Prosecutors are appealing. More recently, the mafia has drawn attention for its threats against pop singer Madonna and for its likely involvement with the assassination of the government's First Deputy Chairman Andrei Kozlov.)

Smith has some first-hand advice for companies looking to avoid bureaucratic corruption or potential problems with crime: "Pick proper advisors and be careful who you associate with. Stay clean and legal. We joined the RDSA prior to launching our business, and they were very helpful."

Green Lights

Getting bogged down with government regulations or being intimidated by crime hasn't stopped the direct selling business. The hands-down top selling category is cosmetics. According to Avon's Der, most Russian women use cosmetics every day. It is as much a part of Russian women's routines as brushing their hair or getting dressed. And while the larger cities have traditional stores where cosmetics can be purchased, many smaller towns and villages do not. Add to that the fact that this audience likes to get personal advice, and you've got the perfect setup for direct selling. Research shows that 61 percent of Russian women are willing to buy cosmetics through direct selling companies.

"The analysts estimate the growth of the Russian cosmetic market as 13 to 15 percent every year," says Der. "Its capacity is approximately US $8 billion, and it is predicted to double [to US $16 billion] by the year 2016."

Wellness products are a growing trend in the country as well, and Nu Skin has found some unique ways to convince Russians that their Pharmanex products are working. The company originally introduced the BioPhotonic Scanner in 2003 and has used it in its Russian operations since its launch last April. The ingenious device basically tests the body's antioxidant protection and shows its changing results. "Russians want to see something tangible," Smith says. "We use the scanner to show the difference and quantify the impact of our products. It's been very helpful in the market."

For all product categories, Russians are receptive to direct selling. RDSA studies show that 68 percent of consumers have a positive attitude about the industry, 74 percent about its distributors, and 60 percent about the products sold. More than two-thirds of Russians have at least talked to a direct sales distributor, and over half have purchased at least one time from a direct sales person. Nearly a quarter of Russians purchase products from direct sellers regularly, with 12 percent buying once a month or more.

It is important for companies to approach the Russian market with a thorough understanding of the culture and the marketplace. Der maintains that Avon is so successful (second only to Oriflame) because it has established itself as an international, not an American, company. "The American company image has been transformed to the beauty image here," he says. "Our distributors share our values and principles. Our corporate culture is not American for them, it is international; it is clear for Russian people. Companies must build their business from the 'inside,' studying Russian traditions, and Russian culture and mentality. I meet here the hardest working people, and it is a great pleasure to work with them."