BUSINESS INDIA + August 9, 2009 By word of mouth Amway’s distinguishing feature is its direct selling model anjeev Nar of Kerala became an part time while he was head of corporate planning at Bharat Petro- leum. After two years of working weekends and public holidays, he finally quit his job to become a full- time entrepreneur with Amway. It's been 13 years now. Nair has recruited many more ‘business owners’ to Amway to crea‘e his own multi-level Pinckney: optimistic about indian operations distribution network, which collec- tively rakes in sales of approximately Rs1.5-2 crore annually. Amway India has many such busi- ness owners, the likes of Nair, who with their distrioution networks, have enabled the ccmpany to grow to a Rs1, 128 crore corporation. Operating in the FMeG space, Amway sells 100 products in four categories, namely nutrition and wellness, beauty, per- sonal care and home. On the face of it, it resembles any other macc com_ pany. But unlike the Procter & Gam- bles and Maticos of the world, Amway’s distinguishing feature is its direct selling model. px, Hindustan Unilever, etc. sell their products through retail networks. Amvvay sells its products directly through people (see box). Over the years, it has builta robust network of 4.5-5 lakh aBos anda dis- tribution system of 127 pick-up cen- tres delivering into 4,000 cities across the country. Last year, the business grew 40 per cent from Rs800 crore in 2007 to Rs1,100 crore in 2008. This year, despite slow market conditions, it is already growing at 30 per cent. Steve Van Andel and Doug DeVos, owner-promoters of Amway. Inc, expect 2009 to be a challenging year for the company. “We're down to sin- gle-digit growth,” says Steve Van Andel, chairman, Amway Inc. But liam Pinckney, cro, Amway India, is optimistic about the Indian operations. He is targeting a topline of Rs2,500 crore by 2012 with expansion to 300 pick-up outlets in the next three to five years. For Amway Inc, India is a priority Corporate Reports market. It ranks seventh in terms of size (China is number two) in the overall Amway portfolio, but the top management believes it has tremen- dous potential. "We would want to see India in our top five markets,” says Van Andel. Taking a leaf out of Amway China's success story, Amway India intro- duced a national, electronic media, advertising campaign forthe first time in October 2007. Until then, the com- pany used to spend a few crores here and there on the print medium and let word of mouth do all the talking. "For direct selling companies, word of mouth is our marketing strategy because the crux of our business is per- son-to-person selling,” says Naveen Anand, senior vice president (market- ing), Amway India. But after ing the resounding success Amway hina created with its multi-media brand building campaign, Amway India decided to take the plunge. “China proved that if you invest in brand building, you will see the results,” says Pinckney. With a budget Of Rs16 crore, Amway India’s Tv cam- paign attempted to build the Amway brand and inform customers about the product categories they are pre- sentin, It succeeded. Brand awareness scores rose considerably and the awareness to favoutability scores cor- related. Pinckney was so impressed with the results that going forward, he’s planning to increase advertising spends. “We'll invest more as we grow,” he says. He’s also toying wit the idea of branding products individ- ually, especially in the nutrition and cosmetics category. “Once we gain favourability with the Amway brand, we'll build our other brands like Nutrilite and Artistry (personal care and beauty), because it'll be a lot eas- jer to promote them as ‘from the house of Amway’,” says Anand. Nevertheless, the brand building process has gone hand in hand with strengthening the distribution net- work. Currently, Amway has four mother warehouses, 36 regional/city warehouses, which then distribute to 127 outlets spread across the country wos collect their products from these pick-up centres. Four of them have been designed as experience centres,BUSINESS INDIA ¢ Aurust9, 2009 Corporate Reports which allow Anos and customers to come in and experience the products, while 50 are full service centres that provide training, products and all other Amway services within the premises. Going forward, Amway plans to convert 50 of them into branding centres in the next few ‘years. Recently, the company also introduced an ¢-commerce Website, which allows aBos to order products online that are delivered to cus- tomers’ doorsteps. Business has grown four to five-fold since then. Along with convenience, the Website has flso resulted in deeper penetration into small town India, which accounts for 65 per cent of the company's ales. ‘According to Anand, none of this would have been possible without the ‘raining programmes that Amway pro- vides free of cost to its business owners. Last year, Amway conducted 29,000 training sessions in India. Basic and hhigh-end training programmes, cover- ing product information and other basic skills, like how to open a sale, how to closea sale, etc, are free. But in a bid to encourage further commitment from owners, Amway provides a certifi- cation programme in nutrition, affili- ated with the Nutrilite Health Institute in California, and a beauty training programme, both at cost. Over the years, Amway has also significantly reduced its start-up cost (to become an {A8O) from Rs4,500 to R995, ‘A lot has changed since the com- pany began operations in India in 1998, A subsidiary of the privately- ‘owned, US-based $8.2 billion Amway Corporation, Amway entered India in 1995, but began operations in the country only in 1998. It took the The Amway direct selling model ike other direct selling models, Amway follows the multi-level chain model. With an initial start-up cost of Rs995 (which includes start-up kits and free training sessions), people sign contracts ‘with the company to become Amway business owners (asos). They can choose to either merely sell products to ‘other customers, or sign on their friends and relatives to, in turn, become Amway business owners, who again can choose to sell products to other people, or sign on other people to the Amway network. In this way, an ago sets up his own multi- level network and makes money not only company three years to set up its high- tech, stringent _quality-controlled ‘manufacturing facility in collabora- tion with its outsourcing partner, Sarvotham, in Baddi, Himachal Pradesh. The decision to outsource its ‘manufacturing to a third-party vendor was a result of the stringent Foreign Investment Promotion Board (riP8) regulation in the country at the time, which didn’t permit Amway to import its products. Over the years, the HPB restrictions have disappeared, but Sar- votham continues to manufacture exclusively for Amway. In fact, about 85 per cent of Amway India’s products are manufactured at Baddi, while 13 per cent are manufactured at six other locations in India, and only about 2 per cent of the products, namely the pre~ ier Artistry brand, are imported from the United States. Over the years, Sar- votham has become such an integral part of the operations, that Amway has planned an investment of between onnis own sales, butalso earns commis- sion on the sales made by the people he hha'signed on to the network. Amway has ‘clearly defined incentives that determine how. much commission a business owner can own. But unlike illegitimate pyramid schemes, an Ao can only earn cemmission if he and his network sell products, not ifthey merely recruit peo- ppl. Also, in line with the global laws of the direct selling industry, all products an be returned within 30 days, no ques tions asked, and the business can be inherited. 3630 crore and Rs40 crore to double Baddi’s capacity by December 2009. Ensuring consistency India is one of the only three locations in the globe where Amway manufac- tures its products. The other two loca~ tions are the US and China ~ both facilities are owned and operated by the Corporation. Back home, even ‘though Sarvotham has partnered with ‘he company for so many years, Amway still stations its company exec- utives at the plant 24/7 in order to ensure complete consistency. “Thereis no difference in quality in the products, we manufacture in the United States and in India,” says Pinckney. Tt wasn’t easy, though. When ‘Amway entered India, it was known moreas a cleaning company. It came in with only six products in the home ‘and personal care category. “It took us three years to manufacture six prod ‘ucts at the same quality standards as 2105eee ee BUSINESS INDIA + August 9, 2000 Corporate Reports in the United States,” says Pinckney. Many were sceptical that Amway’s high-end products sold through the direct selling model wouldn't work. But they decided to stick to it anyway. Instead, the Indian subsidiary decided to tweak its product portfolio and packaging formulaa tad tocater to the unique Indian landscape. It launched a second, premier cosmetics brand ‘attitude’, developed specially for the Indian market, at a lower price point than its global ‘Artistry’ brand, which is also available in India, Attitude is priced at par with competitors like Revion, Maybelline, etc, while Artistry positions itself as a competitor to the Estee Lauder and Lancomes of the world. A few years into its operations, Amway also developed a range of great value products such as coconut oil, amla oil and shaving cream for men, especially developed for the Indian market. With the backing of 450 scientists headquartered in Ada, Michigan, the technicians in India are now working on developing a range of deodorants for the Indian market. India is also the only country where Amway has introduced differ- ent sizes and different price points for its products. Its multi-purpose liquid organic cleaner (Loc) has been made available in three more sizes —500 ml, 200 mi and a single-use sachet apart from the regular one-litre size that is available the world over. Growing indigenously Anmway’s factory in Raddi, Himachal Pradesh Acommon criticism about Amway products is that they’re too expensive, although Pinckney insists that in sev- eral categories, Amway is priced at par with competitors. Perhaps as a result, health and beauty have become the company’s main focus over the years, because consumers don’t mind pay- ing a premium for these categories. ‘Nutrilite, Amway’s nutrition supple- ments brand, is the number one vita- min seller in the world. Its cosmetic brand, Artistry, also ranks amongst the five biggest beauty brands in the world. Back home in India, the health and nutrition category contributes to more than 50 per cent of the com- pany’s sales. In the dietary supple- ments category, Amway leads the way with a 16.8 per cent market share, compared to other players like Dabur and Pfizer, which have 11.3 per cent and 4.6 per cent, respectively (Euromonitor International _esti- mates). Cosmetics, on the other hand, is the fastest growing category in the portfolio. In 2008, the category grew by 50 per cent over the previous year. Meagre Indian market And yet, the Indian direct selling industry is estimated to be only a ‘mere Rs3,000 crore, of which, Amway constitutes 33 per cent (of the organ- ised market). Even Mexico, which has one-tenth of India’s population, has a direct selling industry five times our $1066 size. According to Pinckney, the large issue in India is that it has no legal framework guiding the industry. This has given rise to several fly-by-night ‘companies that follow illegal pyra- mid structure schemes, in which peo- ple get paid based on recruiting other people to the organisation, rather than on making sales. Frustrated at being clubbed with other illegitimate ‘ponzi’ schemes, Amway, along with 16 other direct selling compa- nies like Oriflame, Tupperware and Modicare, has formed the direct sell- ing association of India (Dsal) to pro- vide some basic structure and code of ethics to legitimate companies. This, has helped organise the industry to some extent. But there’s a long way togoyet. In its 50® year, Jay DeVosand Van Andel began Amway in 1959 selling 10€ house to house, a biodegradable product Amway sells even today. Despite the transformation in the eco- nomic environment toa largely retail format, Steve Van Andel and Doug Devos, who have inherited the busi- ness from their fathers, have decided to retain the direct selling model. "Direct selling is what our experience is in, We feel most comfortable in it. But on a personal note, we have a net- ‘work of three million plus entrepre- neurs who depend on us and we don’t want to go back on our commitment,” says Van Andel. There have been occa- sions when the company considered moving to the retail model. But it has always decided against it. Some industry observers believe that direct selling allows companies to earn higher margins because it has sig- nificantly lower distribution costs and almost negligible advertising expenses. But according to Pinckney, the costs for both direct selling companies and traditional FMCG companies are largely the same. “The margins we earn are distributed to our business owners, in the form of incentives,” he says. No matter what the model is, the ultimate goal of all FMcG companies remains the same — to sell products to consumers who demand them. As Jong as Amway manages to fulfill this promise, i'l fare well, nomatterwhich Toute it chooses to reach that goal.