Recruiting in China

Having received the first license for a foreign-owned company to resume direct sales of cosmetic products in China, Avon added more than 33,000 new sales staff to its workforce there last month, according to data from the Chinese Ministry of Commerce.

The data, which was cited by Morgan Stanley in a note to investors, stated that the 33,339 new representatives were added to the work force in the month of August, bringing the total number of representatives to 188,273.
The figures indicates that the company is recruiting at an even faster rate than it had originally expected. Back in July the company said that its China sales force had reached 114,000 and that it was hoping to recruit a further 31,000 new employees.

Avon received the go ahead to resume door-to-door sales back in January of this year. The move followed the government lifting a total ban on direct sales implemented in 1998 in an attempt to quash pyramid schemes and other scams that were being offered on a door-to-door basis in the country.

Morgan Stanley reiterated in its note to investors that China remains Avon's brightest hope for future growth at the moment, with the recruitment drive likely to boost sales for the second half of the year and helping to buoy the company's overall results in the Asia Pacific market.

Although the general trend in the company's global sales has been positive, the Asia Pacific region has proved particularly disappointing for the company as a whole. With the exception of China, the company reported a poor performance in other countries in the region, contributing to a 10 per cent drop in sales during the second quarter of the year.

But where other Asian markets are showing slow retail sales, the China market remains robust. Currently China is seeing some of the largest industry growth in the world, with almost all cosmetic and toiletry categories reporting sales growth well into double figures - figures that are in line with GDP that continues to exceed 10 per cent.

This growth could prove the key to getting Avon out of a difficult situation. Restructuring charges have hit the company hard of late, forcing investors to shy away from its shares. Following the announcement of its second quarter results at the beginning of August, the Avon share price fell over $5 to reach $27.40 on August 8. Since then the share price has leveled off and finished trading at $29.54 this week.

But the downward trend in the company's share price reflects a general loss of confidence. The company's latest results showed that sales had gone up, but underlying growth was below analyst's expectations, due mainly to the heavy restructuring charges the company incurred.

During its second quarter net income dropped 54 per cent to reach $150.9m on the back $2.1bn in sales, up 5 per cent on the same period last year.

This figure was impacted by a $49m charge, as part of its massive $500m restructuring program, introduced in the last quarter of 2005. The scheme has seen profits tumble by 54 per cent but eventually could save the company $100m a year.

The restructuring costs have included organizational realignments and a reduction in the workforce, particularly in its middle management that has seen the elimination of more than 25 per cent of its management positions and lowered the number of management tiers from 15 to eight.

To date the company has now eliminated 10 per cent of its 43,000 worldwide workforce, however the expansion into China is helping to reverse that trend, emphasizing just how important the upturn in the China market is to the company.