October 01, 2014
Billion Dollar Markets
by Andrea Tortora
Direct selling is an industry proving its mettle as it prepares to take advantage of major growth opportunities fueled by technology, increased entrepreneurial support and the new emerging market consumer.
Global estimated retail sales topped US$178 billion in 2013, up 8.1 percent from 2012, according to the most recent data from the World Federation of Direct Selling Associations (WFDSA). The worldwide salesforce also grew, up 7.2 percent to 96 million independent contractors. Both are record numbers.
In 2013 there were 23 countries with annual retail sales above $1 billion. That group accounts for 93 percent of global sales. Of special note is the industry’s 6.8 percent three-year cumulative growth rate (CAGR). The figures reinforce direct selling’s strength and show its potential, says Alessandro Carlucci, CEO of Natura Cosméticos and Chairman of the WFDSA. “The opportunity this industry has to really be even more powerful is in taking advantage of the fact that we are living in a moment in our society when technology is reinforcing relationships and allowing us to do more and better business,” Carlucci says.
STRONG SUSTAINABLE GROWTH
This most recent data clearly illustrates direct selling’s sustainable growth—especially in times of economic recovery and improved governmental policies to support entrepreneurship. Among the direct selling associations reporting their data to the WFDSA Research Committee, about three-fourths of the markets show solid, sustained growth in the three-year compound annual growth rate.
Here’s why that is important: “If the year-over-year percent change represents the snapshot, then the three-year CAGR represents the video and shows the long-term change or the trend. The sustained growth of direct selling is shown in a positive CAGR,” says Amway’s Judy Jones, Chairman of the WFDSA Global Research Committee.
Data is reported using constant 2013 dollars, to remove currency fluctuations from the equation. As more companies participate in sharing sales data with each country’s direct selling association (DSA), the entire industry begins to gain actionable knowledge it can use to enable sellers to better serve customers.
The sales of the 23 billion-dollar markets in 2013 are familiar to those who follow this annual ranking. The top five countries account for 60 percent of direct selling’s global sales. All but one report a positive CAGR:
1. United States, 4.6 percent
2. China, 23.3 percent
3. Japan, -4.4 percent
4. Korea, 8.0 percent
5. Brazil, 8.6 percent
China moved into the No. 2 spot for 2013. If the current rates of growth in the United States and China remain steady, China could become the No. 1 direct selling market in the next year or two.
Interestingly, the billion-dollar markets that make up the bottom five show tremendous cumulative growth, particularly in emerging markets:
19. Australia, 2.3 percent
20. Venezuela, 15.7 percent
21. India, 20.0 percent
22. Philippines, 17.8 percent
23. Indonesia, 12.0 percent
The numbers reinforce trends seen in the past two years. Direct selling is growing rapidly in the Asia Pacific region and Africa—dubbed the “new frontier” by Carlucci. Africa posted just over 9 percent year-over-year sales change for 2013, trailing only Asia Pacific at 12.6 percent.
“Africa is a place where everyone should put a seat now, because in 15 years it will be very relevant,” Carlucci says.
Following closely is the Central and South American region, which also posted just over a 9 percent year-over-year sales change. Six Latin American countries—Brazil, Mexico, Colombia, Argentina, Peru and Venezuela—are billion-dollar markets. More multinational companies are starting to do business in Central and South America, where consumers embrace direct selling.
POWERFUL NEW MARKETS
The desire to improve one’s socioeconomic standing remains strong in emerging markets, which translates to excellent growth potential for direct selling. In fact, seven of the billion-dollar markets with double-digit cumulative growth rates are emerging markets, according to the WFDSA data:
- Argentina, 28.1 percent
- China, 23.3 percent
- India, 20.0 percent
- Philippines, 17.8 percent
- Venezuela, 15.7 percent
- Indonesia, 12.0 percent
- Colombia, 11.6 percent
Direct selling is a very relevant marketing and sales model for emerging markets, says Derrick Irwin, Portfolio Manager for the Wells Fargo Advantage Emerging Markets Equity Fund. In many of these countries, the retail industry is not fully developed and companies cannot put products on a Wal-Mart shelf. “There is also skepticism among consumers about counterfeiting and quality products,” Irwin says. “If items are being sold by someone they trust, it is powerful. The opportunities are very, very good.”
Companies like Avon know how important international markets are for growth. The global beauty direct seller derives 85 percent of its business outside the U.S., and 75 percent of revenues come from emerging markets, says CEO Sheri McCoy. Avon’s priority? Growing its top markets, which include: Brazil, United States, Mexico, Russia, Central Europe, Venezuela, Argentina, Colombia, United Kingdom, Philippines, Turkey and South Africa.
China is also a huge market with infinite business opportunities. Leo Zhou, Deputy Director of Media Affairs at Mary Kay China, believes direct selling is a perfect match for China’s huge population, and that the interpersonal interaction at the industry’s core is quite effective in low-tier cities. He says, “It ensures that the direct selling industry could get into contact with female consumers in a faster and more precise way, thus promoting sales growth.”
Despite being a more mature market for the industry, Latin America is still a developing region with an entrepreneurial middle class that is seeking ways to maximize individual and household incomes, as demonstrated by the number of countries represented on the list, and growing activities in even more. Miguel Francisco Arismendi, Amway’s Director General for the Andean area, based in Bogota, Colombia, says, “There is no doubt that direct selling provides opportunity.”
EMERGING MARKET CONSUMERS
The world’s new consumers are a diverse group. Some are affluent and ready to spend their newly robust income on fulfilling their dreams and ensuring a better life for their children. Others are just beginning to realize their buying potential as they are exposed to the wealth of available products. The new middle class in Indonesia, India, Nigeria, Ghana and Kenya are confident consumers who plan to buy more, save more and invest in education, according to research from Standard Chartered, a London-based international bank.
These emerging consumers have a wide range of incomes and a wide range of desires to follow, including such things as an appetite to travel and willingness to invest in a new car, and some can even consider buying luxury goods. In less developed markets, currency fluctuations and commodity prices impact the consumer spend. Wells Fargo’s Irwin says, “The problem in core countries is that so much of the family budget goes to food, so if those prices fluctuate that squeezes the budget for other things.”
Whereas an American will generally buy shampoo no matter what, in countries like India it may not be a regular purchase. To get around this hard economic truth, companies like Hindustan Unilever Limited offer single-use package sizes for the price of a rupee or two (2-4 US cents). “It takes creative marketing and strategies to really access these markets,” Irwin says.
Another example: In China, direct selling successfully advances the development of consumers’ personal-care habits in low-tier cities and stimulates their willingness to spend more on premium products. Consumers in fourth-tier cities spend an average of 220 yuan (about US$38) each year per capita at cosmetics stores, whereas in the direct selling channel, consumers spend 540 yuan (about US$88) each year. Mary Kay’s Zhou says, “This fully demonstrates the consumption potential of third-tier and below cities.”
As emerging market consumers flex their collective spending muscles, a preference for local or domestically based brands is becoming evident. In the past 20 years, multinational brands dominated consumer brand preferences. As locally based companies achieve scale and develop their own brand strength, they are beginning to compete with multinationals. Irwin says, “Consumers are more open to buying local brands to support local businesses and show their pride in the local market.”
In China, where consumers have long aspired to acquire products with names like Gucci, Nike and other big Western brands, local brands are gaining market share as they fill a niche in the middle ground between the luxury and inexpensive brands. China-based Belle International is one of them. The company makes mid-range women’s shoes and is like the Nine West of China, according to Irwin.
In India, the domestic Godrej Consumer Products now claims more than $1 billion in revenue, taking a stab at the more established Hindustan Unilever. “They are getting to scale, and they are creating disruptions,” says Irwin. This bodes well for direct sellers, who build their business on micro-local enterprises and interpersonal connections.
At the heart of direct selling is the ability to offer people the chance to feel empowered, to take control of their lives and to add value to society. This fuels entrepreneurship, self-employment and microenterprises. Research shows that such ventures strengthen a country’s economy.
Alan Finkelstein Shapiro, a researcher at the Universidad de los Andes in Colombia, finds that “economies with larger self- employment shares exhibit faster recoveries following a negative economy-wide productivity shock.”
The entrepreneurial aspects of direct selling empower women and can be attractive to those under age 35 who more often want to be their own boss while also helping others. Sandra Whittle, Managing Director for Partylite U.K. & Ireland, says a favorite quote she shares with those new to direct selling is, “If at first you do succeed—try to cover your amazement.”
Whittle says consultants must be willing to put in the work because experience cannot be bought, and it is particularly important to earn the respect of colleagues and of the field.
Just as important is harnessing the excitement of those who want to be sales leaders, says Andrea Slater, with Avon U.K. “We need to ensure that we capture that enthusiasm within a specific timeframe,” she says. “Then, we need to fan the flames and keep them motivated, engaged and rewarded.”
Mary Kay’s Zhou says that in countries like China, business startups and entrepreneurship are becoming easier to navigate on the policy front, as well as becoming more accepted forms of livelihood for the younger generation. He continues, “Direct selling can help them to fulfill their dream of initiating businesses, and to gain earning opportunities and freedom with the thinking approach and behavioral model of their own characteristics, which constitutes a career development mode catering to the ideal of modern youths.”
For women, in particular, direct selling is an opportunity to contribute money to the household and develop a degree of independence. This is especially true in rural areas and farming communities. Irwin cites Hindustan Unilever Limited as an example. The Mumbai, India-based consumer goods firm employs 65,000 women through its Shakti direct selling initiative. These women sell products in their villages, giving Hindustan Unilever and the women themselves a huge economic opportunity they wouldn’t have otherwise.
THE YOUNGER GENERATION
As an industry, direct selling companies recognize the importance of recruiting young people under age 35 to become consultants as well as consumers of its products. Doing this means using a technology-rich approach and being socially responsible, says Amway’s Arismendi.
In Latin America, direct selling is equipping consultants with social media tools that enhance day-to-day communications. Amway is aggressive in studying tools that promote the use of technology in the field. “This will not replace the personal touch, but it will complement it,” Arismendi says. “Direct communication and social networking can be much more effective than conventional sales and retail.”
SPOTLIGHT ON REGIONAL MARKETS
The No. 1 market for direct selling saw 2013 retail sales of $32.7 billion, up 3.3 percent from 2012. Between 2010 and 2013, the compound annual growth rate was 4.6 percent in the country. The U.S. accounts for 18 percent of worldwide direct selling sales, generating about $1 for every $6 retail dollars globally.
The U.S. salesforce also grew 5.7 percent, to 16.8 million people, which is a record high. The most prevalent sales method is face-to-face, with 70 percent of consultants using this avenue, according to the U.S. DSA.
The product groups with the strongest percent of market share are wellness and services, making up 28.5 percent and 22.9 percent of sales, respectively. New segments are also using direct selling, such as energy, says U.S. DSA President Joseph Mariano. “Direct selling is a smart, go-to-market strategy for many products, especially those that benefit from explanation or demonstration. In the case of utilities, most Americans aren’t used to having a choice in their provider, so they benefit from guidance to make an informed decision.”
Given current rates of growth, China will most likely surpass the U.S. in market size for direct selling, becoming the industry’s No. 1 market. Its 2013 retail sales were $27.3 billion, up an astounding 41 percent from 2012. China also enjoys the industry’s highest cumulative growth rate at 23.3 percent.
“With the acceleration of the global economic integration progress, China promises tremendous market potential as the second largest economy worldwide today,” says Mary Kay’s Zhou. U.S. direct selling giants Amway, Mary Kay and Nu Skin are among the largest companies operating in China. Several domestic Chinese direct selling enterprises also are a noticeable force. Competition across the country is moderate, with 44 licensed enterprises.
Cosmetics consumption keeps growing at an average annual growth rate of 15 percent, despite an overall economic slowdown. China trailed only the U.S. and Japan in consumer cosmetics spending in 2012. Women play a key role in those numbers and are increasingly active in economic consumerism. “As the number of employed women increases and their status in social and economic development rises steadily, their role in consumption is also becoming more prominent,” Zhou says.
Chinese women now control 60 percent of domestic consumption and make 77.5 percent of household purchase decisions. This far exceeds the purchasing power of men and children.
As China grows and becomes a more relevant market, the WFDSA’s Carlucci believes that the industry must put more energy into “understanding how we communicate and maintain the fundamentals of the industry” in a way that can be understood regardless of the country.
Direct selling continues to grow at a steady pace in Europe. Retail sales topped $31.6 billion in 2013, and 12.7 million people work as independent consultants across Western, Central and Eastern Europe. “Europeans have embraced the entrepreneurial spirit and increasingly recognize direct selling as an appealing (and sometimes preferable) alternative to a traditional job,” says Marinda Chaplin, Vice President at SUCCESS Partners Europe.
As recovery continues from the economic recession, the U.K. is seeing more encouraging trends, especially in the area of self-employment. Lynda Mills, Director General of the U.K. DSA, shares that recent information from the Office for National Statistics reveals self-employment is at its highest level in 40 years with 4.5 million people. “This, coupled with the recent statement from Esther McVey, Minister for Employment, saying, ‘Being your own boss is as impressive as a degree,’ appears to give more credibility to self-employment than ever before,” Mills says.
Mills reports that during the recent recessionary years, direct selling in the U.K. has seen year-on-year growth in a variety of demographics, and some direct sales companies are enjoying double-digit growth. With young people being notoriously risk adverse, direct selling is an ideal option for people in many age ranges and from varied backgrounds.
“We have seen more young people between 18 and 25 working in direct selling with 29 percent (75,000) of U.K. direct sellers under age 25,” Mills says. On average, 38 percent of direct sellers are over age 50, representing a rise of more than 32,000 people since 2011.
Direct selling is also increasingly appealing to a multi-cultural audience. In a recent survey of its members, the U.K. DSA discovered that 30 percent of direct sellers (120,000 people) in the U.K. are non-British. DSA member companies attribute this to a rise in interest of people from places like Asia and Eastern Europe, according to Mills.
People in the U.K. are turning to direct selling as a real alternative to traditional employment, with 68,000 direct sellers (17 percent) working full-time hours (more than 30 hours a week). This is up 20,000 from 12 percent in 2011. “Direct selling here in the U.K. really has entered the mainstream,” Mills says.
One factor in the sustainability of the industry is the increasingly digital nature of the world economy. Technology enhances the core aspect of direct selling. Embracing the digital age can ignite new growth in mature markets like the United Kingdom, which enjoys a 10.4 percent three-year compound annual growth rate and reported $3.3 billion in 2013 retail sales.
Germany posted a three-year CAGR of 5.8 percent. The direct selling model enjoys a positive image in the country, says Guido Amendt, Mary Kay Germany’s Director of Marketing. He adds that a sustainable increase in purchasing power per capita offers opportunities for consumers to buy high-quality products through direct selling.
In France, direct selling continues to grow regardless of the economic climate. When it comes to increasingly competitive markets such as cosmetics and jewelry, direct selling leverages innovation as a growth solution, says Jean-Laurent Rodriguez, Director of Communication and Training for the Federation de la Vente Directe, France’s DSA. In 2013, France recorded sales of $5.3 billion. The country’s cumulative annual growth rate between 2010 and 2013 was 3.4 percent.
Continued expansion in the industry is driven by several factors. France is enjoying a growing number of new companies with new brands and new products, such as textiles, shoes, home decoration, gastronomy and health care, Rodriguez says. These companies are international and national industrial groups, medium-sized companies and startup firms. Agreements between the Federation de la Vente Directe and government ministries (higher education, national defense and public institutions) ensure that direct selling is a viable option.
The WFDSA’s Carlucci sees Africa as an interesting continent right now for direct selling although, currently, the only DSA exists in South Africa. South Africa’s 2013 retail sales were $720 million, and its three-year cumulative growth rate is 6.8 percent. “Direct selling is very relevant here because it is a way to be an entrepreneur, and other retail channels are not developed,” Carlucci says.
Multinational companies are taking interest in the continent, says Wells Fargo’s Irwin. That’s because it is a huge market. Irwin cites Nigeria as an example. The country is home to 180 million people and just 10 supermarkets. “The rest are local markets and product distribution via trusted networks,” Irwin says.
Central and South America are comprised of fast-growing countries known for their entrepreneurship culture. Ernst & Young, in its G20 Entrepreneurship Barometer 2013, ranks Argentina, Brazil and Mexico as some of the best world economies for entrepreneurs. The same can be said for the region’s direct selling prospects. The industry is well established in Latin America, where customers like to buy from people they know. Additionally, it is a market with potential because retail is not well developed in many regions.
Latin America’s direct selling billion-dollar markets are:
- Brazil, $14.2 billion
- Mexico, $8.1 billion
- Colombia, $3.3 billion
- Argentina, $1.9 billion
- Peru, $1.9 billion
- Venezuela, $1.4 billion
In Latin America, the “family factor” is very important and makes direct selling attractive as a self-employment option. Unlike in the U.S., children look to go to college close to home and remain with their families. Many career decisions center on one’s family, which makes direct selling attractive as a source of income in addition to traditional employment.
“Direct selling is an opportunity to work but remain close to the family and to have additional income for the needs of the family,” Arismendi says. “So this makes a difference. There is flexibility and management of their own time.”
Direct selling is also becoming a full-time work option, says Pio del Castillo, Mary Kay’s Manager of Corporate Communications. Brazil ranks No. 5 among the industry’s billion-dollar markets. Direct selling retail growth in the country is related to the economic recuperation of international markets, del Castillo says. The country posted year-over-year retail sales growth of 7.2 percent, making for a three-year CAGR of 8.6 percent. The number of sellers grew as well, reaching 1.3 percent, to 4.5 million.
Brazil also boasts a diverse market with access to information. One important factor boosting direct selling in the region includes traditional retailers such as O Boticario adding direct selling to their marketing efforts. Del Castillo says, “The Brazilian economy grew only 2.3 percent in 2012, but Brazil still remains one of the most important players in the direct sales market.”
TECHNOLOGY, DATA WILL FUEL FUTURE GROWTH
Technology in all its forms is an essential ingredient to the future growth of direct selling, according to industry executives and economists. “The Internet and digital technologies, mobile devices, social media and access to more robust data will allow direct selling companies to dramatically increase the level of service they offer to their salesforce and customer base,” says Alessandro Carlucci, CEO of Natura Cosméticos and Chairman of the WFDSA.