On Amway’s website, it boast some of the following:
- Number 1 direct selling company globally
- Nutrilite is the world’s No. 1 selling vitamins and dietary supplements brand; Artistry is among the world’s top 10, largest selling, premium skincare brands.
- 800 patents held worldwide
- 100+ scientific laboratories worldwide with advanced technology and equipment
China is Amway’s largest market. The company president, Doug DeVos had boasted that in 2016, Amway was the largest multi-level marketing company in China with a reported 1.5million distributors that bought in US$2.6billion in revenue (or 30% of Amway’s worldwide sales).
What it doesn’t boast is that its sales have been declining for the past 3 years (and many expect this decline to continue into 2018).
In fact, it is facing its’ toughest headwinds in recent years. Why?
Business model and luck in the beginning
Amway relies on agents to sell their products. Whilst Amway has been innovating its products, it has not been innovating its marketing or its’ agency force fast enough.
A sad trend is that most of the time the agents themselves buy a large chunk of it, and then find it hard to convince other people to buy it. It made sense in the beginning because sales numbers kept growing, cash is collected beforehand, and agents had the very incentive to push products down the chain.
Amway also had a lot of luck with timing when it first expanded its China business – the restructuring of state-owned businesses created a lot of laid-off workers who had no other practical skill sets, perfect recruitment ground for Amway’s direct selling model. In fact, the state government was probably happy that Amway helped address the huge unemployment problem after the structuring.
Exclusivity and Transparency – Oxymorons?
However, over the years this has become a vicious cycle for Amway as these desperate agents turn to desperate measures to sell the products – especially when people find out they can buy the same quality products at a much cheaper price at ecommerce sites.
This misalignment of revenue vs. agency reward system encourages bad behaviour that has been tarnishing the Amway brand.
In China, “Amway” is now the synonym for being brainwashed – nationwide. The company’s name is even used as a verb in everyday lingo to mean “to promote relentlessly”. Not a good brand image.
You can’t get away from the explosion of ecommerce
Most competitors did not have the agency scale that Amway had. This allowed Amway to defend its market share with global competitors entering the market in the last decade.
All that changed with the explosion of ecommerce.
Customers behaviour changed. They started to become more sceptical about what sales people would tell them, and instead opted to conduct their own research, or asked for peer review.
Platforms like Tmall has made this possible, and gave customers the transparency they wanted. Amway agency model did not. The Amway direct-selling model became not so direct after this.
Underlying problem – too reliant on agents
Whilst it is easy to blame the ecommerce evolution or new entrants entering the market, the real problem we believe is that Amway was too reliant on its agents. As with any organisation reliant on its agency model, it avoided any major change that could upset its agency force.
If just a quarter of Amway agents left to join Usana or Herbalife – similar companies trying to gain foothold in China – Amway could easily lose its coveted market share.
Amway had skirted around the issues for years. Unless the core problems are solved, fast, Amway will continue to lose credibility and hence market share.
Is this the end for the agency model? Let’s take a look at HSBC
No. There are companies who had realised the fallacy of the agency model, and had done something about it many years ago. An example is the HSBC bank. Although it has been around for 150 years, it has undergone a revolutionary culture change in the last few years.
Back in 2012, HSBC went through a massive restructuring exercise. It sold off its insurance agency business as well as restructured the way it remunerated its’ relationship managers (RM) at the bank. The RM KPI was changed from a pure commission based structure to a balanced scorecard structure where sales figures was given less importance, and that the RM way of making a sales would significantly impact his or her bonus.
In Singapore, many sales people left HSBC. There were rumors that HSBC was selling its insurance business. Otherwise, why did HSBC sell off the one channel that was bringing in more than 50% of its total sales?
In hindsight, it was the right thing to do. The agency model then was like the Amway. It did bring in the sales, but the agency demanded high commission, and some agencies used sales tactic that tarnished the brand and cost HSBC the trust of the customers.
And yes, whilst they saw good RMs leave, the surprising fact was that many good RMs did come back. Whilst these agents would get higher pay cheques by just product-pushing the highest commissioned product, there was a shift in mindset that an RM could have a more balanced way of making money and serving the customers.
The Monetary Authority of Singapore, the country’s central bank, has since then implemented similar balance scorecard commission structure for sales people, capped the commission for insurance products and also made clear that the insurance agency industry is a sunset industry.
HSBC took further steps to differentiate the agency dilemma in the age of ecommerce. It set a clear channel strategy to differentiate the products that can be bought through direct channels and through the smaller number of RMs.
Simple, low asset value products would be sold directly online; more complicated and higher asset value products would be sold by RMs with clear and structured advice.
This was a win-win for both the company and the RM channel, and 2014-16 saw some of the best sales figures after the strategy was implemented.
Evolve to stay relevant
RMs will continue to remain relevant. But like other parts of the agency ecosystem, people’s reliance on them has decreased and the agency as well as the companies that rely on agents must evolve to remain relevant.
Meanwhile, as mentioned above, Amway is trying to renovate. It has been coaching its sales people to be less “amway” (the verb). It has also created new product categories such as energy drinks and cooking pots.
Alas, without addressing the core issue, Amway’s continuing decline is all but inevitable.
A lesson brands and other consumer businesses should take in this ever-changing world.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected]