[Avon Products Inc.]leaves the U.S. Direct Selling Association, noting scrutiny of other firms’ business practices as key to its decision and saying the trade group’s code of ethics “requires updating to better reflect the current state of the industry.”

“We believe the association’s agenda in the U.S. is overly focused on the issues of a few specific brands rather than industry-wide challenges,” the firm said in a Sept. 12 letter to its direct-selling peers.

Allegations that direct sellers including nutritional product firm Herbalife Ltd. operate illegal pyramid schemes have damaged the industry in recent years.

“DSA is not advocating effectively for Avon and our representatives,” Avon said in a release.

In addition to Avon, global icons in the direct-selling space include Amway Corp., owner of the Nutrilite dietary supplement brand, and personal care and cosmetic product marketer Mary Kay Inc.

In its letter to other firms, Avon says: “Like any industry, direct selling and multi-level marketing evolve, and associations that support the direct-selling industry need to evolve as well. … In the U.S., we believe there is a need to enhance the DSA Code of Ethics to better ensure that individuals entering direct selling have the benefit of adequate safeguards.”

Specifically, Avon cites three elements of its direct-selling platform that protect representatives and consumers at a level above DSA’s prescribed standards:

The firm’s business model “does not rely on nor does it encourage sales of inventory, training or business-support materials between representatives. The core of our business model is representatives selling our products to an end consumer.”
It “has reasonable return policies. Representatives are not left holding excess inventory.”
It limits representatives’ earnings from sales to other Avon agents to three generations. “We do not promise commissions on infinite sales. Rather, we primarily promote and incentivize representatives based on their sales to customers.”

The firm asserts that “by adhering to these principles in every market where we operate, we protect our representatives and help ensure new recruits have a positive experience with direct selling.”

DSA Code Mentions Pyramid Schemes

DSA’s code touches on issues Avon cited or alluded to in its letter, though not to the firm’s satisfaction.

With regard to pyramid schemes, for example, the group states: “Pyramid or endless chain schemes shall be considered consumer transactions actionable under this Code. The Code Administrator shall determine whether such pyramid or endless chain schemes constitute a violation of this Code in accordance with applicable federal, state and/or local law or regulation.”

DSA notes that the code administrator is an independent party that functions to resolve complaints and is empowered to determine remedies. All DSA member companies pledge to observe the code and to honor the administrator’s decisions, the association explains on its website.

DSA’s code also addresses “inventory loading,” or “the practice of loading up salespeople with inventory they are unable or unlikely to be able to sell or use within a reasonable time period,” directing member companies to establish policies providing for the repurchase of inventory from independent sales representatives “on reasonable commercial terms.”

The group defines those reasonable terms as covering marketable inventory repurchased within 12 months from the salesperson’s date of purchase at not less than 90% of the salesperson’s original net cost.

DSA’s code of ethics also advises member companies to institute policies for buying back company-produced promotional materials, sales aid or kits that sales reps are required to purchase.

Avon notes that it abides by the World Federation of Direct Selling Associations’ code of ethics. The firm remains affiliated with the global group along with local-market DSAs and other direct-selling trade organizations outside the U.S.

The U.S. DSA serves as secretariat for WFDSA.

DSA Considers Avon’s Concerns

In an Oct. 7 email, DSA Senior VP of Public Affairs Paul Skowronek said the group is considering issues Avon raised concerning the code of ethics.

Skowronek highlighted sections of the group’s code of ethics designed to protect consumers and the direct-selling salesforce, including inventory-repurchasing provisions and a “Responsibilities and Duties” section that details the group’s expectations for “prompt investigations” into consumer complaints.

“The Code imposes guidelines for fair and equitable marketing practices so that customers and potential consumers are neither pressured nor misled in the course of a solicitation, and the rule that a seller cease contact immediately upon request of the customer/potential consumer,” he noted.

In a Sept. 15 statement, DSA President Joseph Mariano wished Avon well but said direct sellers are better off acting together.

“Our association is far better equipped to address the challenges and opportunities of our industry when all of our member companies stand together. We remain committed to the highest level of marketplace ethics and consumer protection and wish Avon well as it charts its future course” in the U.S., Mariano said.

Herbalife, Amway and two other supplement marketers, LifeVantage Corp. and USANA Health Sciences Inc., were among DSA’s 20 largest members based on net sales in 2012 ([A#05131202009]).

Direct Selling Still ‘Vibrant’

Avon concludes its letter by characterizing the U.S.’s $32 billion direct-sales sector as “a vibrant and growing industry.”

“For well over a century, Avon has been committed to assuring that direct selling remains a viable option for individuals looking for financial empowerment. Our commitment to our representatives today and in the future will not waiver.”

Avon reported revenues of $2.2 billion for its fiscal 2014 second quarter, a decrease of 13% on a reported basis compared with the same period a year ago. CEO Sheri McCoy called the quarter “another tough one” for the firm and noted that it is behind in its turnaround effort, which to date has included extensive management and cost restructuring and the shuttering of its businesses in Ireland, South Korea and Vietnam Also see "Avon Announces More Layoffs, Plans To Exit Ireland" - HBW Insight, 15 April, 2013..

Withdrawing from DSA, in addition to distancing itself from other direct sellers, gives Avon a platform for highlighting key tenets in its own business model that the firm suggests provide safeguards for sales representatives beyond those ensured by DSA’s code of ethics.

The strategy could help Avon reassure existing and would-be representatives at a time when their ranks have been dwindling. In the firm’s fiscal 2014 second quarter, active representatives were down 6% compared with the prior-year period, and Avon has been focused particularly on reinvigorating its ailing U.S. business largely by improving representative engagement ([A#02140804009]).

Further, the move could help put off further probes into the company’s operations following an announcement in May that Avon had reached a preliminary $135 million settlement with U.S. authorities over the alleged bribery of China officials in a case that traces back to 2008 ([A#02140505004]).

Meanwhile, Herbalife continues to contend with “short-seller noise” and is being investigated by the Federal Trade Commission following a request from Capitol Hill ([A#05140804010]).

Anti-aging product direct seller Nu Skin Enterprises in March announced the outcome of an investigation into its MLM activities in China, which followed local media reports condemning the firm’s practices. Authorities found some compliance issues around marketing claims and product registrations – amounting to $540,000 in fines – but nothing suggesting that Nu Skin’s overall operations violate the country’s tight restrictions on direct selling ([A#05140331004]).

Nevertheless, voluntary cession of Nu Skin’s sales recruitment activities in China during the investigation created a drag on revenue, which declined 3% in the firm’s second quarter, announced Aug. 6, after a fiscal 2013 in which it booked whopping growth of 49% Also see "China Regulatory Probe Slows Nu Skin Growth After Record Year" - Pink Sheet, 18 March, 2014..

[Editor’s note: This story was contributed by visit “The Rose Sheet”, your source for cosmetics and personal care product industry news. For more information call 1-800-332-2181. To register for a free trail, click here – no credit card needed.]

Scrutiny Of Direct Selling Businesses Prompts Avon To Leave Trade Group

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