How Amway weathered the storm, one sale at a time

    Don't be fooled into thinking that direct sales are a thing of the past just because you haven't seen a pink Mary Kay Cadillac in a while. Amway is not only still alive and well, it's actually growing, even as many retailers continue to struggle.

    The name Amway may not ring a bell with many American consumers, but it's a giant in the direct sales business. Like companies such as Mary Kay and Avon (AVP, Fortune 500), Amway makes money through people who start their own businesses to sell products ranging from fabric softener to anti-aging cream.

    How has Amway survived? Turns out, the direct-selling business is booming in China.

    Amway has weathered the economic crisis well, and it's been profitable for the last couple of years. Its parent company Alticor announced that it did $8.4 billion in sales for 2009, up from $7.1 billion in 2007, and "Amway comprises the vast majority of those sales," according to Amway's chief financial officer, Russ Evans.

    Amway is positioned to do well in China thanks in part to efforts by the U.S. government to open the doors there. The Chinese government restricted direct-selling companies in the early 1990's, when the country was beginning to liberalize its economy -- the government was nervous that citizens would get burned by Ponzi schemes.

    The U.S. government, meanwhile, had been pushing for American direct-sellers to be allowed to compete in China. The effort was part of an ongoing negotiation with the Chinese government to allow American companies access to the foreign market. In 2006, China lifted some of its policies against companies like Amway.

    That's when "the Chinese government allowed the direct sellers to really go to town," says Charles Skuba, an international marketing expert at Georgetown University's School of Business. "The China market lends itself very well to this model."

    The model works like this: Amway sells products to people, who sell them to customers -- usually friends or acquaintances. Amway provides kits to train people about how to start their own business, and modern-day versions include information online and in iPad apps. In some markets, Amway gives bonuses to sales representatives who recruit others, and new recruits give a portion of their sales to people higher up the chain.

    That wouldn't fly in China, where the government was already wary of the direct-selling model, so Amway shaped its business to earn the government's trust. The company opened its first physical stores so that sales representatives could display products. It also cut off the food chain, so representatives there don't earn money from their recruits' sales.

Why direct-selling works in China

    Amway's business took off. A big reason is because word of mouth matters in China, where counterfeits have traditionally been a big problem. "Family and friends are high influencers in the decisions that people make in terms of all kinds of choices," Evans says.

    This is especially true for nutritional products, which are in high demand in China and other emerging markets. The company's best-selling product in China is a protein powder designed for children. Amway's business model lets the company reach consumers of all economic classes, says Skuba, and lower-income buyers in particular need nutritional supplements. "The Chinese consumer tends to be more brand conscious than in many other countries in the world," he says. "They associate foreign-branded products with quality products and value."