Industry Analysis Paper:

INDUSTRY ANALYSIS PAPER:

Direct Sellers of Personal Care Products

School of Business Administration

ECO 6351 Economics for Managers (Spring 2007)

Dr. Chien Chen

Team #6: Nisha Stephens and Cathy Osh

As a team member, I hereby certify and warrant:

(a) that this Paper is our original team work;

(b) that we have acknowledged all the sources used in this Paper. I understand that copying of another's work and representing it as our own work is a serious academic offense, and should be treated as such;

(c) that the final version of this Paper has been read and approved by all team members in the form it has been submitted to the Instructor.

Name Initials Date

1.Nisha Stephens N.S. 04/27/07

2.Cathy Osh C. O. 04/25/07

Table of Contents

Page

Executive Summary...........................................................................2

Overview........................................................................................3

Industry Organization.........................................................................3

Market History.................................................................................4

Market Structure...............................................................................6

Market Demand................................................................................7

Competitive Forces............................................................................9

Barriers to Entry......................................................................9

Rivalry among Competing Sellers.................................................9

Competitive Forces of Substitute Products.......................................9

Competitive Forces of Buyers.....................................................10

Competitive Forces of Suppliers..................................................10

Conclusion.....................................................................................10

Works Cited....................................................................................12

EXECUTIVE SUMMARY

This term paper analyzes the "direct sellers" distribution channel of the personal care products industry and presents recommendations on entry by prospective competitors. The premises and arguments are supported by citations and references.

Personal care products consist of cosmetics, fragrances, bath products, skin care products, nail care and sun protection. The direct sales business model was developed in the late 1800s and utilizes a distribution channel vis-Ðo-vis beauty consultants.

Avon was the first to enter the market as a direct seller in 1886. Amway followed in 1959 and Mary Kay joined in 1963. The industry is primarily held by private investors. However, Avon is public and trades under ticker symbol AVP.

The market structure for is perfectly competitive and there is no market power in the personal care products industry, because there are too many close substitutes. Each competitor operates in the international market and market demand is being sustained with the implementation of new strategies.

Four out of the five competitive forces yield unfavorable results for entry by potential competitors. As a result, entry into the personal care products industry is not recommended.

Overview

The Cosmetic, Toiletry and Fragrance Association (CTFA) were established in 1894 and are one of the many trade associations for the personal care industry. CTFA currently represents more than 600 manufacturers and distributors of finished personal care products as well as suppliers of ingredients and raw materials. Some of its members are Avon Products, Almay, Braun, The Gillette Company and L'oreal just to name a few.

This analysis will focus specifically on "direct sellers" in this industry. The direct sales business model was developed in the late 1800s and utilizes a uniquely designed distribution channel vis-Ðo-vis sales representatives. The graduated business model is known as multi-level marketing (MLM), which combines direct selling with recruitment.

Industry Organization

Personal care products include cosmetics, fragrances, bath products, skin care products, nail care and sun protection. The first business was organized in 1886 and flourished without competition until the late 1950s and early 1960s. This industry is primarily held by private investors. The manufacturing and distribution channels are all handled internally.

The government monitors the activity in this industry via the U.S. Food and Drug Administration (FDA) and the Federal Trade Commission (FTC). The FDA regulates the manufacturing of the products; specifically the ingredients/raw materials used and the

product labeling. The FTC is primarily concerned with sniffing out pyramid schemes, which are illegal multilevel marketing plans in which the main way of earning money is by recruiting new sales representatives. As the industry expands, it is restricted by FDA inspections and cosmetics compliance related to imports/exports. The industry is categorized as Toiletries Preparation Manufacturing and the SIC/NAICS codes are 325620/2844 respectively.

Market History

The oldest direct