To expand or not to expand" That was once the question debated by China-based executives of Mary Kay Cosmetics.

But not any more.

The question now perplexing the Dallas-based cosmetics company " which holds a 7-8 percent share of China's 14-billion-yuan (US$1.7-billion) annual cosmetics market " is how it can maintain its rapid growth.

Mary Kay's sales last year in China rose 30 percent from 2002, to reach 1 billion yuan (US$120 million), Paul Mak, president of Mary Kay Greater China, told China Daily.

"We expect similar high sales growth for 2004," Mak said.

Mary Kay entered China's market in 1998. It has been profitable since 2001, making it one of the few money-making foreign consumer goods vendors in China's tough market. Like all other foreign retailers, Mary Kay faces numerous major hurdles.

Mary Kay executives hope the company clear those hurdles this year.

Restrictions on trading rights are the first hurdle the company wants to clear. Mary Kay is not allowed to import products from its overseas factories to sell in China.

Distribution constraints also affect the cosmetics giant. For example, the ban on direct sales in 1998 forced Mary Kay to change its 40-year-old distribution model for China's market.

The business environment in China will improve significantly, as China accelerates its market-opening process in accordance with its commitments to the World Trade Organization, Mak said.

"I believe China is serious about meeting those commitments," Mak added.

Mary Kay is most interested in how China will liberalize import restrictions on foreign vendors.

That would ensure Mary Kay has access to more suppliers.

Mary Kay is presently allowed to sell in China only products that it makes in the country.

The company has a factory in Hangzhou. It was built in 1995.

"This factory supplies all the products we sell in this market," Mak said.

Mary Kay, however, has more ambitious manufacturing plans for China.

A few years ago, it bought a large tract of land adjacent to its Hangzhou factory to accommodate the planned expansion of its production facilities.

But the company cannot decide, before the trading rights issue is decided, whether to convert the Hangzhou facility into a production base to manufacture selected products in large quantities for the world market, or to continue producing its range of products solely for China.

In terms of economy of scale, the company prefers dedicated production, or "centre-of-excellence" approach, Mak said.

This is not an option as long as the import restrictions are in place, Mak said.

China will begin granting trading rights to foreign companies this year, Mak predicted.

Before that happens, "we are keeping our China manufacturing plans on hold," he added.

The distribution side of the company's business in China appears to be more complicated. Since the ban was implemented five years ago, Mary Kay, and several other cosmetics makers, who thrived on such business models overseas, have adapted to the regulatory requirements.

Mary Kay had to suspend its business in China for five months after the ban was implemented so executives could devise a new sales model.

That system has been modified many times.

The current sales model calls for the establishment of many sales outlets across China. Many of the outlets operate under a scheme similar to franchising.

"Our arrangement with the stores... is more flexible compared with typical franchise arrangements," Mak said.

"We exercise much less control over the way the stores are decorated."

But, of course, "we'd like to ensure none of the shops look shabby in any way."

In major cities, there are "promoters" who sell the company's products away from the outlets. Unlike the typical "direct sales" model, none of the promoters is required to buy a set amount of the company's products up front. Instead, they receive monthly performance bonuses, Mak said.

More importantly, Mak added, "we place a lot of emphasis on service to attract buyers."

For example, the company conducts regular classes at their various outlets to demonstrate the latest make-up techniques and showcase the company's products.

"At our stores and counters, we always encourage potential customers to try our products with the help of trained beauty consultants," Mak said.

The company's overall sales strategy appears to work well in China. Mary Kay has expanded its sales outlets to more than 40 cities, and the firm employs 50,000 promoters.

Mary Kay will devote itself to increasing its market share, especially in the mid-priced segment of China's cosmetics market.

But it will not ignore other market segments, which show great potential for rapid growth.

For instance, the company recently introduced a new line of products under the brand name "Timewise," aimed at the relatively more up-scale consumers.

In addition, Mary Kay has also created a separate line specifically for younger consumers.

"We have 150 items in our entire product line," Mak said. "That's a lot of products to suit the different needs of our customers."

(China Daily January 15, 2004)