Cosway Corp Ltd stores are sprouting up all around the Klang Valley and other cities and towns, in a re-strategising effort by the company to increase market share.

Founder Al Chuah says these new retail outlets, in shopping districts and residential areas, are ringing in good sales every month. The best shop could generate sales revenue of some RM500,000 a month, which translates into roughly RM6 million annually.

In addition to about 300 Cosway stockists that have existed for years, the home-grown direct selling company has opened some 400 stores nationwide in the 18 months since the group decided to change its business model. The key difference is that stockists earn margins of 10% of sales, while the margin for the appointed operator of Cosway shops is 5%.

The key driving force behind the aggressive expansion is the adoption of a new business model that aims at eliminating the layers of distributors in traditional direct selling.

In Chuah’s opinion, the old model is getting obsolete. “It worked well in the past because it was suitable for society at that time, when there were many housewives looking for part-time jobs to earn extra income. But it is different now, more women are working,” he says.

“We are moving away from the red ocean where competition is so fierce and moving to the blue ocean,” says Chuah, the CEO who founded Cosway in 1979 and sold the company to Berjaya Corp Bhd in the 1990s.

In October last year, Berjaya Corp injected Cosway into Berjaya Holdings (HK) Ltd, which is listed on the Hong Kong Stock Exchange.

Chuah’s blue ocean strategy is rather simple. He realised that in the multi-level marketing business model, the hefty commissions paid to the layers of distributors are a heavy cost burden.

Chuah wants to eliminate the layers along the distribution chain. Thus, the birth of Cosway’s “free store concept”. Instead of keeping inventories in a big warehouse waiting for distributors to collect and sell the products, Cosway’s model is to display the products in retail outlets so people see and buy them. The group sells a wide range of consumer products, ranging from skincare products and foodstuff to lingerie and cookware. 

Cosway bears all the costs of the shops, including inventories, rental and utility bills, and pays members chosen after training and tests to operate the stores a 5% commission on the sales revenue.

“There is a long line [of people] waiting to be operators of our new concept stores, since they can own a business without incurring any costs,” says Chuah.

He stresses that the new concept is cost saving. “We only pay 5% commission to the members who operate the store. So we can afford to sell our products at much lower prices,” says Chuah.

“Other multi-level marketing companies have to inflate their prices to pay the layers of distributors,” he adds.

Cosway shops have sprung up in other countries in the region as well since the company adopted the new business model. Already it has more than 1,500 retail outlets in Asia-Pacific, including Hong Kong, Taiwan, South Korea, Singapore, Brunei, Indonesia and Thailand. And it has plans in the pipeline to enter the US, Japan and China markets soon.

The group plans to enter the US in April this year, with 100 stores in the first year, and to open 50 stores in Japan this year.

“If the new business model doesn’t work well, we wouldn’t consider going to the US and Japan. These are mature markets, saturated with many direct-selling players,” says Chuah.

“We are waiting for the approval of the licence in China. But our products have already reached Chinese consumers who purchase over the Internet. We ship our products from Hong Kong,” says Chuah, who believes in the great potential for growth in China, noting that the country accounts for 40% of Amway’s global sales revenue of US$8.2 billion.

Reflecting its speedy expansion, Cosway’s net profit has doubled in two financial years. For FY2009 ended April 30, the group achieved net profit of RM60.7 million versus RM46.6 million in FY2008 and RM30 million in FY07. The group’s gross margin was at 40.7% while net profit margin at 7.8% in FY2009.

Revenue grew to RM774 million in FY2009 from RM578 million in FY2008 and RM442.9 million in FY2007. Between FY2006 and FY2009, Cosway’s net profit recorded CAGR of 45% and revenue 27%.

The group’s expansion plans in new markets will certainly help to lift its earnings in the future should the products sell well.

“We want to be in the top three direct-selling groups in the world. I think we can achieve that,” says Chuah.

Currently, foreign operations contribute nearly half of the group’s total revenue. Soon its international contribution will be substantially more than the domestic earnings, should its expansion plans succeed.

The new business model seems to be steering Cosway back to the high-growth path. And its boss Tan Sri Vincent Tan foresees that  the direct selling group will be the company with the largest market capitalisation in his business stable, exceeding Berjaya Sports Toto Bhd, which churn out net profit of over RM400 million.

This article appeared in Corporate page, The Edge Malaysia, Issue 790, Jan 25-31, 2010