Avon Products, Inc.

Introduction of Avon Products, Inc.

Headquartered in New York City, Avon is one of the world’s largest direct-seller firms, and is

by far the largest direct seller of cosmetics and beauty-related items. Avon is the fifth-largest

cosmetics and fragrance firm in the world. The company receives sales from catalogs and a

website, but the vast majority of its sales come from its 6.4 million independent sales

representatives in some 110 countries. These women are all independent contractors. Avon

has 39,100 employees, but only 4,800 are employed in the USA. Since 1892, Avon has been

on the forefront of empowering women to be their own boss and be independent and become

leaders in communities and business. Avon products include cosmetics, fragrances, toiletries,

jewelry, apparel, home furnishings, watches, footwear, children’s products, skin care, and gift

and decorative products, nutritional products, housewares, and entertainment and leisure

products. Avon owns and sells Silpada jewelry. A few well-recognized company brand names

include Avon Color, ANEW, Skin-So-Soft, Advance Techniques, and mark. Although a large

U.S. iconic corporation, Avon is struggling today to recover from poor management strategies

that led to CEO Jung resigning over global bribery investigations. The direct-selling business

model has waned in the USA, but it is effective in many emerging economies globally. Avon

obtains 85 percent of its revenue from outside the USA. Millions of motivated direct sellers in

many countries is Avon’s key competitive advantage going forward, but the company needs

a clear strategic plan. Avon reported a loss of $38.2 million in 2012 compared to a net income

of $517.8 million the prior year. Avon’s second-quarter 2013 net income declined 48 percent

but that was above Wall Street expectations and so Avon’s stock price hit a new high for the

year. Avon has made an offer to settle its overseas bribery allegations for $12 million; the

offer has been rejected by U.S. authorities. Avon’s beauty products earned $31.9 million for

Q2, down from $61.6 million a year ago. Revenue slipped 2 percent to $2.51 billion due to

currency rates and North American sales. Avon’s sales in North America during Q2 2013
declined 12 percent, hurt by a 13 percent drop in the number of active sales representatives.

Avon’s Asia-Pacific sales fell 9 percent, but the company’s sales in Latin America and Europe,

the Middle East and Africa rose. For the quarter, Avon’s prices rose and their average order

size increased.

History

David McConnell started a business in 1886 that eventually came to be named Avon Products.

A traveling book salesman, McConnell did not originally intend to create a beauty company,

but he realized that his female customers were far more interested in the free perfume

samples he offered than in his books. McConnell had also noticed that many of his female

customers were isolated at home while their husbands went off to work. So, McConnell

purposely recruited female sales representatives and believed they had a natural ability to

network with and market to other women. At a time of limited employment options for women,

the Avon earnings opportunity for women historically was a revolutionary concept for mankind.

It marked the start of the company’s long and rich history of empowering women around

the globe. In 1892, McConnell changed the company name when his business partner, who

was living in California, suggested that he name his business the California Perfume Company,

because of the great abundance of flowers in California. In 1916, the California Perfume

Company was incorporated in the state of New York and filed its first trademark application

for Avon on June 3, 1932. The document described the company’s goods and services as

perfumes, toilet waters, powder and rouge compacts, lipsticks, and other toiletry products.

Avon entered the Chinese market in 1990, but legal changes in 1998 forced Avon to sell only

through physical stores called Beauty Boutiques. The company received China’s first license

for direct selling in 2006. Avon purchased Silpada, a direct seller of silver jewelry, in 2010 for

$650 million. Brazil is the company’s largest market, passing the USA in 2010. Avon closed its
Atlanta distribution center in 2013 and is closing its Pasadena distribution center in 2014.

Avon’s revenue dropped 5 percent to $10.72 billion in 2012.

Internal Issues

Vision and Mission

Avon has stated vision and mission statements on its corporate website. Avon’s vision is: “To

be the company that best understands and satisfies the product, service and self-fulfillment

needs of women—globally.” Avon’s mission statement is quite lengthy, but in summary it says:

Avon’s mission is focused on six core aspirations the company continually strives to achieve:

(1) Leader in global beauty,

(2) Women’s choice for buying,

(3) Premier direct-selling company,

(4) Most admired company,

(5) Best place to work, and

(6) To have the largest foundation dedicated to women’s causes.

Marketing and R&D

Avon uses both door-to-door sales people (“Avon ladies,” primarily, but a growing number of

men) and brochures to advertise its products. Avon training centres help women who want to

become Avon representatives selling beauty products, jewellery, accessories, and clothing.

The Avon training centres have a small retail section with skin care products, such as creams,

serums, makeup, and washes. There are classroom areas in which the representatives learn

about the products and sales techniques. Avon representative are each independent sole

proprietors running their own business. Avon spent $253.6 million on advertising in 2012,
down from $311.2 million the prior year. Avon spent $75.2 million on R&D in 2012, down from

$77.7 million the prior year. Avon’s primary R&D facility is located in Suffern, New York.

Sustainability and Philanthropy

Avon has extensive information on its corporate website about its sustainability and

philanthropy programs and operations. Avon is a huge advocate for women’s rights and works

tirelessly through its Foundation for Women to combat violence against women, breast cancer,

and more. For example the recent 10th Annual New York Avon Walk for Breast Cancer raised

more than $8.3 million. Avon is also on a mission to help prevent deforestation worldwide.

Founded in 1955, the Avon Foundation for Women is the largest corporate-affiliated

philanthropic organization for women in the world. Avon has always been committed to

helping women achieve their highest potential of economic opportunity and self-fulfilment by

empowering them through scholarships and support for other forms of educational and

occupational training and advancement. The Avon Foundation awards scholarships for Avon

Sales Representatives and their families, as well as for the children of Avon associates. The

Avon Foundation is currently focused on two key causes: breast cancer and domestic violence.

The foundation approved $38 million in grants in 2011. In 2012, Avon launched its first global

fundraising drive.

Organizational Structure

Avon’s CEO is Sheri McCoy, who previously was a top executive at Johnson & Johnson. The

former Avon CEO, Andrea Jung, was the longest-tenured female CEO among Fortune

500 companies. Jung stepped down as CEO in April 2012 and relinquished her Avon board

seat at year-end 2012.

Segments
Comparing 2012 to 2011, Avon’s geographic results are provided in Exhibit 2. Note the percent

revenue decline in every geographic region, although a few particular countries with regions

reported increases. Avon’s reportable segments are sometimes noted to be: (a) beauty, (b)

fashion, and (c) home. Beauty consists of colour cosmetics, fragrances, skin care, and

personal care. Fashion consists of fashion jewellery, watches, apparel, footwear, accessories,

and children’s products. Home consists of gift and decorative products, housewares,

entertainment and leisure products, and nutritional products. Avon’s sales in its Beauty,

Fashion, and Home segments decreased 5, 5, and 4 percent respectively in 2012 from the

prior year. For 2012, the Beauty segment accounted for 72 percent of company sales, followed

by Fashion at 18 percent and Home at 10 percent. Specifically within the Beauty segment,

2012 Fragrance, Colour, Skincare, and Personal Care revenues were down 4, 6, 7, and 6

percent respectively.

Finance

Avon’s cash dividends paid out dropped to $0.75 per share in 2012 from $0.92 the prior year.

The company’s long-term debt increased to $2.62 billion from $2.45 billion the prior year.

Competitors

L’Oreal SA

Headquartered in France, L’Oreal is a large, global, cosmetic conglomerate with annual sales

of about $30 billion and net income of about $3.5 billion. L’Oreal is structured into three

segments: (1) Cosmetics, (2) The Body Shop, and (3) Dermatology. The Cosmetics unit is

divided into four sectors: Consumer Products, Professional Products, Luxury Products, and

Active Cosmetics. Consumer Products are marketed under L’Oreal Paris, Garnier, Maybelline

New York (Maybelline NY), and Softsheen-Carson brands. Professional Products, including hair

care products for use by professional hairdressers, are marketed under Kerastase, Redken,

Matrix, and L’Oreal Professionnel. Luxury Products are sold under such international brands
as Lancome, Diesel, Giorgio Armani, and Cacharel among others. Active Cosmetics, which

consists of products under Vichy and La Roche Posay brands, are for sale mainly in pharmacies.

The Body Shop segment is focused on cosmetics on the basis of natural ingredients. The

Dermatology segment consists of Galderma, a joint venture between L’Oreal and Nestle.

Mary Kay, Inc.

Headquartered in Addison (outside of Dallas), Texas, Mary Kay is a privately-owned cosmetic

and fragrance direct-selling company. Mary Kay is the sixth-largest direct selling company in

the world, with annual sales of about $3 billion. Mary Kay’s business model is similar to the

Avon business model. Founded by Mary Kay Ash in 1963, the company is famous for its pink

Cadillacs, given to high-selling representatives. Richard Rogers, Mary Kay’s son, is the

chairman of the board. Mary Kay products are sold in more than 35 markets worldwide, and

the global Mary Kay independent sales force exceeds 2.4 million women. In 1968, Mary Kay

Ash purchased the first pink Cadillac and had it repainted to match the Mountain Laurel Blush

in the Mary Kay compact. Since the Cadillac program’s inception, more than 100,000

independent sales force members have qualified for the use of a Career Car or elected the

cash compensation option. GM estimates that it has built 100,000 pink Cadillacs for Mary Kay.

For 2012, high-sellers may select other Career Cars, including the Chevrolet Malibu, Chevrolet

Equinox, Toyota Camry, and the Cadillac CTS, SRX, and Escalade Hybrid—or most recently, a

black Ford Mustang.

Estee Lauder Companies, Inc.

Headquartered in New York City, Estee Lauder has sales of about $10 billion annually and

income of about $1 billion. Estee Lauder manufactures and markets skin care, makeup,

fragrance, and hair care products. The company’s products are sold in more than 150

countries and territories under a number of brand names, including Estee Lauder, Aramis,

Clinique, Origins, M.A.C, Bobbi Brown, La Mer, and Aveda. The company is also the global
licensee for fragrances or cosmetics sold under brand names, such as Tommy Hilfiger, Donna

Karan, Michael Kors, Tom Ford, and Coach. The company sells its products at more than

30,000 points of sale, consisting of upscale department stores, specialty retailers, upscale

perfumeries and pharmacies, and prestige salons and spas.

Revlon, Inc.

Headquartered in New York City, Revlon is a cosmetics leader with brands such as Almay and

Revlon ColorSilk hair color, Mitchum antiperspirants and deodorants, Charlie and Jean Naté

fragrances, and Ultima II and Gatineau skin care products. Revlon’s beauty aids are distributed

in more than 100 countries, though the USA is its largest market, generating about 55 percent

of sales. Walmart is Revlon’s biggest single customer, accounting for some 22 percent of sales.

Revlon manufactures, markets, and sells cosmetics, women’s hair colour, beauty tools,

antiperspirant deodorants, fragrances, skin care, and other beauty care products. Revlon

products are sold and marketed under brand names, such as Revlon, including the Revlon

ColorStay, Revlon Super Lustrous, and Revlon Age Defying franchises; Almay, including the

Almay Intense i-Color and Almay Smart Shade franchises; Sinful Colors in cosmetics; Revlon

ColorSilk in women’s hair color; Revlon in beauty tools; Mitchum in antiperspirant deodorants;

Charlie and Jean Nate in fragrances, and Ultima II and Gatineau. Revlon also owns certain

assets of Sinful Colors cos  metics, Wild and Crazy cosmetics, freshMinerals cosmetics, and

freshcover cosmetics.

Coty, Inc.

Headquartered in New York City, Coty is one of the world’s leading makers of beauty products

for men and women. Led by CEO Bernd Beetz, Coty is a $4.1 billion beauty company, and the

biggest seller of nail care, nail polish, and fragrances in the USA. Sarah Jessica Parker, Jennifer

Lopez, Celine Dion, Gwen Stefani, Katy Perry, and Thomas Dutronc are several celebrities that

promote Coty. Founder of the company, François Coty created his first perfume, La Rose
Jacqueminot, in 1904. Coty’s product lineup today ranges from moderately priced scents sold

globally by mass retailers to prestige fragrances and nail polishes found in department stores.

Coty’s brands include adidas, philosophy, Rimmel, and Sally Hansen. Cody’s prestige perfume

labels are led by Calvin Klein. Coty’s shimmery blue nail polish and Lady Gaga’s perfume are

high-selling products. Thomas Dutronc is the face of Coty’s new Cerruti fragrance for men

that was launched in the Spring 2013. Coty’s Rimmel Scandaleyes mascara, which debuted in

early 2012, is another big seller. Over-the-top lashes are hot these days because false eye

lashes have made a comeback and are “almost mainstream.” Promotional material for

Scandaleyes urges women to “ditch those falsies.” Mascara makers today compete with

eyelash lengthening drugs such as Latisse. Nail care generated $735 million in sales in U.S.

discount stores, pharmacy chains, and supermarkets in 2011, up 6.5 percent from 2010.

Lipstick sales rise even as a nation’s economy falters, partly because the economy has put the

consumer in charge of her own beauty treatments without having to go to the nail bar. Sally

Hansen Salon Effects nail polish strips also brings “nail art,” which has been trending at beauty

salons nationwide, to everyday drugstore shoppers at a mere $8 to $10. Vivienne Rudd, head

of beauty and personal care for market research firm Mintel, says “the nail-art trend is largely

being driven by younger shoppers; it takes a little courage to wear stripes and spots.” Still,

women of all ages are experimenting with the strips as they look for inexpensive fun. Overall,

nail care product sales have been booming in today’s shaky economic climate. Women have

been skipping the salon and playing at-home manicurist, whereas consumer products

companies have been injecting innovation into the business with products like Salon Effects

and the hologram, crackle, and magnetic nail finishes on the market, analysts say. The strips

are available in funky prints and patterns such as leopard, florals, and tie dye.
Avon Products SWOT Analysis

Strengths of Avon Products – Internal Strategic Factors

As one of the leading companies in its industry, Avon Products has numerous strengths that

help it to thrive in the market place. These strengths not only help it to protect the market

share in existing markets but also help in penetrating new markets.

 Highly successful at Go to Market strategies for its products.

 Superb Performance in New Markets – Avon Products has built expertise at entering

new markets and making success of them. The expansion has helped the organization

to build new revenue stream and diversify the economic cycle risk in the markets it

operates in.

 Reliable suppliers – It has a strong base of reliable supplier of raw material thus

enabling the company to overcome any supply chain bottlenecks.

 Successful track record of developing new products – product innovation.

 Strong Brand Portfolio – Over the years Avon Products has invested in building a strong

brand portfolio. The SWOT analysis of Avon Products just underlines this fact. This

brand portfolio can be extremely useful if the organization wants to expand into new

product categories.

 Automation of activities brought consistency of quality to Avon Products products and

has enabled the company to scale up and scale down based on the demand conditions

in the market.

 Highly skilled workforce through successful training and learning programs. Avon

Products is investing huge resources in training and development of its employees

more.

 High level of customer satisfaction – the company with its dedicated customer

relationship management department has able to achieve a high level of customer

satisfaction among present customers and good brand equity among the potential

customers.

Weakness of Avon Products – Internal Strategic Factors

Weakness are the areas where Avon Products can improve upon. Strategy is about making

choices and weakness are the areas where a company can improve using SWOT analysis and

build on its competitive advantage and strategic positioning.

 The profitability ratio and Net Contribution % of Avon Products are below the industry

average.

 Need more investment in new technologies. Given the scale of expansion and different

geographies the company is planning to expand into, Avon Products needs to put more

money in technology to integrate the processes across the board. Right now the

investment in technologies is not at par with the vision of the company.

 Investment in Research and Development is below the fastest growing players in the

industry. Even though Avon Products is spending above the industry average on

Research and Development, it has not been able to compete with the leading players

in the industry in terms of innovation. It has come across as a mature firm looking

forward to bring out products based on tested features in the market.

 The company has not being able to tackle the challenges present by the new entrants

in the segment and has lost small market share in the niche categories. Avon Products
 has to build internal feedback mechanism directly from sales team on ground to

counter these challenges.

 Financial planning is not done properly and efficiently. The current asset ratio and

liquid asset ratios suggest that the company can use the cash more efficiently than

what it is doing at present.

 Organization structure is only compatible with present business model thus limiting

expansion in adjacent product segments.

 Days inventory is high compare to the competitors – making the company raise more

capital to invest in the channel. This can impact the long term growth of Avon Products

Opportunities for Avon Products – External Strategic Factors

 Economic uptick and increase in customer spending, after years of recession and slow

growth rate in the industry, is an opportunity for Avon Products to capture new

customers and increase its market share.

 The new taxation policy can significantly impact the way of doing business and can

open new opportunity for established players such as Avon Products to increase its

profitability.

 New environmental policies – The new opportunities will create a level playing field for

all the players in the industry. It represent a great opportunity for Avon Products to

drive home its advantage in new technology and gain market share in the new product

category.

 Decreasing cost of transportation because of lower shipping prices can also bring down

the cost of Avon Products’s products thus providing an opportunity to the company -

either to boost its profitability or pass on the benefits to the customers to gain market

share.
  New customers from online channel – Over the past few years the company has

invested vast sum of money into the online platform. This investment has opened new

sales channel for Avon Products. In the next few years the company can leverage this

opportunity by knowing its customer better and serving their needs using big data

analytics.

 Stable free cash flow provides opportunities to invest in adjacent product segments.

With more cash in bank the company can invest in new technologies as well as in new

products segments. This should open a window of opportunity for Avon Products in

other product categories.

 Government green drive also opens an opportunity for procurement of Avon Products

products by the state as well as federal government contractors.

 The market development will lead to dilution of competitor’s advantage and enable

Avon Products to increase its competitiveness compare to the other competitors.

Threats Avon Products Facing - External Strategic Factors

 Changing consumer buying behaviour from online channel could be a threat to the

existing physical infrastructure driven supply chain model.

 Rising raw material can pose a threat to the Avon Products profitability.

 New technologies developed by the competitor or market disruptor could be a serious

threat to the industry in medium to long term future.

 Liability laws in different countries are different and Avon Products may be exposed to

various liability claims given change in policies in those markets.

 Increasing trend toward isolationism in the American economy can lead to similar

reaction from other government thus negatively impacting the international sales.
  Intense competition – Stable profitability has increased the number of players in the

industry over last two years which has put downward pressure on not only profitability

but also on overall sales.

 New environment regulations under Paris agreement (2016) could be a threat to

certain existing product categories.

 The company can face lawsuits in various markets given - different laws and

continuous fluctuations regarding product standards in those markets.

The Future

Avon announced in late 2012 that it is cutting about 1,500 jobs globally and will exit the South

Korea and Vietnam markets as part of a turnaround plan. The global beauty industry is

growing at the rate of 6 percent, good news for Avon. The company’s current ratio and debt

service cover  age ratios indicate that it has enough liquidity to survive in the near future, but

a clear strategic plan is needed to survive. The general feeling about Avon is negative because

of the sliding profits, four-year pending legal probe related to bribery and ineffective business

strategies. However, Avon has a popular global brand with a high market share in emerging

markets. Although door-to-door selling may be an outdated business model in the USA, direct

selling remains effective in emerging markets such as Brazil. Direct selling grew about 30

percent between 2006 and 2012 into a $150 billion global market. Many of the more than 100

countries in which Avon competes do not have good retail infrastructure, so Avon’s 6.5 million

person global sales force is its biggest advantage over its competitors. Avon’s stock price hit

a 52-week high in June 2013 of $24.30.