Marketing Analysis of Avon

David H. McConnell founded the company in 1886 at the age of 28 years old. He sold books door-to-door and distributed perfume to lure women to buy his books. His perfume was more popular than his books, so he then founded the California Perfume Company (CPC) in New York, New York in a 500-square-foot (46 m2) manufacturing and shipping office at 126 Chambers Street. As the corporation grew, he employed his first representative, Mrs. P.F.E. Albee. In 1897, McConnell built a small (3000 square foot) laboratory in Suffern, New York. In 1906, the West Coast office in San Francisco was destroyed in the Great Earthquake. In 1914 the first non-US office was opened in the Canadian province of Quebec. January 28, 1916, David H. McConnell and Alexander D. Henderson (businessman) in Suffern, New York [2] incorporated the California Perfume company. Sales attained $2 million by 1928 following five million units sold in North America. The company name was changed to Avon Products Inc. October 1939 which was taken public by 1954, sales reached $55 million, and the “Avon Calling” advertising campaign introduced. Avon Suffern Research and Development facility came into existence in 1971. With one million sales representatives, sales reached $3 million, presently; sales exceed $10 billion worldwide. The 100 million dollar Research and Development facility which house 300 research scientists on the original site in Suffern, New York was opened in 2005. Avon also has offices in Luzerne, Pennsylvania and Davenport, Iowa.

Andrea Jung is the company’s Chairman and CEO, who was selected to the position in 1999. As at December 2009, the company had approximately 41,000 employees [3] 

2.2 Company Profile

2.2.1 Organizational Structure

The Office of the Chairman is responsible for identifying growth initiatives, incorporating global strategies, and apportioning resources to Avon units around the world. In addition, as part of the reorganization, the firm’s three International Regional headquarters were to be phased out, alternated by nine streamlined business units covering sales, marketing and distribution around the world. Profit and loss accountability rested with them. Managers of these units would report directly to the Office of the Chairman.

Also reporting to the chairman are five global staff departments: Finance/legal Affairs, Human Resources, Corporate Affairs and Communications, Planning and Business Development, and a new department – Global Product Management. Each department assumes worldwide responsibility for its function

2.2.2 Major Lines of Business

Avon Products’ line includes skin care items, makeup, men and women perfume fragrances, and bath toiletries, hair care, personal care, hand and body care and sun care. Recognizable brand names included Skin-So-Soft, a product in the bath products area, which benefited from wide publicity concerning alternative uses; Moisture Therapy; and Imari fragrance. Newer products include “Avon Color,” an entirely new line of more than 350 shades of lip, eye, face, and nail colors. The product line assures customers that Avon has just the right shade for them and that their total “look” could be coordinated. Avon newest product “Anew Perfecting Complex for Face,” won the most successful skin care product in Avon history.

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Internationally, the company’s product line is marketed primarily at moderate price points. The marketing strategy emphasized department store quality at discount store prices. Avon is the world’s largest manufacturer and distributor of fashion jewelry, and markets an extensive line of gifts and collectibles. A separate division, Giorgio Beverly Hills, manufactures and sells prestige fragrances. These brand name products are sold through major retail department stores, in boutiques, by mail order catalog and by other means.

2.3 Operating Strategies

Avon Products Inc. is uniquely among major corporations, a woman’s company. The company sells products to, for and through women. The company understands women needs and preferences better than most. This understanding guides the basic business and influences the choice of new business opportunities. Avon need to become and are becoming, more customer-oriented and more market- driven.

Each one of the 18 words in the vision statement has considerable meaning. The three most important elements, however, are the focus on women, on being global, and on the additional opportunities for Avon in self-fulfillment.

Avon Products’ Inc. Principles

1. To provide individuals with additional earning means to support well-being and happiness.
2. To ensure families satisfaction from quality products
3. To render outstanding service to customers in its helpfulness and courtesy;
4. To acknowledge and reward employees and Representatives contributions.
5. To distribute the dividend of growth and success with others;
6. To meet social corporate responsibility; and
7. To keep and treasure the hospitable Avon spirit.

Source: Avon Representative Success Book

2.3 Operating Strategies

2.3.1 Mission Statement and Management Objectives

Avon Products Inc. intends being the company that best understands meets and satisfies women needs globally.

The International Beauty leading company intends to surpass competitors in quality, innovation, value and raising image to become women favorites Beauty Company worldwide by creating a unique portfolio of Beauty and related brands. The Women’s quest for Buying Avon products will become home store for women, offering the convenience of multiple brands and channels, and providing a personal high touch shopping experience that helps create lifelong customer relationships. The Premier Direct Seller will expand the company’s presence in direct selling and lead the reinvention of the channel, offering an entrepreneurial opportunity that delivers superior earnings, recognition, service and support, making it easy and rewarding to be affiliated with Avon and elevating the image of the industry.

Avon products’ leadership edge is through passion for high standards, respect for diversity and commitment to create exceptional opportunities for professional growth so that associates can fulfill their highest potential.

The company’s philanthropic efforts aim at eliminating breast cancer and empowering women to be economic independent. As a way of creating wealth for shareholders, Avon seeks new growth opportunities and improving profitability, a socially responsible, ethical company that is noticed and imitated as a model of success.

2.3.2 Business Models and Strategies

Avon Products, Inc., is one of the world’s largest direct selling organization and merchandiser of beauty and beauty related products. From corporate office in New York City, Avon markets product lines to women in 112 countries through 1.6 million active independent contractors (sales representatives) that receive a percentage commission for their sales but do not enjoy employment benefits, they sell primarily on a “door-to-door” basis. The idea behind the direct selling model is to eliminate the middle man (department and cosmetic stores) and get its products directly to consumers which will be able to cut costs and increase profits.

November 2005, Avon products’ inaugurated an exhaustive turnaround plan to restore sustainable growth. The four-point turnaround plan includes:

Committing to brand competitiveness by focusing research and development resources on product innovation and by increasing our advertising;

Winning with commercial edge by more effectively utilizing pricing and promotion, expanding our Sales Leadership program and improving the attractiveness of our Representative earnings opportunity as needed;

Elevating organizational effectiveness by redesigning our structure to eliminate layers of management in order to take full advantage of our global scale and size; and

Transforming the cost structure so that our costs are aligned to our revenue growth and remain so.

Source: 10-K (Feb 25, 2010)

One of the goals of the 2005 Turn-around Plan was to increase the number of Representatives paid in 2007 when the company had 13% increase in net sales as a result of the increase in the number of Representatives

Primarily, Avon’s revenues come from three main categories:

2009 2008 2007 2006

Beauty Products 72% 72% 70% 69%

Fashion Products 17% 18% 18% 18%

Home Products 11% 10% 12% 13%

Source: http://www.wikinvest.com/stock/Avon_Products_(AVP)

Beauty Products: Cosmetics, fragrances, and personal care.

Fashion Products are Jewelry, watches, apparel and accessories.

Home Products: Home products and decorative products.

2.4 SWOT Analysis

2.4.1 Strengths

• Presence in dynamic sector
• Strategic focus on emerging markets
• Diversification through acquisition
• Wide brand appeal
• Financial stability
• Strong brand image

2.4.2 Weaknesses

• Over reliance on Beauty Products (72%)
• Limited outlets for the customers
• Confusing promotions, out of date catalogs, unattractive packaging and customer complains of Avon image.
• Over reliance on Sales Representatives
• Products are not commonly found in store

2.4.3 Opportunities

Geographic Growth: Enormous growth opportunities exist in countries with huge populations such as China, Indonesia and India. In Eastern Europe, management is excited about the potential in Poland, Czechoslovakia, and Hungary. In the Pacific Rim area, countries like Vietnam, Cambodia, and Laos are targeted as market opportunities.

Emerging and Developing Markets: In those markets, the retail infrastructure was undeveloped, especially in the interiors of those countries. The Avon representatives provide consumers with opportunities to buy a wide range of quality products at acceptable prices

2.4.4 Threats

Avon’s dependence on the productivity and profitability of the representative direct-selling model exposes it to cost and litigation risks. It is likely that AVP will incur future costs through litigation and resolution of the lawsuit, which may include terms that would increase costs and decrease profits for Avon.

Currency Fluctuation Risks as a result of much presence in global markets: Only 20% of the company’s sales Revenue come from the United States while other countries contribute 80%, making the company very sensitive to currency fluctuations and the strength of the dollar. A weakening of the dollar against foreign currencies would allow Avon products to become more competitively priced in global markets, thus positively affecting sales revenue from foreign markets; however, a weak dollar would also mean higher costs for products manufactured overseas.

2.5 Core Competencies

Over the last three years, Avon Products’ have been implementing its turnaround plan through various strategic initiatives, including: restructuring plan, product line simplification program (“PLS”), strategic sourcing initiative (“SSI”) and investment in advertising and sales representatives.

Among other things the company does well are:

• Diversification through acquisition
• Distribution strategy and brand image
• High technology and innovation
• Economic Empowerment
• Philanthropy

3. Industry Analysis

3.1 Industry Definition, structure and major competitors

The US personal care products industry includes about 800 companies with combined annual revenue of $50 billion. Major companies include Estee Lauder, Johnson & Johnson, and Procter & Gamble. The industry is concentrated: the 50 largest firms account for about 70 percent of industry revenue. There are 28,001 companies in this industry with the US personal income driving consumer demand for personal care products [4] .

Company Sales Location

The Protecter & Gamble Company 78,938.00M Cincinnati, OH

L’Oreal SA 25,041.73M Clichy, France

Kimberly-Clark Corporation 19,115.00M Irving, TX

Colgate-Palmolive Company 15,327.00M New York, NY

Kao Corporation 12,777.13M Tokyo, Japan

Source: http://www.hoovers.com/industry/personal-care-products/1192-1.html

3.2 Industry Growth and Profitability

Market moves over the last two years have clearly been extraordinary. The forecast call for a continued, gradual recovery in demand from developed markets with emerging economies faring better.

The personal and disposable personal incomes are the main drivers of this sector. According to the Bureau of Economic Analysis, July 2010, Personal income increased $30.0 billion, or 0.2 percent, and disposable personal income (DPI) increased $17.6 billion, or 0.2 percent, Personal consumption expenditures (PCE) increased $44.1 billion, or 0.4 percent.

Table 3.2 Personal and Disposable Personal Income

2010

June July Aug. Sept. Oct.

(Percent change from preceding month)

Personal income, current dollars 0.1 0.2 0.5 0.0 0.5

Disposable personal income:

Current dollars 0.1 0.0 0.5 -0.1 0.4

Chained (2005) dollars 0.2 -0.2 0.3 -0.2 0.3

Personal consumption expenditures:

Current dollars 0.0 0.5 0.5 0.3 0.4

Chained (2005) dollars 0.1 0.3 0.3 0.2 0.3

Source: Bureau of Economic Analysis, US Department of Commerce. July, 2010

3.3 Pest Analysis of External Factors Affecting the Industry

3.31 Political Factors

These include the form of government, role of government whether as a participator or a facilitator or a regulator, political stability and risk, consumer protection, employment law, election, competitive regulations, industry-specific regulations, environmental regulations, understanding cultural differences, government structures, governmental leadership, political trends, taxes, terrorism and war.

Avon Products is majorly affected by government tax and industry specifications. Different countries have different regulations with taxes.

Political and legal systems of different countries have important implications for Avon Products’. Sometimes, the political system changes quickly, throwing the company into crisis and at other hand, it evolve more slowly.

Countries Over 30

Hongkong 25.25

China 17.37

United Kingdom 25.69

United States 26.26

Singapore 25.24

Thailand 16.42

Norway 28.19

Canada 27.80

Japan 24.65

Russia 14.66

Source: http://www.euromoney.com/Article/2675660/Country-risk-September-2010-Full-results.html

3.3.2 Economic Factors

In various countries, economic growth trends differs, government spending levels, taxation, disposable income, exchange rates, tariffs, inflation, job growth/unemployment, consumer confidence index, import/export ratios, and production levels.

Avon has experienced fluctuating growth; it’s said to largely depend on economic conditions and disposable household income levels. A higher disposable income will definitely increase spending pattern.

3.3.3 Social Factors

These include race, family size, age, gender, lifestyle changes, population shifts, education, trends, fads, diversity, immigration/emigration, health, living standards, housing trends, fashion, attitudes to work, leisure activities, occupations, and earning capacity.

Since Avon major source of Revenue is on Beauty products which is mainly used by women, the company stands the chance of increasing revenue all things being equal. A higher taste or lifestyle to substitute products like Mary Kay may affect the company revenue.

3.3.4 Technological Factors

These are factors that enable innovative and creative ideas that make Avon to compete and meet customer’s needs. These include Inventions, new discoveries, research, energy uses/sources/fuels, communications, rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances, information technology, internet, transportation, bio-tech, genetics, agric-tech, waste removal/recycling, and so on, all these and many more need to be improved upon continually. As technology advances, there is need to ensure compliance and engage in more research in an attempt to increase the quality of the products. The company should keep the analysis of past developments separate from that of the present situation and future trends

3.4 Porter’s five forces of Analysis Competition

3.4.1 Threat of new Entrants: Low

Being a household name for some years, the threat of new entrants can be said to be low. Consumers who are serviced in this industry tend to stick with long and experienced

3.4.2 Threat of Substitutes: High

There are several substitutes to Avon products by its competitors in the market. A slight change or below standard can push customers to buy other products.

3.4.3 Bargaining Powers of supplier: Low

3.4.4 Bargaining Power of Customer: Low

Customers who are mainly women often don’t mind price(s) as long as they have value for money spent. Rather than customers fixing price, Avon does.

3.4.5 Rivalry among Competing Firms: High

This is really high. Mary Kay among several others is in high competition with Avon.

3.5 Summary

Bargaining power of buyers – Low

Competitive Rivalry within an Industry – High

Threat of Substitute Products – High

Threat of new Entry- Low

Low

Bargaining power of suppliers – Low

4. Economic Outlook

4.1 Global Outlook

The last three quarters have been impressive with the company’s operating performance and its key credit measurements are improving. Avon is envisaged to continue to have conservative stances with its liquidity and share repurchases.

Avon innovative ideas has earned its performance very well relative to its consumer products peer group and remains one of the best geographically positioned companies to gain from emerging market growth over the next several years.

Avon is in the midst of a restructuring that includes cutting jobs and trimming overhead. It has concentrated on recruiting independent sellers, as well as broadening its assortment of less-expensive items, including products under $5, to drive sales. It is also growing sales in emerging markets.

The recession affected the manufacturers of beauty products fairly well, due to large part to their vast product range. While demand for cosmetics stumbled some are considered essentials and were mostly resistant to the downturn. The economic recovery will push the industry back to steady growth, as improving disposable incomes allow consumers to spend more on nonessentials like makeup. Meanwhile, manufacturers will expand both their product lines and geographic reach to take advantage of new market opportunities [5] .

4.2 Regional Outlook

Avon is on a course of action to deliver strong quarterly growth, although the US market is likely to prove the exclusion to regional growth in view of the tough conditions there.

The world’s leading direct sales cosmetic company increased revenue by 8 per cent for the first quarter in dollar terms, while the continuing weakness of the dollar will mean that revenues will rise by 5 per cent in local currencies.

Based on region, Avon revenue is projected to leap and operating profit forecast to be up. Internationally, Latin America’s revenue is projected to increase at a double-digit rate and operating profit forecast to grow in line with or slightly ahead of revenue, reflecting a strong performance in both the Brazil and Argentina markets.

Europe’s revenue and operating profit are expected to increase in the ranges of 10 per cent and 15 per cent, respectively. Growth in this region is continuing to focus on the central and eastern European markets.

Operating profit is expected to be more than 25% in the Asia Pacific region.

4.3 Local Outlook

Avon overall growth is being driven by sales of beauty products, which are expected to increase more and more particularly the Anti-aging skincare Product. The company feels it is also a reflection of its successful new product launches and continuing commitment to invest significant resources to support its brand-building strategies.

Also, the company expects increase number of active representative to positively impact on sales.

4.4 Summary

There is strong growth and improving profitability as the global outlook becomes ‘Stable’ from ‘Negative.

5. Ten-year pro forma forecast

5.1 Underlying Assumptions

Avon had $650 million Agreement with Silpada. The company designs is the world’s largest and fastest-growing sterling silver jewellery home party company which is expected to generate revenue from 2015 [6] .

Focus on emerging markets such as Brazil, China, Colombia, Russia, Turkey, and Venezuela, aiming for high market share and brand recognition in these markets. The only positive regional revenue growth the company had been in the Latin America and China at 5.6% and 0.7% [7] . For example, China re-licensed Avon for direct-selling, which allowed Avon’s revenues from China to increase rapidly from 2006 to 2008. The total revenue from China rose from $212 million in 2006 to $353 million in 2009 [8] . Similar situations may arise in Avon’s other emerging market segments.

Increased cost of production and Companies are also focused on controlling their operating margins in order to maximize their profits. While advertising and commodity costs have been rising, efficient production has been useful in reducing margins.

A takeover Rumour by L’Oreal expand in emerging markets, particularly in Latin America [9] 

First quarter for the year ended March 31st, 2010. [10] Avon’s net income was $43 million, a 64% decrease from Q1 FY 2009 net income of $117 million. The decrease was mainly caused by AVP’s effective tax rate being a 66.1% due to the devaluation of Venezuelan currency. Excluding this negative impact, net income was actually $144 million. Total revenue increased 14% to $2.5 billion. The number of active representatives grew by 6% as the recessionary environment attracted many unemployed people to Avon’s independent selling business strategy. Additionally, the company’s Beauty segment grew by 14%.

Avon had mixed sales results internationally, as it had a 2% sales decline in North America, a 22% sales increase in Latin America, a 31% sales decrease in China, a 28% sales increase in Eastern Europe, and a 23% sales increase in Western Europe and Africa. The company spent $96 million on advertising — a 23% increase from the same quarter last year.

Second quarter for the year ended 30th June, 2010, Q2 FY 2010. [11] The company’s Net Income was $167.6 million more than double the year-ago quarter value of $82.9 million. Net sales rose 8% to $2.68 billion. Sales in all of the company’s product categories increased with 16% growth in perfume and 12% growth in color cosmetics. Avon increased advertising in the quarter to $97 million, up 19% from the prior year quarter. The company increased advertising mainly in Latin America. Geographically, Avon’s revenue increased 16% in Latin America from strength in Brazil and Mexico. Sales in North America remained flat.

Important to note is Other Income for the quarter in review shows a deficit of usd 100m. [12] 

Third quarter for the year ended September 30th, 2010

Avon’s net income increased 7% to $167 million. The higher costs are due to advertising and weak sales from markets like china and Brazil.

Net Revenue increased 4% to $2.66 billion, compared to $2.56 billion in the prior year quarter. The company benefited from higher sales in Latin America (8% growth) and Western Europe, the Middle East, and Africa (11% growth). However, sales in North America remained stagnant with a 2% decline in growth and sales in China fell by 30% as Avon tries to transition away from retail stores in the region in favor of a direct selling method that it uses in its other markets.

Advertising costs increased 36% as the company promoted its fragrances as well as its two new product categories hair and acne [13] .