Avon Products (AVP)

Consumers are relying more and more on the internet for shopping. During the 2010 holiday season, online sales in the US grew 12% YOY, with a 23% increase in health and beauty products. Gadgets like the iPhone, iPad, and Android OS are helping to increase the ease of online shopping -- online sales are expected to increase 19% in 2011.

Increasing online sales hurts Avon because it puts pressure on Avon's business philosophy. Avon sells its products through active sales representatives who buy Avon's products at steep discounts and earn a commission for every item they sell. The benefits of this method is that Avon is able to have higher profit margins by not having to deal with third party retailers like Wal-Mart which take a higher percentage of commission (40%) compared to active sales representatives (25%).

Online retailers can hurt Avon by offering better deals for consumers and in turn drawing people away from Avon's products. Avon does sell some of its products online, but has yet to develop a mobile platform for sales, something that's been gaining popularity with consumers. The growing online trend affects beauty products more than fashion products because there's still the need to touch and try on fashion products. But with the beauty products that Avon sells, sales are more easily transferred online.

Avon's operating margins have declined significantly since 2004 well below the industries averages. The company faces steep competition. The restructuring plan aims to save $300MM annually but that may not be enough to turn around the company's margins.

Avon is highly dependent on Emerging Markets.70% of the company's revenue and 81% of its profits are generated in developing countries. While these countries benefit from rapid growth rates their economies are generally more volatile than those of developed countries.

The global economic downturn continues to plague businesses that sell non-essential items, and Avon falls under this category. A majority of cosmetics are luxuries which consumers are cutting from their budgets to save money.

In order to get consumers to continue buying its products, Avon has launched several promotional discounts, which in turn have backfired causing products to be unavailable to customers. That combined with the fact that Avon's suppliers are shutting down factories, thus reducing the amount of products produced, does not bode well for future sales.

The North American market for beauty and personal care products is extremely saturated. While some of Avon's other markets have experienced double digit growth rates, North America is growing by only 1% a year. Moreover, margins in North America have been declining, in the face of high labor costs and intense competition. In 2006 North America only generated 19% of the company's profits. In addition, the current recession has lowered consumer confidence as well as demand for the high-end personal care products that AVP sells.

AVP's Q3 2009 results continued to add on to a disappointing FY2009. The company's net income fell 30% compared to the prior year's quarter and net sales fell another 4%. Even though these numbers were better than the results from Q2 2009, where net income fell 60%, the company has faced a hard time in the face of the economic recession. However, some of the company's main competitors aren't struggling as much as Avon. Revlon for example, a cosmetics company, reported that its Q3 2009 earnings were actually positive ($23 million) and beat the street's expectations of a net loss. Revlon's sales also slipped only 2.5% compared to Avon's 4%.