Avon Products (AVP)

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See all Bulls Reasons Bulls: Reasons To Buy AVP's Active Sales Reps Reduce Costs of Secondary Selling Channels and Promotes Sales 0% agree AVP's Active Sales Reps Reduce Costs of Secondary Selling Channels and Promotes Sales AVP's unique Active Sales Rep selling channel strategy reduces the costs of having to designate secondary re-sellers to sell its cosmetics products. In fact, customer service provided by the Sales Reps helps foster strong customer relationships that are crucial in the female... read more View or Edit Reason 0 votes 0% agree Independent Avon Reps are unique advantage 0% agree Independent Avon Reps are unique advantage Avon is uniquely positioned to increase the product price without much opposition as it sells its products through Independent Avon Representatives and they don't have a bargaining power as the customers of other Personal Products Manufacturer have. It doesn't mean that Avon... read more View or Edit Reason 0 votes 0% agree Extensive restructuring program should cut costs 0% agree Extensive restructuring program should cut costs As cost savings associated with an extensive restructuring program are realized, Avon should see sequential margin expansion and improvements in its return on capital. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell N.A. market for beauty and personal care products is saturated, Low consumer demand 0% agree N.A. market for beauty and personal care products is saturated, Low consumer demand 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... read more View or Edit Reason 0 votes 0% agree Operating margins since 2004 well below the industries averages 0% agree Operating margins since 2004 well below the industries averages 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. View or Edit Reason 0 votes 0% agree Avon is highly dependent on Emerging Markets 0% agree Avon is highly dependent on Emerging Markets 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 developing countries. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Hi, I had a few suggestions on the AVP article. Very good work, but the China section could use... more [Dismiss] [Done] See All Suggestions

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AVP's products face intense competition in all of its markets from both global and regional mid-end brand personal care products. To combat competition and improve brand recognition in US and global markets, AVP launched a Turn-around Plan in 2005 that included strategic initiatives to reduce costs, increased advertising spending, improve product quality, and improve Representative profitability. AVP expects an annualized savings of $430 million when the plan is completely implemented in 2011-2012 as well as improved market share and increased sales performance. ^[2]

However, AVP's direct-selling business model is at risk for incurring more costs due to Representative dissatisfaction and global legal restrictions. In 2004, four Avon Representatives filed a class-action lawsuit against AVP, charging AVP for charging Representatives unfairly for products and refusing refunds of unsold products. ^[3] In 1998, China banned direct-selling and did not reinstate AVP's license for direct-selling until 2006, resulting in large revenue losses for AVP as it could not longer use its main business model in the Chinese market during this time. ^[4] Due to AVP's reliance on its direct-selling business model, earning potential and satisfaction of its Representatives and maintaining its business model are essential for AVP's success in global markets.

[edit] Business Overview

[edit] Product Segments

AVP produces and sells consumer packaged goods worldwide through its direct selling boutique store channel and its online channel. Its products fall into three main categories:

• Beauty: cosmetics, fragrances, and personal care products;
• Beauty Plus: jewelry, watches, apparel and accessories;
• Beyond Beauty: home products and decorative products. ^[5]
  

  

  The above graph shows a breakdown of AVP's total revenue from FY2007. AVP's revenues from 2007 consists of a large majority of Beauty products, which makes up 70% of the company's sales, while the other 30% of sales comes from Beauty Plus and Beyond Beauty products. ^[6]

[edit] Strategic Initiatives and Significant Restructuring Programs

[edit] Turn-around Plan

To combat increasing competition, cut costs, and develop new products for sustainable growth, AVP launched a series of strategic initiatives beginning in November 2005, including:

• R&D: more focus on developing new products
• Marketing: increasing investment in advertising campaigns to increase market share and brand recognition
• Direct-Selling: improved pricing and promotion models as well as more attractive earnings opportunities for Representatives
• Scale: restructuring the organizational structure to take advantage of AVP's global scale
• Costs: redesigning the cost structure to reduce costs and stay in line with revenue growth. ^[7]

At the launch of the Turn-around Plan, AVP announced that it expected annualized savings of $300 million once the initiatives were fully implemented in 2011-2012. ^[8]

Due to these initiatives, in FY 2007, revenues increased by 13%, Active Representatives increased by 9%, and sales of Beauty products increased 15%. These increases were due to the increased advertising investment, better earnings for Representatives, and increased R&D investment. ^[9] AVP now expects annnualized savings of $430 million once all initiatives are fully implemented. ^[10]

[edit] Product Line Simplification

In 2006, AVP began an evaluation of its optimal product portfolio and developed exit plans for products with low profitability. The program is set to commence in late 2008, and AVP expects annualized savings of $200 million when the product line simplification program is complete. ^[11]

The above graph shows total revenue and net income trends from FY2005 through FY2007. The compounded annual growth rate (CAGR) for AVP's net income over these years was 6.8%, while the CAGR is -14% due to the low earnings from FY2006 and FY2007, which were a result of large costs from expansions into new global markets such as China. ^[12]

[edit] Regional Performance

AVP continued to expand its business worldwide in FY2007, especially in emerging markets such as Brazil, China, Colombia, Russia, Turkey, and Venezuela, aiming for high market share and brand recognition in these markets. ^[14]

The above graph shows a breakdown of AVP's total revenue from FY2007 by region. ^[15]

[edit] Business Growth

In Q3 of 2008, AVP's total revenue grew 13% to $2.6 billion compared to Q3 of 2007; notably, sales of beauty products increased by 15%. Net income in Q3 2008 was $223 million, compared to $139 million in the prior-year quarter. Growth of beauty product sales overall may be attributed to the 11% year-over-year increase in advertising spending, which totaled $106 million, to support the launch of new beauty product lines. ^[16]

Regional growth patterns in Q3 2008 for AVP products can be attributed to the following:

• North America: Overall slow economic growth and deteriorated consumer confidence had a negative impact on AVP sales in the U.S. Decrease in average order price offset the increase in Active Sales Reps. resulting in a 29% decrease in operating profit when compared to the same quarter last year. ^[17]

• Latin America: Increased average order price and growth in Active Sales Reps resulted in 44% increase in operating profit when compared to the prior-year Q3. ^[18]

• Central & Eastern Europe: Average order price for Q3 2008 was flat, but spending on advertising and employee recruitment was higher, resulting in a 13% decrease in operating profit when compared to Q3 2007. ^[19]

• Western Europe, Middle East & Africa: High growth in Active Sales Reps and higher pricing of products resulted in a 73% increase in operating profit from Q3 of the previous year. ^[20]

• Asia Pacific: High growth in Active Sales Reps and larger average order resulted in an increase of 96% in operating profit. ^[21]

• China: Sales were negatively impacted by the residual effect of the Sichuan earthquake and other natural diasters, but the negative impact on sales was somewhat offset by the large increase of 98% in Active Sales Reps. Operating loss increase from $5 million in Q3 2007 to $7 million in Q3 2008, reflecting AVP's continued objective to invest in a Chinese expansion. ^[22]

[edit] Trends and Forces

[edit] Direct-Selling Model Dependent on Earnings from Active Sales Representatives

In both domestic and global markets, AVP's sales largely come from direct selling through its Active Sales Representatives. These Representatives are independent contractors that receive a percentage commission for their sales but do not enjoy employee benefits. Due to its reliance on direct-selling through representatives, AVP not only compete for the end consumer but also for representatives that are knowledgeable about the industry and about beauty products. AVP's dependence on the productivity and profitability of the representative direct-selling model exposes it to cost and litigation risks. In 2004, four AVP representatives filed a class action lawsuit against AVP for alleged "channel stuffing," where AVP supposedly shipped products representatives without an order and held representatives responsible for payment for the unordered shipments. It is likely that AVP will incur future costs through litigation and resolution of the lawsuit, which may include terms that would increase costs for AVP. ^[24]

[edit] Multi-year Cost Restructuring Initiative May be Unable to Reduce Costs and Support Increased Advertising

In late 2005, AVP launched a Turn-around plan that included several strategic initiatives to realign costs, improve products, and increase market share through brand competitiveness. AVP expects annualized savings of more than $430 million when the plan is fully implemented in 2011-2012. However, with the global economic downturn and slowing demand for non-essential personal care products, AVP may not be able to achieve its savings target. Falling short of its savings targets would be detrimental to AVP's profitability as it would not longer be able to support its increased advertising spending. In 2006, AVP increased advertising costs by 83% and 48% in 2007 to support new product launches and improve brand recognition as part of the turn-around plan. AVP does not expect to reduce advertising spending in the near future, which means success of the turn-around plan is vital to supporting AVP's increased advertising costs as well as costs incurred by AVP's entry and expansion in new global markets. ^[25]

[edit] Direct-Selling Business Model Exposed to Regulations in the Global Market

Avon has become synonymous with the direct-selling business model. In 1998 the Chinese government banned direct-selling in response to abuses perpetrated by some corporations. Avon's business in the region was crippled in the short-term and strongly disadvantaged in the long-term as the company was forced to form partnerships with retailers in order to sell its products. Not until 2006 did China re-licensed Avon for direct-selling, which allowed Avon's revenues from China to increase rapidly from 2006 to 2007. Similar situations may arise in Avon's other emerging market segments, which would negatively impact Avon's revenue growth globally. ^[26]

[edit] Large Present in Global Market Exposes AVP to Currency Fluctuation Risks

78% of AVP's sales revenues come from markets outside of the United States, making the company very sensitive to currency fluctuations and the strength of the dollar. A weakening of the dollar against foreign currencies would allow AVP 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.

[edit] Competition

As a retailer of personal care products, AVP faces intense competition from other mid-end personal care product retailers. Most of its competitors use a reseller model and distribute its products to retail stores such as Walgreens, Wal-mart, Macy's, etc., while others also sells products through the direct-selling channels. Almost all competitors also advertise and sell products through an online channel. In the following table, note that companies included in the market share comparison consist only of mid-end personal care product retailers that compete directly with AVP products.

[edit] References

1. ↑ AVP SEC Filing 2008 10-K, Pg. 7
2. ↑ AVP's Restructuring Program
3. ↑ Avon Class Action Lawsuit
4. ↑ China Bans Direct Selling
5. ↑ AVP SEC Filing 2008 10-K, Pg. 2
6. ↑ AVP SEC Filing 2008 10-K, Pg. 7
7. ↑ AVP SEC Filing 2008 10-K, Pg. 17
8. ↑ AVP's Restructuring Program
9. ↑ AVP SEC Filing 2008 10-K, Pg. 18
10. ↑ AVP's Restructuring Program
11. ↑ AVP Product Line Simplification Program Savings
12. ↑ AVP SEC Filing 2008 10-K, Pg. 24
13. ↑ [AVP SEC Filing 2008 10-K, Pg. 24
14. ↑ AVP SEC Filing 2008 10-K, Pg 17
15. ↑ AVP SEC Filing 2008 10-K, Pg. 26
16. ↑ AVP Q3 2008 Revenues up 13%
17. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 26.
18. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 25.
19. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 27.
20. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 28.
21. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 29.
22. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 29.
23. ↑ AVP SEC Filing 2008 Q3 10-Q, Pg. 25-29.
24. ↑ Avon Class Action Lawsuit
25. ↑ AVP SEC Filing 2008 10-K, Pg. 18
26. ↑ China Bans Direct Selling
27. ↑ AVP SEC Filing 2008 10-K, Pg. 24
28. ↑ Estee Lauder Company Profile, CNNMoney.com
29. ↑ ACV Reports Strong Growth in Q4 FY2008
30. ↑ BARE Company Profile, Morningstar.com
31. ↑ RDEN 4th Quarter Earnings
32. ↑ REV Company Profile, Google Finance