"Avon calling" -- calling for a younger crowd, overseas reps, and improved global operational efficiencies. Avon Products, the world's top direct seller of cosmetics and beauty-related items, is busy building a global brand and enticing more consumers to buy its products. Direct selling remains its modus operandi; sales also come from catalogs and a website. Its lineup includes cosmetics, fragrances, toiletries, jewelry, apparel, home furnishings, and more. Avon, which owns Silpada jewelry, boasts about 6.4 million independent representatives. With sales and distribution operations in some 110 countries, the company continues to transform its business following a multiyear turnaround and a takeover bid by Coty.
Smaller rival Coty, a privately held maker of such fragrances as Calvin Klein and Kenneth Cole in May 2012 raised its original $10 billion unsolicited offer (which Avon rejected in April) to $10.7 billion. Backing Coty's sweetened offer is Berkshire Hathaway, run by famed investor Warren Buffett. (The addition of Buffett is designed to bring Avon to the negotiating table.) To spur a turnaround in the meantime, Avon has purged staff, streamlined manufacturing, and narrowed its supply chain with regard to procurement and distribution. Avon plans to shut down plants in Ohio and another in Germany by 2013. It also moved its New York headquarters in 2011, lured by a lease allowing one year of free rent. Other cost-saving measures include freezing salaries and bolstering its recruitment of sales representatives. The cost of the reorganization, estimated at $700 million a year, factors in savings from simplifying its product line and making sourcing improvements. Avon is using the savings to fund investments in consumer research, product innovation, and advertising. Stubborn unemployment in the US and other countries has created a line of new recruits. Its ranks of independent representatives swelled from 5.8 million (in 2008) to 6.4 million (2011). While its number of sales reps grew, its office staff has shrunk. By 2008 the company had trimmed its employee ranks by 10% and management by nearly 30%. Avon later purged another 4,000 jobs. Job eliminations hit Avon's global direct-selling operations hardest, notably in Germany. As a result, the beauty company is outsourcing transactional and other services, where necessary, and navigating toward countries with lower operating costs. Avon has focused on building its group of independent sales representatives particularly in Russia and China, and, less so, the UK.
Avon has grown its business on North American soil but the beauty company counts on more of its revenue beyond its roots from operations overseas; it now generate 83% of its sales outside the US. It operates in Brazil, Russia, China, the UK, and Germany, among other countries.
The beauty company logged a 4% increase in revenue in 2011. The modest gains can be attributed to Avon's efforts to ramp up its largest market, Brazil. While the company saw lower than normal sales there, it has not been able to see traction as it invests in implementing an Enterprise Resource Planning system in the country. The effort has weakened results in the interim. Besides Brazil, whose beauty business stalled during the second half of 2011, Avon's 2011 global growth was further bogged down by a weak beauty market in Russia during the year. Avon has found its calling in China. Despite resistance from the country, Avon persisted in knocking on the Asian giant's door and eventually gained entrance. In 1998 China banned direct-selling, citing consumer confusion in distinguishing between companies that direct sell and those with pyramid schemes. Nonetheless, in 2005 Avon was given approval from the government to test its direct selling in parts of China, specifically the cities of Beijing and Tianjin and the province of Guangdong. Happily, Avon has since retained a direct-selling license. Pulling out of the Japanese market was part of the company's decision to double up on its efforts in China. To this end, it sold its 75% stake in Avon Japan to private equity firm TPG for $90 million in 2010. The move also was part of the beauty products maker's plan to refocus on direct sales. (The Japanese unit typically generated more than half its revenues through direct mail.)
Sales & Marketing
Competition from mass merchandisers and specialty and department stores, however, has spurred Avon to not only spend many millions on consumer research, market intelligence, and product innovation, but set aside just as much to launch a global ad campaign intended to boost sales of fragrances (Today, Tomorrow, Always) and skin care (Anew anti-aging). The company's recent reorganization has freed up many millions of dollars with which Avon plans to use to fund the company's investment in consumer research, product innovation, and advertising (for selling products and recruiting sales reps).
Mergers & Acquisitions
The company has expanded its product lineup through an investment in acquisitions and alliances. Avon bought Silpada Designs, a Kansas-based direct seller of sterling silver jewelry with operations in the US, Canada, and the UK, for $650 million. The 2010 acquisition was the company's largest in more than a decade. Silpada's higher-priced jewelry offerings were expected to boost margins. However, in 2011 the jewelry brand delivered weaker than expected performance, spurring Avon to lower its revenue and earnings projections. Not helping Avon or Silpada is that silver prices nearly doubled since the acquisition; this was paired with the negative impact of pricing on revenues and margins. The Silpada deal followed a pair of purchases earlier in the year: UK-based Liz Earle Beauty, which develops skin care products made of botanical ingredients, and the Tiny Tillia brand, engaged in bath and body care products for babies. Both purchases help to broaden Avon's brand portfolio in the growing markets of natural personal care products and baby care.
Avon's alliances have included a global licensing agreement with Finnish clothing design firm Marimekko to create a color collection. In addition, Avon has made a Bond Girl 007 fragrance under license, and signed on award-winning singer Fergie to develop a signature fragrance. Other partnerships have involved French designer Emanuel Ungaro for two fragrances (U by Ungaro for Her and U by Ungaro for Him) and the New York Yankees' Derek Jeter for "Driven" men's fragrance and a personal grooming line of products. – less