Avon company case study

AVON: A NEW ERA?*

“If we stop and look over the past and then into the future, we can see that the possibilities are growing greater and greater every day; that we have scarcely begun to reach the proper results from the field we have before us.” —David McConnell, Avon Founder, late 19th century1 Overcoming the Challenges The year of Avon Products’ 131th anniversary, 2017, brought numerous challenges for CEO Sheri McCoy. For the first time since David McConnell had founded Avon in 1886, his vision of endless possibilities and growth for Avon had begun to seem unattainable. Could McCoy prove the naysayers wrong and return the iconic, direct-selling company to profitable growth? Or was it time to wake up and sell the company to an interested bidder? CEO McCoy had recently taken some promised steps to turn around the company. To combat their continuous financial deficit, Avon had made a strategic partnership deal with Cerberus Capital Management, a prominent financial institution based in New York City. Avon Products sold 80 percent of its North American business to Cerberus Capital Management for $170 million, forming a separate private entity called New Avon LLC. Cerberus had also bought approximately 16.6 percent of Avon Products Inc.’s international business, investing an additional $435 million.2 New Avon LLC appointed former president of Abbot Laboratories Scott White as its CEO on April 25, 2016. White had a proven record of delivering consistent revenue growth at Abbott Laboratories.3 The formation of New Avon LLC was expected to take advantage of significant operational expertise from Cerberus Capital. Having thus split Avon Product’s North American business with Cerberus Capital, CEO Sheri McCoy expected that additional capital and suspension of dividend payouts would enable the company to achieve some operational efficiency and financial flexibility. Ms. McCoy had laid out a three-year transformation plan for Avon starting 2016 through 2018 to improve the declining revenues and to achieve cost efficiency. The transformation plan had three key objectives: driving out cost, improving financial resilience, and investing in growth.4 First, in order to drive out cost by about $350 million by the end of 2018, the company would move Avon Products’ headquarters from New York to the United Kingdom and cut about 2,500 jobs. Despite the Brexit vote, the decision to relocate the company headquarters to the U.K. was expected to save about $70 million by 2017. It also put the company closer to its lucrative European customers.5 Second, to improve financial resilience, the company suspended dividend payouts and divested its Liz Earle business, in addition to making the promising Cerberus deal. Third, the company would invest in growth by increasing digital media spending to expand their product presence in the market. (See Exhibit 1.) EXHIBIT 1 Avon’s Three-Year Transformation Plan Source: Avon 2015 Annual Report. C-134 CEO McCoy stated that the execution of the transformation plan would be evolutionary over at least three years and must reflect the direct-selling representative perspective. Improving growth of their direct-selling representatives in the most promising markets was another significant priority for the company. In the past, radical changes to selling approaches had been unsuccessful (e.g., selling Avon products in retail locations) because they had attempted to do too much too fast and did not involve the critical direct-selling representatives in the planning process. There were other challenges. In several emerging markets within the Latin America, EMEA,6 and Asia-Pacific regions, intense competition and price discounting threatened to erode market share and profitability. On the other hand, the company’s attempted price increases in these markets had only hurt its cause further. Last but not least, Avon had agreed to a $135 million settlement to address charges that it had violated the Foreign Corrupt Practices Act (FCPA) in China. This fine was nearly 10 times higher than its original settlement offer to the Securities and Exchange Commission (SEC).Avon Background—First 100 Years Marked by Opportunity and Growth7Unique Opportunity for WomenIn 1886, David H. McConnell, a book salesman from rural New York, created a novel opportunity for women—a chance to become financially independent by selling perfumes. This was at a time when only one-fifth of women in the United States were working outside the home and for wages that were a fraction of what men earned. Most of these working women were employed in agriculture, domestic service, and manufacturing jobs, which did not always provide safe environments. As a book salesman, McConnell had noticed that his women customers were far more interested in free perfume samples than in the books he sold. He had started using these samples as “door openers” when visiting the homes of potential customers. But McConnell had also noticed one more need that, if effectively tapped, could provide tremendous growth potential for both him and his women customers. Women were looking for ways to supplement their household incomes, and he believed many would make the perfect perfume salespersons for other women customers. McConnell could offer women the opportunity to create and manage their own perfume businesses using a unique direct-selling approach. Earning a commission for selling perfumes to other women like themselves could create an exciting and glamorous solution for an existing need. McConnell’s first recruit for Avon, or the California Perfume Company as it was known then, was Mrs. P. F. E. Albee of New Hampshire. He provided Albee and other early sales representatives with an earnings opportunity within a supportive, family-like environment. The attractiveness of the offering was tremendous, and the army of representatives rose to 5,000 within only 13 years. With the seed of an idea, McConnell had created a “company for women,” which would eventually become the slogan for the company a century later. Pioneering Direct-Selling Mode lThe company had thus pioneered a new direct-selling model. Company representatives sold products directly to the end users, bypassing any go-between distribution channels. The model generated efficiencies by eliminating the need for a middleman. In addition it made for direct and regular contact with consumers. In the late 19th century, direct selling at Avon connected women, who were otherwise isolated and immersed in domestic life, through what the company called “the original social network.” An intimate, personal selling approach allowed many women to bond over beauty products. Many women no longer had to travel to the closest department store or drugstore to purchase beauty products or seek beauty advice. The Avon Ladies (as the sales representatives came to be known) brought the store to them. Decades of success followed, and Avon and its direct-selling approach became famous. In the 1970s and 1980s, when the company’s core customer base of stay-at-home women began to shrink, the company adapted its direct-selling approach to keep up with the times. Avon Ladies began to leave samples and call-back brochures on front doorknobs, and with more women entering the workforce, even began offering the opportunity to buy products at the workplace. Direct selling continued to evolve over the years as needs and technologies evolved. The advent of the Internet prompted the company to engage in online promotion and to offer online selling options. In 2017, realizing the growing importance of e-commerce, CEO McCoy decided to further increase spending on digital media sources.

The Power of Partnerships

Fragrances were the first products Avon (then known as the California Perfume Company) sold, and they became an integral part of the company product line. Avon relied on partnerships to market its fragrance products. Celebrities from the movie and music industries were often used in advertising and created excitement for new fragrance launches. In addition, partnerships with fashion designers were established for enhanced image and efficiency.

New Century Brings Many Changes

Evolution of the Direct-Selling Model

Throughout the long history of the company, representatives could earn money only on commissions by selling to customers. With the launch of Avon’s Sales Leadership program in the 1990s, representatives could now also earn money by recruiting and training others. This new earnings avenue exponentially increased the amount of money an individual representative could generate.C-135With the advent of the Internet, Avon created a collection of digital tools that enabled representatives to use the technology in their businesses. Online ordering, an ­e-brochure, and customized online communities allowed Avon Ladies to contemporize their offerings and image.“The relevance of direct selling has to do with what the consumer expects from service,” said Angie Rossi, group vice president of North America Sales. “There will always be a space for relationship-based service to the consumer.” So, while the media and tools might change with time, the company believed the relevance of direct selling as a strategy would never diminish. In the 21st century, Avon was producing and selling its products worldwide through its direct-selling, boutique store, and online channels.

Launch of New Products and Partnerships

The first product that Avon sold was the Little Dot Perfume Set. Over time, Avon product sales expanded to a wide range of color cosmetics, as well as skin care, fragrance, fashion, and home products. Some of its more established brand names were Avon Color, ANEW, Skin-So-Soft, Advance Techniques, and mark. Revenues came from three main categories:Beauty (73 percent of net sales): cosmetics, fragrances, and personal care products.Fashion (17 percent of net sales): jewelry, watches, apparel and accessories.Home (10 percent of net sales): home products and decorative products.The company continued to rely on celebrity partnerships to launch and market its new (mainly fragrance) products. These included Uninhibited by Cher (1988) and Undeniable by Billy Dee Williams (1990). Outspoken by Fergie (2010) was the most successful fragrance launch in the company’s history. The company then teamed up with the popular singer to offer a follow-up fragrance, Outspoken Intense (2011). American Ballet Theatre, was the new face of Avon Prima that highlighted creative confidence among women (2016).

Avon also established partnerships with international design houses Christian Lacroix, Herve Leger, and Ungaro, which allowed the company to offer premium products at affordable prices for its mainstream customer base. On the fashion apparel front, it teamed up with designer Diane von Furstenberg to create a customized line for Avon called The Color Authority

Expansion into Emerging Markets

The 20th century had seen expansion into neighboring markets in Canada and Latin America. As the 21st century approached, Avon was rapidly expanding into additional emerging markets.9The company started selling its products in China in 1990. However, a direct-selling ban in China forced the company to open brick-and-mortar retail locations (Beauty Boutiques) within the Chinese market. The ban was lifted in 2006, and the company then started to sell via both direct-selling and retail routes in China. Avon also expanded into Russia in 1993 with retail stores, and it started direct selling its products there in 1995.By 2016, Avon products were sold in over 100 countries (sold through subsidiaries in 63 and through distributors in an additional 41). Operations were managed over four regions: North America, Latin America, EMEA (Europe, Middle East, Africa), Asia-Pacific. Latin America now accounted for nearly half of total company revenues, with Brazil being the largest market (see Exhibit 2).

Global and Regional Competition