Avon little dot perfume set

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

On a broader level, Avon’s beauty products faced competition from international cosmetics companies (e.g., Procter & Gamble, L’Oreal, Estee Lauder, Revlon, and Mary Kay) as well as regional players (e.g., Natura in Brazil).In the direct-selling space, the company primarily competed with Mary Kay, which had a similar product lineup. Mary Kay Inc. was created in 1963 by Mary Kay Ash, direct-selling sales director, who believed women needed more opportunities in business.10 Mary Kay and Avon used slightly different approaches to reimbursing their representatives:Avon representatives (Avon Ladies) bought their products on credit without paying for anything up front. After completing product sales, they reimbursed the company for the products and pocketed a 20 percent margin.Mary Kay representatives considered themselves “skin care consultants” and were required to invest $100 up front to buy a demo kit to provide skin care and makeup training to customers. To maintain the position, consultants had to buy at least $200 worth of Mary Kay products at 50 percent wholesale discount offered by the company.

By the beginning of 2017, Avon was one of the biggest direct-selling enterprises globally, with over 6 million active sales representatives. Between 2006 and 2011, this selling route had grown by an impressive 30 percent into a $136 billion global market. Unlike traditional retailers, which used a pull strategy to get customers into the store, direct selling was a push business.11Direct selling also presented a tremendous entrepreneurship opportunity in emerging markets like Brazil, Russia, China, and India. Avon faced intense competition from Mary Kay in recruiting representatives in these markets.12 In Brazil, Avon also faced intense competition from a regional direct-selling player, Natura. Direct selling accounted for nearly one-third of the sales of beauty products in the country, due to an underdeveloped retail sector.Avon’s remaining beauty competitors distributed their products to retail resellers such as department C-136stores, drugstores, or cosmetic stores. In recent years more of these competitors and channels had begun offering discounted products that encroached on Avon’s traditional value-shopping customer base. Many international competitors like L’Oreal had also made major strides in growing the retail channel within emerging markets like Brazil.In the fashion and home categories, Avon had competitors in the jewelry, accessories, apparel, housewares, and gift and decorative products industries globally, including retail establishments (principally department stores, gift shops and specialty retailers, and mass merchandisers) and direct-sales companies specializing in these products.

Management Changes

The 1990s ushered in a period of management change and the first woman CEO in the company’s history. Andrea Jung arrived at the company in 1993 with a background in high-end retail (i.e., Neiman Marcus, I. Magnin, and Bloomingdale’s). She was appointed by then-CEO Jim Preston to look into the feasibility of selling Avon products in retail outlets. Jung quickly assessed that Avon didn’t have the right packaging or positioning to compete in that arena. Impressed by her work, Preston invited her to join the company full-time in 1994 as president of the product marketing group for Avon U.S., a newly created position.When Preston retired in 1998 after nine years with the company, Charles Perrin (Avon board member and former head of Duracell) became the new CEO. Jung rose to the prominent role of president and chief operating officer. Perrin had planned on staying for about five years but remained for less than two. Jung then took over in November 1999, becoming the first woman to ever lead the company.

Focus Shifts from Direct Selling to Retailing and Marketing

In 1998, Avon opened the Avon Center, with a store, spa, and salon, in Trump Tower on Fifth Avenue. When Jung became CEO in 1999, Avon adopted the slogan “the company for women,” moving away from its long-time ad campaign “Ding Dong, Avon Calling.” The change was meant to modernize Avon, but it also paralleled a shift in focus within the company. The old tagline emphasized the direct-selling side of the business; now the priority was retail.A year later, Jung launched the “Let’s Talk” global advertising initiative, with Venus and Serena Williams as spokespersons. Advertising spending jumped from $63 million in 1999 to a high point of $400 million in 2010. “Mark,” a hipper, trendier product line, was launched to attract a younger demographic and contemporize the company’s image.

Business Slows Down Due to Competition and Execution Issues

In 2005, earnings flattened for the first time due to competitive encroachments in key markets. Avon completed a major restructuring, cutting 30 percent of managers and chopping its 15 layers down to 8. Consultants were hired and acquisitions explored to achieve growth. Senior managers were brought in from top-tier companies that Avon wanted to emulate. Liz Smith, who joined as president of global brand marketing in 2005 after working for Kraft, tried to bring a new kind of discipline to Avon. New rigor was infused into the marketing evaluation and execution process. The changes created some friction with existing managers. “Avon’s an iconic brand,” said one former marketing executive in the U.S. business. “It’s not the same as macaroni and cheese.”Another restructuring began in 2009 and left employees demoralized and uncertain about the leadership and future of the company. Rather than working toward a long-term vision, employees often felt as though they were patching up problems for the short term. “At Avon, when something doesn’t go right, just put some concealer on it,” said a former communications manager. A major gap appeared to exist between what the company wanted to accomplish and what it was capable of executing:Also in 2010, Avon announced an ambitious five-year plan called the “Road to $20 billion.” Less than a year later, the company cut off funding for most of the initiatives in this plan. Executives then communicated a new directive that Avon would eventually hit $20 billion but not by 2017. Avon had revenues of only $5.57 billion by 2016 (see Exhibits 3 and 4)

Problems in Emerging Markets

Avon pursued an ambitious global growth strategy by expanding its presence in Brazil and China. Unfortunately, there were several hiccups in this ambitious effort.Brazil Brazil was the third-largest beauty market, behind the United States and Japan. Importantly, direct selling accounted for almost 30 percent of the booming market. Vivienne Rudd, head of beauty research at Mintel, explained: “The retail structure in Brazil isn’t sufficiently developed yet for the beauty industry, so direct selling is a much more valuable model.” Brazil surpassed the U.S. in 2010 to become the biggest market for Avon in terms of sales, but managing operations there proved to be a major challenge.When the government required electronic invoicing for tax purposes in June 2010, Avon’s computer systems were not prepared to handle the additional load. The change created service issues for representatives, forecasting problems, and product shortages.

A year later the company went ahead with implementing a new information-management system in Brazil, one it had been planning for nearly two years. However, when the new system went live, there were additional execution problems. Orders were missed, and shipments to representatives got delayed. The service problems dragged down sales, with nearly half of the decrease coming from lost sales due to a problem with representatives. Unlike the case in the U.S. direct-sales market, representatives in Brazil often sold for multiple companies, and Avon lost many of them to its regional competitor, Natura.

China In China, Avon’s problems were more pronounced. Avon opened for business there in 1990 amid press reports that the company had sold out six months’ worth of inventory in just four weeks. However, a direct-selling ban by the Chinese government in 1998 forced Avon to seek alternate approaches to selling and eventually open brick-and-mortar locations called Beauty Boutiques. Avon received the first license to resume direct selling in China in 2006.Despite these efforts, in 2008 Avon received a whistleblower letter with allegations of bribery and possible violations of the Foreign Corrupt Practices Act. Avon began an internal investigation, which subsequently led to the departure of six employees. The highest-level dismissal took place in January 2012, when Avon reported that Charles Cramb, the former CFO, was no longer with the company. In October 2012, Avon disclosed that the SEC had opened a formal investigation. (The company finally settled for a whopping $135 million with the agency.)

New CEO Seeks New Solutions

Faced with Avon’s soft performance and also its legal issues, the board decided the company needed a change of leadership. Jung resigned as CEO in 2011, and the search for a new CEO began.In April 2012, Sheri McCoy was appointed CEO of the company. She came with a proven track record at the Johnson & Johnson (J&J) Company, where she was responsible for the global pharmaceutical and consumer businesses. The consumer business included well-known skin care brands like Neutrogena. She had a good pedigree, with a master’s in chemical engineering from Princeton and broad experience in a number of roles of increasing responsibility at J&J. Despite the impressive background, McCoy had no prior experience in direct selling. In some ways, her profile matched that of Jung when Jung took the reins of the company.Shortly after becoming Avon CEO in 2012, McCoy sought the input of current and former sales representatives to hear firsthand what the company could do better. She then used the information to develop a plan for the future, and she laid out how this plan would be different from things the company had tried in the past.

As she prepared to lead the transformation of the company, she made some critical changes to her executive team:15C-140In August 2012, McCoy made her first C-level appointment: PR expert Cheryl Heinonen was recruited as chief communications officer and senior vice president of Corporate Relations. The company could clearly benefit from an image makeover.Soon after, McCoy appointed Jeff Benjamin and Scott Crum to lead the Legal and Human Resource departments, signaling the importance of legal compliance and personnel development in the new company environment.In December 2012, she appointed P&G veteran Patricia Perez-Ayala as chief marketing officer. Perez-Ayala had started her career with P&G in Venezuela and was an expert on Latin America.In 2013, more critical additions were made to the leadership team. Experienced transformation guru David Powell joined as senior vice president of Business Transformation and Supply Chain. Tupperware executive Pablo Munoz, who had a successful track record of direct selling and turning around businesses, was brought in to lead the ailing North American business. Brian Salsberg, an Asia-Pacific market expert from McKinsey, was recruited to head up Strategy.In 2015, James Scully joined the firm as its new CFO after 9 years at J.Crew, a multichannel apparel retailer. He replaced company veteran Kimberly Ross, who had resigned to pursue an external opportunity.McCoy believed the company needed to evolve by focusing on three critical areas: executing growth platforms, driving simplification and efficiency, and improving organizational effectiveness. She indicated that the company was making progress in these three areas and the new turnaround would increase the prospects of future success:

In the area of growth platforms, the company had begun refining its consumer value proposition. This involved clearly defining product categories and developing fully integrated marketing plans. It also included a renewed organizational focus on improving all aspects of the representative experience and achieving geographic optimization. An important C-141priority was given to expand the company’s presence through digital media and advertising.In the area of simplification and efficiency, the company was streamlining complex processes and trying to create a mind-set of cost management. To improve the cost efficiency, the company divested its low performing segment Liz Earle in 2015.In the area of organizational effectiveness, a new culture of discipline and accountability was being implemented.Soon after taking charge, McCoy pushed the adoption of technology at all levels, including mobile applications and online brochures. The company invested nearly $200 million in expanding its information technology systems and in updating and repositioning brands.Unlike past changes, however, these changes were implemented with the direct-selling representative at the center of the planning effort. In the past, some of the changes that had been implemented without active involvement of the sales representatives had failed due to lack of relevance and inconvenience for the representatives.

As mentioned at the start of this case, McCoy’s new three-year transformational plan cut about 2,500 jobs, announced Avon’s exit from unprofitable markets, and sold off 80 percent of the North American business as part of a plan to save $350 million by the end of 2018. Previously, in July 2013, Avon had sold its Silpada jewelry unit to Rhinestone Holdings (original owner of Silpada) for $85 million.McCoy believed marketing would play a critical role during the transformation. “We have to continue to look at how we make direct selling more modern in some ways,” including using technology and social media to amplify the social connections forged by the reps, she said. “You see this blurring of the channels, and that’s why the brand is so important because in the end, the consumer is going to buy on the brand.”If CEO McCoy was unable to turn the company with the new three-year transformational plan, there would continue to be takeover bids that investors would expect the board to consider for the remaining international and North America business.

The Rocky Road Ahead

High Tab of Litigation

According to company releases, an internal investigation was being conducted and covered a broad range of areas: travel, entertainment, gifts, use of third-party vendors and consultants, joint ventures and acquisitions, and payments to third-party agents and others. The legal fees and costs for the outside counsel conducting the internal investigation totaled $59 million in 2009 and $95 million in 2010. In December 2014, the company revealed it had settled with the SEC for $135 million.

Women-Centric Philanthropic Efforts

The “company for women” had a rich history and mission of supporting women-centric causes (see Exhibit 5). However, its 2015 balance sheet (see again Exhibit 4) showed a drop from $249 million to $92 million in assets relating to goodwill. The company had lost the majority of its goodwill value after Egypt business accounting signified that carried business was considerably overvalued relative to its fair price. Similarly, revenue decline in China indicated loss of goodwill in the Chinese market as well, shrinking the company’s intangible assets.17 Will the company be able to continue to fund these causes in the future? Could these commitments eventually become a financial liability for the company?

Breast Cancer

Avon’s Breast Cancer Crusade was launched in the United Kingdom in 1992. Through Avon’s sales channel, an army of Avon Ladies was mobilized to raise awareness and funds for the cause. In 1998, the Avon Foundation was named the beneficiary of the first long-distance walk series for breast cancer. Five years later, the foundation launched its current highly successful event model in the United States: the Avon Walk for Breast Cancer, a marathon-and-a-half walk (39.3 miles) over two days.In 2005, the company started the Avon Walk Around the World for Breast Cancer series, bringing grassroots activism to a global scale. Walk Around the World mobilized a quarter of a million people each year for the breast cancer cause. This “walk” sometimes included runs, concerts, and educational seminars. World walkers trekked past historic sites, including the Great Wall of China and the Kremlin, and through diverse locales such as Kuala Lumpur, and Prague.In 2007, popular actress Reese Witherspoon was appointed as Avon’s global ambassador and as honorary chairperson of the Avon Foundation for Women.By 2017, the Avon Breast Cancer Crusade had become a powerful global force, and Avon was the leading corporate supporter of the breast cancer cause worldwide. The crusade had donated more than $800 million to accelerate research progress and improve access to care.

Domestic Violence

The Avon Foundation supported efforts to build awareness of domestic violence as a problem. By 2017, Avon and Avon Foundation had contributed approximately $60 million to the cause.C-142EXHIBIT 5 Avon Values and PrinciplesAvon’s VisionTo be the company that best understands and satisfies the product, service, and self-fulfillment needs of women globally.Avon’s MissionAvon’s mission is focused on six core aspirations the company continually strives to achieve:Leader in global beauty: Build a unique portfolio of beauty and related brands, striving to surpass competitors in quality, innovation, and value, and elevating Avon’s image to become the world’s most trusted beauty company.Women’s choice for buying: Become the shopping destination for women, providing a personal, high-touch experience that helps create lifelong customer relationships.Premier direct-selling company: Expand Avon’s presence in direct selling, empowering women to achieve economic independence by offering a superior earnings opportunity as well as recognition, service and support, making it easy and rewarding to be affiliated with Avon.Most admired company: Deliver superior returns to shareholders by pursuing new growth opportunities while maintaining a commitment to be a responsible, ethical company and a global corporate citizen that is held as a model of success.Best place to work: Elevate the company’s leadership, including its high standards, respect for diversity, and commitment to helping Associates achieve their highest potential in a positive work environment.To have the largest foundation dedicated to women’s causes: Be a committed global champion for the health and well-being of women through philanthropic efforts, with a focus on breast cancer, domestic violence, and women’s empowerment.