Global distibution channels will keep Avon ringing the door bell

- With their renowned “Avon Ladies” the company Avon Products (AVP) has positioned it’s self for continued global growth as the direct largest seller of cosmetics with 5 million independent sales representatives selling at homes and in the office place globally.

- Almost 70% of AVP top line sales come from outside the U.S. where the evolving “tiered direct selling” dynamic is a perfect fit for the foreign markets and their culture of entrepreneurialism. These representatives thrive on an incentive based track to success where a combination of aggressiveness and finesse are rewarded. This representative is hungry to climb up the ladder being promoted to the different leadership positions that allow them to earn more money as they recruit and develop their own independent teams.

- AVP followed a tough 2^nd quarter with a financially cryptic 3^rd quarter. When analyzing the results the beginnings of the turn around initiatives are evident. Although the metrics did not paint the best of pictures for the 3^rd quarter metrics the turn around is some what evidenced by the top line sales. With revenues exceeding $2 billion (>9%), which is impressive, the real encouraging news is that North America has yet to kick in it’s realized potential from the planned turnaround initiatives. The growth was fueled by the strong performance in Brazil, Latin America, Turkey and other international revenue steams. China even showed indications of what should be a huge market in 2-3 years.

- The poor showing in operating profits are a result of residual problems that are being addressed as written in the article. The major hits to the bottom line came from the $40 million charge to burn obsolete inventories; a one time $20 million tax charge and the 50% increase in advertising spend (> $30 million). All this resulted in a 500 bps reduction in margin for the 3^rd quarter but the good news is that this was forecasted and not a surprise.

- AVP is continuing to embark on the 2 main strategies to improve the operating margin through the improvement in costing. The original initiatives corporately referred to as the Strategic Sourcing Initiative (SSI) and the Product Line Simplification (PLS) seem to be working in the initial stages. As fore mentioned this is a rather simple exercise where they are streamlining the assortment to in order to mitigate the annual $75 million charge in disposing of obsolete inventories by offering an assortment of high volume, high margin products that are centrally sourced to take advantage of the economy of scale. As I repeat, this is not brain surgery but basic block and tackle merchandising.

- AVP is stressing to the investors that this is not just a cost cutting initiative but instead an efficient “growth story”. They are aggressively looking at the $300 million dollars to be saved through reorganization and operational opportunities and in no way are minimizing the importance of this savings. AVP also wants to highlight their growth plans utilizing the improved sourcing dynamics, new product category introductions, improvement on the existing product assortments to fuel demand and sales in the quickly expanding global markets. Eastern Europe has been identified by AVP as a perfect fit for their business model. The business is very entrepreneurial which is attractive to this opportunistic demographic.

- While the growth for AVP has been fulminating internationally with double digit increases, management realizes the unsustainable rate of growth and is forecasting single digit growth in their forecasts. AVP is the undisputed leader in this sector but realize tough competition is coming from P&G, L’Oreal and other direct sales companies including Amway and Oriflame. This is another factor that makes the new and improved product assortments success all the more critical as AVP will not give up market share willingly.

- With the cost savings soon to be realized, AVP is redirecting money back into the marketing and advertising of the new and improved product assortments. This is an important spoke in their strategy to stave off the competition and management is devoting much of their time to the new campaigns.

SUMMATIONS:

- The up side at AVP is contingent on a very realistic go forward plan where improved sourcing, new and improved product initiatives, the growth in existing and emerging international markets and the revamping of/and new IT investments to maximize merchandising and operational opportunities will be the keys to growth. All of these strategies are very executable.

- The down side is with all the restructuring and change, AVP risks the alienation of the independent reps that are the backbone of the company. They are highly dependent on strong relationships and need to ease the change into the culture of the company and its famous “Avon Ladies”.

- The average consumer of this product has an equivalent, relative household income of < $40,000/year. This customer is highly sensitive to the changing prices of energy and any negative macro economic trends.

- As identified the competition in the emerging markets will be stiff. With the size of P&G and L’Oreal their exposure to risk is less acute allowing them room for merchandising or marketing missteps. AVP does not enjoy this same comfort zone and have to be diligent in ensuring the proper assortments and marketing campaigns are correct from inception to delivery