Avon Products (NYSE:AVP) is a dominant player in the multi-billion dollar cosmetics market with revenues of almost $11 billion. What differentiates Avon from other beauty and personal care players such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Unilever (NYSE:UL) is not what it sells but how it sells. Incorporated in 1916, Avon Products is the largest direct selling organization in the world with over 6.3 billion active sales representatives operating in over 100 countries.
An Avon representative contacts customers directly and recommends Avon products aided by sales brochures and literature. The representative buys the company products at a significant discount and distributes them at the printed prices. Avon Products has an elaborate process for effectively handling multiple orders and delivering the requisite goods to its representatives. A representative can also direct the customers to buy through Avon’s website and still get credit for the sale made, provided the customer chooses the representative’s name from the drop down menu. Direct selling brings Avon closer to its customers and reduces turn-around time in responding to changes in consumer tastes, which gives it a distinct advantage over competition.
Impact Of Sales Representatives On Revenues
Avon Products has invested almost $121 million in developing the Representative Value Proposition (RVP) program. The RVP includes a sales leadership program, focuses on enhanced incentives and optimum discount structure, increases sales campaign frequency, improves commissions and provides new web-enabled e-business tools to improve the earnings potential of its representatives.
Since the majority of the company’s revenue is generated through its representatives, the total sales growth is heavily dependent on the growth in the number of representatives. During the global financial crisis in 2007-08, total sales representatives grew by 7% year-on-year as people reached out for supplementary sources of income. This helped Avon Products clock an impressive 8% growth in revenues for 2008. The number of representatives rose from 6.2 million in 2009 to 6.5 million in 2010 which resulted in an increase in revenues from $10.2 billion to $10.8 billion during the same period. However, the number declined to 6.3 million in 2012, resulting in lower overall revenue of $10.5 billion.
Avon Products offers higher incentives to boost the morale as well the count of its sales representatives. However, we have seen a contraction in its marketing team over the past two years from over 6.5 million in 2010 to about 6.3 million currently.
Avon Products’ stock value is extremely sensitive to the number of active sales representatives. If the company is able to attract more representatives in the coming years through its investment in RVP and expand the team size to about 10 million by the end of our forecast period, the stock value could see 50% upside from its current value of $20. On the contrary, if the team shrinks to its 2007 levels of 5.4 million representatives by the end of our forecast period, the stock’s value could plunge to $13.