Struggling cosmetics manufacturer, Avon Products (NYSE:AVP), signed an agreement with Coty Inc. to sell the company’s fragrance products in Brazil through Avon’s 1.5 million representative network.  Although the actual revenue sharing terms have not been made public, we expect Avon representatives to derive earnings on a commission basis from the sale of Coty fragrances. The partnership is expected to benefit both parties, with Avon expanding its sales and brand presence in the Brazilian fragrance market and Coty expanding its geographical reach into Brazil.
In its latest third quarter results, Coty reported revenues of approximately $1,009 million, marginally higher than the $998 million reported during Q3 last fiscal. Fragrance products account for more than 50% of revenues for Coty, followed by a 34% contribution from color cosmetics and the remaining from skin care products. However, the share of fragrance products for Coty is expected to gain momentum from two sources: (i) the Avon-Coty partnership in Brazil; and, (ii) Coty’s restructure and divestitures i the skin care segment, particularly in China.
Below, we take a look at the Brazilian fragrance product market and the impact of this partnership on Avon’s business performance. We have a Trefis Price Estimate of $14 for Avon Products, marginally ahead of its current market price.
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Partnership Provides Entry Into Niche Fragrance Market
Avon derives approximately 49% of its $9,955 million revenues from the Latin American market, of which Brazil is the largest. The company has a total of 1.5 million representatives in Brazil alone, or 24% of its global representative base of 6.2 million. If this 24% representative share translates to an equal revenue share, revenues from Brazil will amount to $2,400 million for FY13. Assuming beauty product sales are of the same proportion as overall beauty product sales for Avon, 71% of the $2,400 revenues amounts to approximately $1,700 million. This translates into a beauty product sales per representative figure of approximately $1,136 annually.
However, Avon Brazil had notched top line growth rate (constant currency basis) of 9% in fiscal 2013, compared to a 5% and 16% decline in developed markets of the U.K. and North America respectively. A report published by The Economist underlies the growth potential in the cosmetics industry in Brazil. Per capita spend on cosmetics products in Brazil is approximately equal to the per capita spend in a developed economy such as the U.K., and is expected to outpace Japan in the coming years. Given its rapid growth potential, it is possible that the 24% representative base in Brazil provides a larger revenue share for the country. Hence, beauty product sales per representative should be higher than $1,136 computed earlier, primarily due to the higher consumer spending potential in Brazil. This skewered revenue-representative relationship in Brazil provides Avon’s representatives with more cross-selling opportunities in comparison to other geographies.
In particular, fragrance products are one of the strongest drivers in the Brazilian cosmetics market. The fragrance market in Brazil is the world’s largest market, worth more than $6 billion in 2013.  This makes it larger than the U.S. fragrance market, driven by the high per capita consumption of fragrance products by Brazilian customers. Comparatively, Brazilian consumers utilize three times more fragrance by volume than consumers in the U.S.  However, 90% of sales continue to be in the mass-market range, with domestic sale of prestige brands being impacted by a high tax rate. 
This domination of mass-market fragrance brands helped home-grown cosmetics maker Nature hold a 33% value share according to Euromonitor.  However, with the partnership, Avon will be able to market and sell Coty’s celebrity and lifestyle fragrance brands in the region, and expand its market share in the niche, prestige fragrance product market. Coty’s prestige line of fragrance products, inspired by Beyoncé, Katy Perry, Lady Gaga and other renowned celebrities, should be able to create a market of high-end fragrances in a market that is dominated by mass-market fragrances. Coty expects Avon to include select fragrance products into its product catalog in time for the Christmas holiday season. We believe the Avon-Coty partnership in Brazil should be a win-win scenario for both companies in a niche market.Notes:
- COTY INC. AND AVON PRODUCTS, INC. SIGN AN AGREEMENT FOR BRAZIL, Avon Investor Relations, May 2014 [↩]
- Brazil’s fragrance market continues rapid growth trend, Cosmetics Design, March 2014 [↩] [↩]
- Could Brazil Become a Premium Fragrance Market in the Future?, Euromonitor, March 2013 [↩]
- Fragrances in Brazil, Euromonitor, August 2013 [↩]