In our previous article, we discussed the implications of Avon Products (NYSE:AVP) exiting the North American and Asia-Pacific markets. (Read: Will Exiting North America And Asia-Pacific Markets Turnaround Avon’s Performance?) The combined revenue share from these geographies shrunk to 22% in FY13 from 25% in FY12, owing to double-digit declines in regional revenues. Strategic lapses in curbing representative churn in these markets has contributed to a significant deterioration in its overall operational and financial performance over the last two years. Churn is the percentage of representatives exiting the company in a certain period.
Last week, Bloomberg published an article hinting that Avon might be looking for buyers. Through this article, we analyze Avon’s business from a takeover perspective and list possible buyer options and their corresponding benefits.
- How Did Avon’s Different Segments Perform Over The Last 5 Years?
- What Led To Avon’s Revenue And EBITDA Decline Over The Last Five Years?
- What Is Avon’s Fundamental Value Based On 2016 Estimated Numbers?
- Why We’re Revising Our Price Estimate For Avon From $3 To $5
- Revlon Versus Avon: How Do The Top Line And Bottom Lines Fare Currently?
- Avon: Year 2015 In Review
Avon had an active representative count of over 6.2 million representatives in more than 100 countries globally by FY13 end. Because Avon’s representatives are independent and do not have any employment contract with the company, an acquirer would be acquiring Avon’s brands, its operations and its 36,700 full-time employees. To understand the benefits of a possible acquisition better, let’s see how either (i) a direct-selling operator like Tupperware, or (ii) a retail cosmetics player like L’Oréal or Estèe Lauder, can benefit from acquiring Avon.
(i) If Tupperware acquired Avon: For a direct-selling player, acquiring and integrating Avon in a strategic manner could unlock a lot of operational synergies and provide growth avenues into new geographies. For example, a company like Tupperware would be able to significantly expand its operational footprint in the South American market by acquiring Avon. In 2013, Tupperware reported revenues of $374 million from South America, representing 14% of its overall revenues. Comparatively, Avon has a revenue share exceeding 50% from the same market.
Avon’s acquisition presents significant growth opportunities for a direct-selling operator like Tupperware. The company would be acquiring Avon’s global distribution network instead of investing and developing a network on its own, saving valuable capital expenditure dollars. Likewise, the buyer would be acquiring products that have a reasonable demand in the market, and would be saving on Research & Development and Sales & Marketing spend.
Challenges: However, despite the above advantages, there are many executional challenges in integrating two direct-selling businesses. In order to leverage the full potential of the acquisition, a company like Tupperware for example needs to recruit Avon’s representatives for the sale of its products. This is because the relationship between the customer and a representative is crucial for the direct-selling process. Disrupting these relationships could impact revenue recognition, as witnessed in the North American region for Avon.
For example, Tupperware has a direct sales force of 2.9 million worldwide compared to Avon’s 6.2 million. For both companies, representatives are the only point-of-sale to a customer, and hence, generating and growing revenues are entirely dependent on the integration of these representatives. This presents a huge challenge for the acquirer because clubbing sales representatives post acquisition can result in sales conflicts across districts.
(ii) If L’Oréal acquired Avon: A global retail cosmetics company such as L’Oréal would only be interested in Avon’s product line and manufacturing facilities. This is because post acquisition, products manufactured in Avon’s facilities could be distributed through L’Oréal’s distribution network. Hence, for L’Oréal, the performance of Avon’s product line and their reception through retail and other standalone counters are the more important factors to be considered before the acquisition. Given that Avon has delivered strong operational performances in Latin America (LatAm), Europe, the Middle East and Africa (EMEA), a global company might focus more on integrating Avon’s operations closely with its own operations in these high-growth markets.
On the other hand, a retail player with limited footprint in either the LatAm or EMEA region could consider acquiring Avon to extend into these geographic boundaries. For such a company, Avon’s distribution network is also an important aspect of the acquisition, primarily because it is expanding its presence through the acquisition. Given that the buyer has limited presence in the LatAm or EMEA region, executional challenges in terms of integrating businesses should be limited. However, the high price of buying Avon entirely is a huge entry barrier for a small retail operator.
Of the two scenarios presented above, we believe a global retail cosmetics company has more to gain through acquiring Avon in comparison to a direct-selling operator. Strong operational capabilities and a retail point-of-sale should reduce risks associated with integrating both the businesses. For a direct-selling operator, although the acquisition provides significant revenue growth opportunity, integrating Avon’s representative base and minimizing sales conflicts is a cost intensive process with significant risks of executional lapses.