A Brief Recap of Avon’s Performance in 2014

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Avon Products (NYSE:AVP), the direct selling company of  beauty, household and personal care products, experienced a rough year in 2014.  The company seems to be on a downhill trend, having posted its last profit back in 2011. Avon’s direct selling model through representatives is losing market share to retail outlets and online shopping. In 2014, Avon was adversely impacted by both macroeconomic as well as microeconomic factors.

  • Externally, the grim economic environment weakened Avon’s performance in 2014, especially in the Latin American region, which contributes to over 50% of Avon’s revenues.
  • Internally, the company underwent major management restructuring and attrition of its representative base.

In this article, we will recap the major factors that impacted Avon’s performance in 2014.

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Avon’s Latin American Travails

  • Brazil

Latin America contributes to over 50% of Avon’s annual revenues. Within the Latin American region, Brazil is Avon’s single largest market. Brazil is the third-largest beauty market in the world.  This market has had a 10% annual growth rate for the last 17 years, up until 2013, when the growth rate in 2013 was 4.9%. [1] Direct selling contributes to approximately 70% of Brazilian market sales in the skincare, color and fragrance categories. These factors fueled Avon’s erstwhile growth in Brazil.

At present Brazil’s economic environment is grim and has still not recovered, as it was expected to do post the World-Cup. Consumer spending has dampened due to grim economic conditions and high household debts. Competition in the personal care market through direct sales as well as retail is intense. Avon’s introduction of the premium color line  LUXE in Q3 2014 suffered due to all these factors. The product pricing was not suitable for an economy where consumer price sensitivity for luxury goods, like cosmetics, was high.

However, the management believes that Avon’s Brazilian business will grow in 2015. In 2014, the company has forged strategic alliances with KORRES, a Greek skincare brand, and Coty, a French beauty and personal care company, to provide a boost to the Latin American, and specifically to the Brazilian, market. The details of the partnerships are discussed later in this article.

  • Mexico

Sales in Mexico suffered in the first half of 2014, due to attrition in the representative workforce and an unsuitable portfolio price mix. The product portfolio and pricing have since improved,  resulting in an  increase in average orders in Q3 2014, though the representative retention is yet to improve significantly. Hence, the recovery rate in Mexico remained below management’s expectations in Q3 2014. Avon plans to improve the retention rate by helping representatives navigate the first 6 campaign cycles. Earlier, this plan had resulted in significant improvements in representative retention in the UK.

Declining Pool of Avon Representatives

Avon’s sales structure is dependent on active representatives. The North American base of active representatives is on a gradual decline. This is adversely affecting Avon’s product sales in that region. Avon had nearly 470,000 representatives in 2009, which declined to 314,000 representatives by the end of 2013. Going by the rate of decline in representatives in North America, Avon’s active representative count by 2014 end could stand at about 258,000. This continued double-digit decline in active representatives is likely to weigh on sales and put margins under pressure going forward.

Year to date, Avon’s active representative base in Latin America has declined by 4% on a year-on-year basis, primarily due to low retention of new recruits in the first 6 campaign cycles. Similarly, the  representative base in Asia-Pacific declined 9% year to year over the some time interval.

The reasons behind Avon’s waning representative base are:

  • Avon’s reorganization of its sales force in Q2 2013, which resulted in the disruption of its sales representatives pool.
  • The recovering North American economy and the subsequent creation of full-time jobs is expected to pile on additional pressure on Avon’s representative base because Avon representatives are usually non-contractual workers.
  • Over the longer term, digital channels such as e-commerce are likely to cannibalize sales from the direct-selling channel for Avon, leading to a reduction in representative base. The company launched its consumer-centric e-commerce platform avon.com in the U.S. in Q3FY14 and intends to expand into other key markets in 2015.

Management Reshuffling

The company announced corporate restructurings to support its multi-year turnaround plan. The management responsibilities in Latin America have been split into two defined sets of markets which would be overseen by two separate executives. In addition to this, there will be changes in the marketing and sales organization, in Avon’s key markets. [2]

Avon’s Chief Financial Officer, Kimberly Ross, resigned in October 2014. The senior management transition added to the company’s existing set of troubles. For 9MFY14, Avon’s sales decreased 11% to $6.51 billion (vs. $7.29 billion in 9MFY13).  Although external factors such as volatile currencies have played their part in declining sales, internal representative churn and lapsed management strategies across geographies have contributed to significant declines in constant currency sales.

Avon’s Turnaround Strategies

  • The company plans on improving its supply chain efficiencies, including contract terminations, as well as global headcount reductions, which may result in annualized pre-tax savings of approximately $50 million to $55 million as a part of Avon’s $400 million Cost Savings Initiative.
  • Earlier in February 2014, Avon entered into an alliance with KORRES, the Greek skincare brand, to develop manufacture and market the latter’s products in Latin America. In May 2014, the company partnered with Coty, a pure play beauty company, to market and sell select Coty fragrances through Avon Brazil’s network of 1.5 million independent sales representatives. The company aims to strengthen its presence in its most important sales region, through these initiatives.
  • Avon is reducing its footprint in the Asia-Pacific region, particularly China, where it operates under a beauty boutique model compared to its traditional direct-selling model due to the intensifying competition from local and Korean cosmetics manufacturers.
  • Avon ceased operations in Bolivia, in mid-2014, after a series of weak performances in the region. The company aims at focusing on regions with greater growth potential.

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Notes:
  1. Multinationals Target Brazil’s Beauty Industry for Growth Despite Drop, GCI Magazine, June 2014 []
  2. Avon Revises Management Structure in Support of Turnaround Plan, Avon Press Releases, November 2014 []