Avon Sells Its UK-Based Brand Liz Earle To Walgreens: Why And What’s Next?

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Avon Products (NYSE:AVP) announced the divestiture of its UK-based standalone skincare brand, Liz Earle, in an effort to revive its capital structure. Avon’s persistent poor performance and eroding representative base have made it necessary for the company to take some drastic initiatives. In this article, we explore in detail the reasons behind Avon’s recent move, and what we might expect from the company in the future.

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On June 9, Avon announced the divestiture of Liz Earle, its wholly-owned, UK-based natural skincare brand. Liz Earle was acquired for £140 million in an all-cash transaction by Walgreens (NASDAQ:WBA), the global pharmacy-led health and wellness enterprise. Avon acquired Liz Earle in March 2010 and managed it as a standalone business. Liz Earle contributed 1% to the company’s consolidated revenues and adjusted operating profit in 2014. Avon will use the proceeds from the transaction for the redemption of its $250 million worth 2.375% notes that are due in March 2016. (See Press Release). Additionally, Avon’s weak capital structure is expected to receive a boost as a result of this transaction.

Reasons For The Divestiture

Avon’s Bleak Performance And No Major Signs Of Recovery

Avon’s performance has been deteriorating over the past few years. The company was last profitable in 2011. In 2014, sales declined by 11% to $8.9 billion. This was due to a grim economic environment, especially in the Latin American region (which accounts for over 50% of Avon’s revenues) and North America (which accounts for more than 10% of its revenues). The company underwent major management restructuring and experienced a significant attrition of its representative base. Further, in Q1 2015, Avon’s sales declined by 18% to $1.8 billion. Avon’s return to its shareholders in 2014 was negative 44% and was negative 27% through June 2015. [1]

In Brand Finance’s Brand Cosmetics 50 report, Avon witnessed a 39% brand value erosion to reach $3.9 billion in 2015. Brand Finance attributed the reasons for Avon’s poor performance to the changing constructs of social and economic framework that did not support Avon’s formerly popular direct selling marketing model. This was a significant brand value decline for Avon, as the brand secured the second most popular beauty brand position in 2014. [2]

AVP

Skincare Segment Undergoing Restructurings

In view of its sequential improvement in the skincare segment over the last five quarters leading up to Q1 2015, Avon has planned a few additions to its skincare division. The sale of its skincare brand, Liz Earle, might be one of the measures to provide better revival options to its other more popular brands. In Q2 2015, Avon plans to launch an upper-market product line called Nutra Effects. There will be a few key additions to its Anew line. Within the color cosmetics segment, Avon has planned a few product lineups in mascara, lipstick, and eye color. The color segment is being boosted with strong advertisements in key markets. [3]

Avon’s Other Restructuring Initiatives

The sale of the Liz Earle brand is one of the initiatives by Avon to streamline its structure and improve efficiencies. Some of the other steps recently taken by the company include: 

  • Avon launched a new product positioning theme in May 2015. Avon is trying to upgrade its direct selling model to a more social selling structure, whereby its active representatives can sell through the digital media. Avon is also transforming its business model into a social selling model with the aid of mobile, digital, and social media.
  • Avon 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 part of Avon’s $400 million cost savings initiative.
  • 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 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.
  • In February 2014, Avon entered into an alliance with KORRES, a 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.

Are More Restructurings Probable In The Future?

Avon is reported to have been exploring strategic alternatives since April 2015. [1] There were rumors of an offer in May, where Private equity firm PTG Capital Partners was alleged to acquire Avon for a value of around $8.16 billion, not including debt. However, the claim was refuted by an Avon spokesperson shortly afterward. [4]

In North America, Avon’s sales have been hit due to a drop in the representative pool. In 2014, North America experienced 17% constant dollar decline in revenues and an 18% decline in the active representative base. 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. In view of its losses, Avon might be contemplating the sale of its North American business, according to a report the Wall Street Journal. The company has not yet commented on the issue. [5]

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Notes:
  1. Walgreens Buys UK Cosmetics Brand from Avon, 24/7 Wall St, July 9, 2015 [] []
  2. L’Oreal Paris Named The Most Powerful And Valuable Cosmetics Brand, Cosmetics Design, April 9, 2015 []
  3. Avon’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 30, 2015 []
  4. Did Avon Finally Get an Offer — and Is It Real? (Updated), 24/7 Wall St, May 14, 2015 []
  5. Avon exploring sale of North America business: WSJ, Reuters, April 14, 2015 []