Avon’s Insurance-Based Incentives In Mexico Could Help Retention And Growth

Direct beauty products seller Avon Products (NYSE:AVP) recorded 2% y-o-y growth in revenues from Latin America during the fourth quarter of 2012. The growth was primarily on account of Brazil where sales grew by 10% y-o-y as the count of active representatives increased by 9%. Similar trends were observed in other countries in the region such as Argentina, Mexico and Venezuela. The direct selling nature of the business requires the company to maintain a sizable workforce in the form of sales representatives who act as its contact point with customers.

Avon recently announced the launch of accident and life insurance for its representatives in Mexico to attract new representatives and promote retention. ^[1] Latin America contributes about 47% to the company’s total revenues and Mexico is its third largest market after the U.S. and Brazil. We believe that the success of the program in Mexico will lead to a wider roll-out across Latin America. A wider footprint along with greater retention of representatives should support its efforts to turn around the 5% decline in revenues witnessed in FY 2012. The decline was accompanied by a 1% decline in the count of active sales representatives.

The company’s direct selling business model differentiates it from competitors such as L’Oréal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estée Lauder (NYSE:EL) and Revlon (NYSE:REV).

View our detailed analysis for Avon’s stock here

Insurance Coverage Linked To Performance

The insurance coverage launched in a tie-up with Zurich Insurance would reach 150,000 people in Mexico, including the family members of sales associates. A similar initiative is planned for Colombia. The company has not disclosed details about how much the program is going to cost them other than that the costs in Mexico would increase by around 15%. The company has tied incentives with the performance of the representatives under the plan. An Avon representative becomes eligible for the incentive when the sales targets are met. Also, the amount of coverage will be proportional to the sales they generate. We believe the initiative will help the company improve on its 4% constant dollar sales growth in 2012 from Mexico.

Mexico To Measure Effectiveness Of Turnaround Initiatives

Avon is battling slowing growth in Mexico. The constant dollar growth at 4% in Q4 2012 was slower than in the previous quarters and  was at par with growth in Mexican economy in 2012. The company expects a slowdown in Mexico’s GDP growth as well as retail growth which could have some impact on its financial results in 2013. We believe that despite a weak economic scenario if the turnaround initiative in Mexico in successful, it would trigger a wider launch of similar initiatives in other geographies and thereby boost overall sales growth.

We have a $18 Trefis price estimate for Avon which is 11% below the current market price.

1. Avon Offers Mexican Sales Reps Accident and Life Insurance, 4-traders, February 2013 [↩]