A Look At Avon’s Plans To Turnaround Its Ailing North American Division

-50.38%
Downside
5.57
Market
2.76
Trefis
AVP: Avon Products logo
AVP
Avon Products

Avon’s (NYSE:AVP) last two quarterly performances were marred with severe disruption in its field operations in North America. Within US, Avon reorganized its field level representatives across sales districts to better focus on high target districts that impacted critical representative-customer relationships. In addition, the rollout of a pilot module of its new order management system, the Service Model Transformation (SMT), in Canada led to a reduction in active representative count as representatives found the new system cumbersome and hard to adapt.

In the recent Consumer Analyst Group of New York (CAGNY) Conference in Florida, Avon provided some crucial insights into its strategy for turning around the performance of the North American region. In terms of revenues, Avon derives only 15% from North America. However, the region’s performance, along with the weak Asia-Pacific region, has been severely disruptive to the overall performance of Avon last fiscal. In this note, we present key takeaways from the presentation at CAGNY 2014 and what they mean for Avon’s stock value. We currently have a Trefis price estimate of $21 for Avon Products, which is under review.

See Our Full Analysis for Avon Products

Relevant Articles
  1. How Coty Benefits From Recent Divestment & Deleveraging Plans
  2. Synergies From The Avon-Natura Merger Could Unlock More Than $1 Billion In Value For Shareholders
  3. What Does The Avon-Natura Merger Deal Mean For Investors In Avon?
  4. A Closer Look At Avon’s Global Operations, And What’s In It For Natura
  5. Key Takeaways from Avon’s Q4 Earnings
  6. Will Representatives Growth Drive Avon’s Q4 Earnings?

Demographic Customer Segregation, New Ordering System To Fix US Performance

Avon stated that segregating customers demographically should help the company achieve positive revenue growth rate towards the back half of fiscal 2014. Avon has close to 850 sales districts in the US, most of which are concentrated on the upper east coast. The company stated that the top 10 grossing districts out of the 850 total districts are primarily Hispanic. Hispanic women are expected to drive 100% of growth among all women aged 18-49 according to the company. In 2014, Avon plans to capture a higher wallet share of Hispanic customers by deploying more representatives in districts with a higher Hispanic concentration. On average, Hispanic representatives had a 11% higher average order size compared to other representatives, and mapping potential Hispanic customers with Hispanic representatives should give Avon opportunities to synergistically boost North American revenues. Additionally, the company also plans to increase the number of representatives to cater to the Hispanic population in Florida and the south west region across areas like California and Texas.

Avon plans to reduce representative attrition, a problem that has crippled North American revenues in the last two quarters, by providing them with greater earnings opportunities. Avon’s Senior Vice President for North America, Pablo Munoz, indicated that representative recruitment procedures would be conducted through an online appointment engine along with the traditional recruitment system. In the third quarter of fiscal 2013, Avon reported a decline in rep count in North America due to a fallout in its global hiring system. The optimized online appointment engine is expected to account for as much as 25% of overall recruitment from the region going forward, according to Pablo Munoz.

Additionally, the company plans to boost product pricing by eliminating products across overlapping categories. Customers wanting a certain product are choosing a similar produce at a lower price point that has made the higher priced product redundant. For example, the number of products in the ANEW brand is expected to decline from 45 to 31. The company also plans to gradually move away from its paper brochure model to a more engaging demonstrable product model so customers can try the product before buying. This move is expected to reduce the number of pages in Avon’s current brochure from 180 pages to 152 pages by 2015, saving close to 6 billion pages annually. Cost cuts are also expected to come from a stronger e-commerce platform within the US, along the release of a mobile brochure app. The US e-commerce portal should provide representatives with additional earnings opportunities through higher commissions from an expanded customer base.

We will continue to closely track Avon’s performance and the extent of its turnaround in the North American market going forward. For fiscal 2014, we have a revenue estimate of approximately $9,714 billion which stands close to 2.5% lower than fiscal 2013 revenues. We expect Avon to see first positive growth in revenues in 2015, along with a growth in product margins.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)