Though Avon’s Transformation Plans Are On Track, Its Performance Is Expected To Improve Towards The Second Half Of 2017

by Trefis Team
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Avon Products Q1 2017  results have been in sync with the management’s expectations. The revenues declined by 1% y-o-y on a constant dollar basis and the adjusted operating margin dipped by 130 basis points. The problems for Avon Products was compounded due to macroeconomic slowdowns that have been going on in certain geographies. Regions such as Brazil, Avon’s most important market, have been witnessing a persistent weakness in beauty consumption due to the country’s ongoing recession. This problem was further intensified with increased competition from the region. Avon’s transformation plans are going according to schedule and the management expects the business to show recovery towards the second half of this year. The company’s top 15 markets’ growth surpassed the growth rate of the rest of its business. Approximately, 10 out of these 15 markets grew in the first quarter with stellar performances from countries like Argentina, South Africa, and Brazil. Let us take a brief look at Avon’s three most important markets.

  • Brazil

Avon’s revenues in Brazil grew by 2% y-o-y in terms of local currency due to higher average orders which was offset to some extent by the reduction in the Active Representative pool. This in turn increased the level of bad debt in Brazil. With a better collection process and more stringent terms of recruitment, the bad debts are expected to decline towards the second half of this year.

Though Brazil’s weakness continues in terms of a low consumer confidence, the economy is gradually indicating towards signs of stabilization. However, increased competition in this weak environment, especially in the Color segment, dampened Avon’s performance considerably.

Avon completed the roll-out of the new digital platform in Brazil which includes features such as mobile responsiveness and an integrated social media network along with training modules. This is expected to improve representative engagement and facilitate the representatives to do more business with Avon. The company has also invested in an innovative product lineup in the region.

  • Mexico

Mexico’s revenues increased by 1% y-o-y in terms of local currency mainly due to higher average orders. The Beauty segment delivered well in Mexico on account of the launch of Avon True Color in Q4 2016, along with new shades in the True Matte Lipstick and the launch of Avon Care Milk in skincare. However, the Fashion and Home segment performed poorly due to the dearth of new launches and due to the freeing of excess inventory at cheaper prices.

  • Russia

There was a product pricing adjustment problem in Russia due to an unexpected appreciation of the Russian Ruble. This is expected to be more aligned along with the progress of 2017. There was a problem with service issues among its representatives due to an altered delivery contract provided by the Russian delivery provider. Though this began towards the end of last year and the situation is almost in control by now, yet this led to a decline in Active Representatives.

Avon’s Transformation Plan Is Progressing According To Schedule

  • This year happens to be the second year of Avon’s three-year transformation plans, and so far its journey is progressing well according to plan. The company aims in achieving a mid single-digit constant dollar growth in revenue by 1% to 2% and a low double-digit adjusted operating margin by the end of this three-year period.
  • The investment in the Avon brand name is one of the main drivers of the growth plan. Along with managing costs and remaining on track to save around $350 million by the end of next year, the company continued its investments towards the positioning of the company in line with its new theme, Beauty for a Purpose. Almost one-third of the target group of women in its top ten markets are aware of the Beauty for a Purpose positioning. In 8 out of its top 10 markets, Avon occupies the first position in being on top of the target customer’s minds when it comes to beauty brands. This is expected to be a significant growth driver for the company in the future. Along with this, there has been a 20% increase in its social media reach over the last 6 months, with the company garnering around 21 million fans on Facebook, making it the third most popular beauty brand on the platform.
  • The company’s investment in its innovation pipeline is going on full steam with the top 40 brands outpacing the growth of the overall Beauty category’s performance. The advertising for these top brands in its top markets are also in motion.
  • Its #BeautyBoss campaign to attract more representatives among the millennial age group seems to have worked well, with almost half of its new representatives coming from that category.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Avon Products

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