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Avon Restructuring May Cost $500 Million

December 2, 2005

Avon Products, Inc. launched a restructuring initiative that includes trimming management layers as well as outsourcing some work to low-cost countries as the world’s largest direct seller of cosmetics tries to improve sluggish sales and profit across the globe. Avon expects the restructuring to cost anywhere from $300 million to $500 million before taxes. The company said it could see initial pretax costs of $20 million to $40 million, or 4 cents to 7 cents per share, in the current fourth quarter.
Chairman and chief executive Andrea Jung told analysts and investors that Avon understands the issues in its business today. She added that Avon would deliberately give less detailed financial forecasts as it works on improvements.
“The company has up to 14 management layers in its organization, depending on the division, while other companies operate effectively with as few as seven or eight,” Ms. Jung said. She indicated Avon would have a “substantial downsizing” but did not give specific figures on jobs to be cut.
Avon has been grappling with increased competition, particularly in the anti-aging skin care market, where competitors have launched several new products at prices below Avon’s Anew line. The company said that the restructuring will enable it to increase spending on advertising, market research and product innovation. Ad spending is expected to more than double by 2008.
The company has reported declines in sales in several markets, including China, where boutique owners reduced the size of their orders in connection with the anticipated resumption of direct selling in that country.
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