“Ding Dong, Avon Calling” is one of the classic slogans in business history. Unfortunately, today, irate investors and regulatory agencies are making their own calls to the multibillion dollar beauty company, even as the number of Avon representatives declines.
Ironically, The Company for Women, was founded by a man—David H. McConnell. Avon, which dates back to its formation in 1886, offered American women of the 19th century a door-to-door perfume company as well as a chance at financial independence—two rarities in many areas of rural America. And though most women in the US were confined to agricultural, domestic and manufacturing jobs, McConnell would offer another option for work to many women as the industrial revolution accelerated across the country.
As the son of Irish immigrants, McConnell grew up on a farm in rural New York and first began working as a traveling book salesman. While making his way on horse and buggy, McConnell discovered that with each stop the female customers he encountered were more interested in the free perfume samples he offered than they were in his books. He also found that many of these women were often struggling to live paycheck to paycheck yet had great potential as salespeople, and soon enough McConnell started formulating plans for his own perfume company that would involve the help of these women.
The first woman that McConnell took on board was Mrs. P.F.E. Albee from New Hampshire, who soon became the company’s first representative. As she traveled by horse and train across the Northeast section of the country, Mrs. P.F.E. offered single-note scents such as Violet, White Rose and Lily-of-the-Valley in a convenient, door-to-door manner that allowed women in isolated areas to gain access to perfumes.
Thirteen years later the representative ranks rose to 5,000, and McConnell soon structured Avon so that all employees would participate in an incentive program that encouraged happy, motivated and productive workers. Many of these guidelines are still in place at Avon today, and they include:
• Providing an earnings opportunity so individuals can achieve financial independence and enjoy all that comes with such an accomplishment;
• Recognizing everyone’s unique contributions;
• Giving back to the communities Avon serves;
• Offering the highest-quality products with a guarantee of satisfaction, and
• Maintaining and cherishing the “friendly spirit of Avon.”
Today, with corporate sales of nearly $11 billion ($7.7 billion for cosmetics, fragrances and toiletries) Avon has representatives all over the world whom hail from The Philippines to Romania. While door-to-door may no longer be the preferred method of sale, today’s representatives have grown the company by continuing to sell to colleagues and friends in the workplace as well as online.
Products and Progress
During its first year in business, Avon launched its Little Dot Perfume Set, and had built a lineup of nearly 20 different fragrances just 12 months later.
Over the next couple of decades Avon would move from a small private company to a public company in 1946. Its first step became the promotion of its first catalog in 1896 and of its first full color catalog in 1905. Around the same time Avon sold a full range of cosmetics and in 1931 eleven of Avon’s products received the coveted Good Housekeeping Seal of Approval. Meanwhile sales topped $1 million and would continue to grow in the coming years.
The biggest change during the next 50 years would be Avon’s marketing campaign, or what Avon calls “From ‘Little Dot’ to Dot-Coms.” While historically Avon’s business model was based on door-to-door selling, the strategy became less effective as women increased their activity in the workforce and were no longer at home when Avon rang. In order to remain competitive in a changing sales environment, Avon moved from door-to-door to door-to-desk in 1986.
As selling occurred more in the workplace, Avon updated its Earnings Opportunity in the 1990s in order to attract more representatives. Prior to Avon’s Sales Leadership program, Avon representatives could only earn money by selling to customers. However, the new program created additional incentives for Avon representatives by allowing representatives to earn money by recruiting and training others. The result increased the amount of money many Avon representatives earned by exponential amounts, and today some representatives run multimillion-dollar Avon businesses.
Much of Avon’s success can also be measured through its awards and recognition of the past 10 years. In the US alone Avon has garnered over 20 different types of awards, ranging from a 100% rating in the Corporate Equality Index from the Human Rights Campaign Foundation to the 50 Best Companies for Minorities from Fortune magazine. Other notable awards include America’s Most Admired Companies in 2006 and 2007 from Fortune magazine, the Top 25 companies in the Global Corporate Reputation Index presented at the 2012 World Economic Forum in Davos and the 100 Most Innovative Companies from Forbes magazine.
Globally Avon has faired equally well. It was awarded in 2008 the Top 100 Best Employers in China from World Executive Weekly magazine and the Best Place to Work in Spain from 2005-2007 from the Great Place to Work Institute. Avon has also received awards in 18 additional countries.
This past year marked Avon’s 20 years of fighting breast cancer initiative, which was launched in the U.K in 1992. At the time Avon began the Avon Breast Cancer Crusade breast cancer was not an issue spoken about openly. However, in 1998 the Avon Foundation was named the beneficiary of the first long-distance walk series for breast cancer, and only five years later the Foundation began its very own Avon Walk for Breast Cancer (a marathon and a half walk over two days). At the end of 2011 163,000 participants raised more than $400 million and more than 14,000 breast cancer survivors have participated. The Crusade has donated over $780 million to accelerate research progress and improve access to care in 58 countries.
Even though the company is said to have significant emerging-market growth potential, Avon has been wading through rough waters over the past several years. Its number of independent representatives has been declining in many key markets and Avon’s thin profit margins have declined more than 25% since 2010.
For the second quarter of 2013, total revenue declined 2% $2.5 billion. Active representatives and total units were relatively unchanged and price/mix increased 2% during the quarter. Avon Beauty sales declined 4% and Fashion & Home sales were up 2%.
Second-quarter 2013 gross margin was 62.7%. Adjusted gross margin was 63.3%, 40 basis points higher than the prior-year quarter, primarily due to lower freight costs, largely in Latin America, partially offset by the negative impact of foreign exchange. Operating profit was $202 million and operating margin was 8.1% in the quarter.
Second-quarter net income from continuing operations was $85 million, or $.19 per diluted share. Second-quarter adjusted net income from continuing operations was $127 million, or $.29 per diluted share.
In July, Avon completed the sale of its Silpada business for $85 million plus the potential for a $15 million subsequent earn-out. Silpada has been classified within discontinued operations for all periods presented. In the second quarter of 2013, the Company recorded within discontinued operations a pre-tax charge of $79 million ($50 million net of tax) reflecting the expected loss on sale.
To combat the declining business, Avon has launched a plan to focus on three different initiatives that include innovating the consumer proposition, transforming the representative experience and optimizing geographies. Currently more than 70% of company sales come from emerging markets and, and Avon executives are working toward better communicating consumer insights and using that information to create focused category tactics in color, fragrance, skin care and fashion.
Cost reduction has already been occurring with the elimination of 400 jobs and the restructuring or abandoning of poorly performing businesses in Africa, the Middle East and Europe. The plan could save Avon $400 million by 2016. But will it be enough to save Avon?
Third quarter sales fell 7%, as the company reported a 19% decline in North American sales as well as a decline in emerging markets like Mexico and Russia. Those results knocked its stock down more than 23% to its lowest level since February, when Chief Executive Sheri McCoy started detailing her plan to return Avon to growth. Last month, Avon said that US Securities and Exchange Commission offered to settle a previously disclosed bribery probe in September with penalties that were "significantly greater" than Avon's offer to pay $12 million. Avon said a settlement of the size the SEC has proposed - which Avon did not reveal - would "materially adversely" hurt its financial condition. During the quarter, Avon sold 7% fewer items, and the number of sales reps fell by 3 percent, after showing signs of stabilizing earlier in 2013.
"We need to build strong execution into our DNA. This will take time," McCoy, who replaced Andrea Jung in April 2012, told analysts on a conference call.
Even in difficult times, however, Avon continues adding new products to its over-twenty product lines in color cosmetics, skin care, fragrances and personal care. Avon’s newest products include Anew Clinical Absolute Even Multi-Tone Skin Corrector, Anew Clinical Pro Line Eraser Eye Treatment with A-F33, Avon Totally Kissable Lipstick and Super Drama Mascara.
Those launches won't be enough to turn Avon around, but company executives insist they are determined to return Avon to its wonderful heritage.