AVON (Direct Seller)

A Written Analysis of a Business model

Submitted to

NICOLO YU, CPA

Instructor

Bachelor of Science in Accountancy

School of Business and Management

XAVIER UNIVERSITY

Cagayan de Oro City

by

DALIDIG, JAMIL

ESTRADA, PHOEBE AMALIA

LA VICTORIA, KIMBERLY

MANGALOS, GIANNA

ODCHIGUE, HUMPHREY

PO, ALEXIS MAE

1

I. Article

Avon’s in a ding-dong battle to stay in business

The cosmetics company is mulling strategic alternatives, including potentially selling its

North American business, according to a report.

“Ding Dong, Avon’s calling,” was a familiar sound for decades in the United States, heralding

the arrival of an Avon Lady selling beauty products door to door.

But according to a Wall Street Journal report, that may become a thing of the past in North

America as the struggling direct-selling company looks at so-called “strategic alternatives” that

include the 129-year-old New York company possibly selling its business in its home market.

An Avon spokeswoman declined to comment on the report, which came one day after Avon

announced it is postponing from May to the fall an analyst day with Wall Street experts during

which it was to have laid out its latest turnaround plan.

Once the largest direct-selling company in the world, Avon has flailed in recent years,

particularly in North America. In 2014, Avon’s North America revenue fell 18% to $1.2 billion,

crumbling to barely half of what it took in 2007. And more worryingly for a company that

depends entirely on sales reps, the number of Avon Ladies selling its products fell 18% at home.

Globally, the size of its sales force fell for the fifth straight year.

The Journal’s report comes about three years after Avon rejected a $10.7 billion takeover offer

from smaller rival Coty Inc COTY 2.71% . Before the Journal’s report sent Avon shares surging

Tuesday afternoon, the company was worth $3.5 billion. (Its all-time peak market capitalization

was $21.8 billion in June 2004.)

In recent years, Avon’s U.S. business has struggled to adapt its direct selling model to the

realities of modern life. Last year, Avon completed the first major overhaul of the avon.com

2

website in 10 years, but it is now contending with nimble e-commerce rivals such as beauty

online retailer Birchbox.

Avon’s offerings, generally lower-end, must also compete with vastly improved offerings at

brick-and-mortar retailers such as Target TGT 0.36% , Walgreens, Kohl’s KSS -1.18% and

J.C. Penney JCP 1.85% , which has Sephora boutiques at hundreds of its stores. Some of the

pain has come from confusing customers about what it stands for. Just a few years ago, Avon

unsuccessfully tried to add higher-end products as well as silver jewelry to its line-up. The move

was a total flop.

Efforts under Sheri McCoy — a Johnson & Johnson executive who took the reins in 2012 — to

fix Avon’s U.S. problems have not worked. Avon has struggled to make its commission structure

competitive with that of competitors such as Mary Kay Cosmetics. One big failed effort was the

cancellation a couple of years ago of a big software upgrade that had been designed to make

tracking orders and compensation easier for reps.

While many on Wall Street have clamored for years for Avon to consider exiting the U.S.

business altogether to focus on more promising markets such as Brazil, Russia, and Mexico,

McCoy told Fortune last year that success in Avon’s home market was too important: “To not

compete in one of the largest markets in the world doesn’t make sense. It’s the founding country

of the brand; there are a lot of roots to the brand,” she said in September.

What’s more, going the retail route is not that simple either, given that the company has no

systems in place to sell to stores. It’s hard to see anything encouraging in Avon’s North

American sales, particularly as the business is clearly unprofitable, losing $132 million in the last

two years.

3

“Avon needs to do something big. This may be too little, too late,” said Ali Dibadj, a Sanford C

Bernstein analyst. “They’ve been throwing good money after bad for years.”

Until last year, Avon could at least find some solace overseas, with promising numbers in some

markets. But revenue in Latin America (Brazil is Avon’s biggest market), Europe, and Asia

(Avon’s bribery scandal in China destroyed its business there, erasing a lead it had gotten by

being the first U.S. direct seller) all fell last year. (To be fair, Avon has said the strong U.S.

dollar was behind a lot of that.)

Three years ago, when Avon urged shareholders to reject Coty’s unsolicited bid, the company’s

board argued that they would get a better return by giving the newly appointed McCoy a chance

to fix a company left in a shambles by her predecessor Andrea Jung. But fast forward to now,

despite all the time McCoy has had, the company is in worse shape. Its revenue is down 22%

over a 3-year period to $8.8 billion, and the company is struggling to compete with aggressive

competitors in places such as Brazil. It’s hard to argue McCoy has not had enough time to at

least stabilize the ship.

“Avon gets more grief from equity analysts than any company we’ve ever followed and it’s no

wonder. Management continues to claim they know what’s wrong and how to fix it, yet results

continue to languish,” said Carol Levenson, director of research, at Gimme Credit, an

independent research service on corporate bonds, in a research note.

II. Facts about AVON

Avon uses the ‘direct selling’ retail system. The business is exclusively for women. The sales

force comprises the career Avon representative (20% of total members) and part time Avon

representative (80% of total members). The sales process includes campaigning then distribution

4

of brochures to customers personally, by mail or left at conspicuous places, thereafter, placing an

order is by filling long purchase orders.

Currently the business maintains a site, “Avon.com”. The site was launched in 1997,

developed on a budget of USD 400,000. It is only for commerce of beauty products and it offers

direct sales to consumer, no involvement of representatives. Avon viewed it as a test of potential

new channel. It has little advertising and insignificant sales volume.

Based from the article above, Avon has been experiencing a huge decline on the number of

their sales representatives, which could greatly distress the business provided that they have a

direct selling type of business model. Without their competent sales representatives, the business

will not be able to work effectively. This just proves that this type of a business model creates a

disadvantage on their part, when their sales representatives do not function as how they are

expected to be.

Avon SWOT Analysis

Strengths:

a) Personal Selling

b) Customer Loyalty

c) Flexibility for Employees

d) Diversified product

e) Reasonable product price

  Weaknesses:

a) High Employee Turnover

b) High Commission Fees

Opportunities:

5

a) New Market Channel

b) Technological Development

c) Advertisement creates willingness of purchase from consumers

Threats:

a) Increased Rivalry (especially in North America)

b) Consumer Preference Changes

c) Multi channels of business will increase the cost

III. Problems

a) How AVON can keep its corporate identity through emergence of e-commerce?

b) How a new Web Strategy can be distinguished from the first low-profile launch of

Avon.com?

c) How to leverage sales representatives in building Avon.com?

Main Problem:

How to keep direct relationship with customers while enhancing online sales?

IV. Alternative Solutions

A. Keep personal selling as the main distribution channel and create a Web strategy only

for marketing purposes.

Advantages:

a) Establish corporate identity of Avon as a direct seller

b) Strong customer relationships because of face to face interactions

c) Current representatives are still employed

6

Disadvantages:

a) Inconvenient for customers since they need to buy it personally from a representative

b) High commission fees

c) Loss of AVON‘s competitiveness

B. Reduce number of representatives and rely on online sales.

Advantages:

a) Reduced costs

b) Encourages technological development

c) New market segment in the internet

Disadvantages:

a) Loss of competitive advantage rrelying on online sales

b) Downsizing

c) High implementation costs

d) Lack of experience in e-commerce

C. Create business strategy which would combine both: E-Commerce and Direct Selling

Advantages:

a) Corporate identity

b) Strong customer relationships

c) Current representatives employed

d) Keeping up with the technology

e) New market segment

Disadvantages:

a) It creates an ununified business approach since two methods are used, it creates confusion

7

b) High implementation of e-commerce costs

c) Lack of experience in e-commerce

V. Conclusion

The suggested conclusion would be to create business strategy which would combine both:

E-Commerce and Direct selling. In overcoming the negative consequences of this, the effect of

not unified business approach can be positioned as a competitive advantage as something unique

to the business. The effect of high implementation of e-commerce costs can be understood in the

sense that investment in e-commerce will pay-off in the long-run. The effect of lack of

experience in e-commerce can be mitigated by hiring e-commerce consultants.

VI. Recommendation

Since over 70% of the total sales of Avon were through its sales reps, the company should

use the ‘Business-to-business’ path and ease the ordering style for the representatives by

eliminating the filling of long purchase orders. The company should also use the ‘business-to

customer’ path because a significant target customers would buy independently. The website

should be more attractive and there can be a forum so that the sales representative as well as the

customers can discuss about the Avon products. This way, the corrporate identity of Avon can be

distinguished more by the consumers.

References

Avon Products. (n.d.). Retrieved from https://en.wikipedia.org/wiki/Avon_Products

Experience Avon's History. (n.d.). Retrieved from http://www.avoncompany.com/aboutavon/history/

Wahba, P. (2015, April 14). Avon’s in a ding-dong battle to stay in business. Fortune. Retrieved from http://fortune.com/2015/04/14/avon-battle-for-future/

8