Avon Products Inc in Beauty and Personal Care_GMID

7/29/2019 Avon Products Inc in Beauty and Personal Care_GMID

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AVON PRODUCTS INC IN BEAUTY AND PERSONALCARE (WORLD)

January 2013


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Euromonitor International PASSPORT 2BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Disclaimer

Much of the information in thisbriefing is of a statistical nature and,while every attempt has been madeto ensure accuracy and reliability,Euromonitor International cannot beheld responsible for omissions orerrors.

Figures in tables and analyses arecalculated from unrounded data andmay not sum. Analyses found in thebriefings may not totally reflect thecompanies' opinions, reader

discretion is advised.

Avon Products Inc is thelargest and best known of theworld's direct sellers. However,in 2011 it began to encounterfinancial hardships. It has lostshare in its cash cow Brazil,whose performance over thereview period was still able tooffset poor performanceselsewhere, notably in China. The

company needs to generaterapid investment to reversethese trends; this is certainlypossible, as Avon is among thebest-known BPC brands in theworld.

Scope

All values expressed in this report are in US dollar terms, using a fixed

exchange rate (2011).All forecast data are expressed in constant terms; inflationary effects arediscounted. Conversely, all historical data are expressed in current terms;inflationary effects are taken into account.

Beauty and Personal Care US$425,840 million

Baby and Child-Specific Products US$13,636 million

Bath and Shower US$37,245 million

Colour Cosmetics US$52,091 million

Deodorants US$20,354 million

Depilatories US$4,483 million

Fragrances US$43,892 million

Hair Care US$73,686 million

Men's Grooming US$32,734 million

Skin Care US$96,485 million

Sun Care US$9,258 million

SCOPE OF THE REPORT
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STRATEGIC EVALUATION

COMPETITIVE POSITIONING

MARKET ASSESSMENT

GEOGRAPHIC AND CATEGORYOPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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Avon Products Inc is a US-based manufacturer and

direct seller, primarily of beauty and personal care(BPC) products. It is the leading direct sellingcompany in the world, and ranked fifth in the globalBPC market in 2011 with a 3.2% market share.

Avon also operates a chain of conventional retailoutlets called Beauty Boutiques in China alongside alimited direct sales operation, as well as sales viacatalogues and websites in selected markets.

The company is primarily a BPC retailer, although insome markets its BPC distributors also sell jewellery,clothing and home furnishings.

Like its BPC peers, the company has built share onemerging markets. In 2011, 49.9% of total BPC saleswere generated in Latin America, where it rankedfourth in BPC in 2011 with a 8.6% share, up from

37.1% in 2006. The company is predominantly a mass-marketoperator; 97.5% of its 2011 BPC sales weregenerated by mass cosmetics. Its core products arecolour cosmetics (25.7% of 2011 value sales), skincare (24.8%) and fragrances (24.3%).

Key company facts (1)STRATEGIC EVALUATION

Avon Products Inc

Headquarters: New York, NY, USA

Regionalinvolvement:

Global

Categoryinvolvement:

Baby and child-specificproducts, bath and shower,colour cosmetics,deodorants, depilatories,

fragrances, hair care, men'sgrooming, skin care, suncare

World BPC valueshare 2011:

3.2%

World BPC value

growth 2011:3.1%


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In 2011, Avon Products reported sales and distribution

operations in over 100 countries, operated by around 6.4million distributors. Its domestic North American market isbecoming less important to the company, as it seeks todevelop its presence in more dynamic emerging markets.

As a result, Avon Products launched a restructuring in 2009in order to better reflect its international growth.

This has involved widespread layoffs and streamliningglobal manufacturing. The company plans to shut plants in

the US (Ohio) and Germany by 2013, in order to focus onnew territories. This also lay behind its 2010 decision to pullout of the Japanese market in order to focus efforts onChina. In December 2012, it followed this with theannouncement it will exit South Korea and Vietnam. Thecompany has performed poorly in 2012, and announced inits third quarter earnings release that it looking to make costsavings of at least US$400 million by the end of 2015,largely in Selling, General and Administrative expenses.

Avon has also sought to diversify its brand position in BPC,primarily through acquisition. In 2010, it acquired UK-basedLiz Earle Beauty, a botanical skin care brand, and the TinyTillia brand of bath and body care products for babies.

Key company facts (2)

Avon Products Inc: Sales by Reported

Geography 2011(US$ million)

Latin America

North America

Central & Eastern Europe

Western Europe, Middle East & Africa

Asia Pacific



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Despite retail sales growth of 3.1% in 2011, Avon

has undergone a chaotic 2012. The company hasfound itself in difficulty after failing to deal quicklywith poor results in important overseas markets, aswell as distributor supply problems in Brazil, its keymarket.

The company is also facing a federal probe intoallegations of bribery of officials in China and Latin

America that has led to widespread investor

dissatisfaction with CEO Andrea Jung, who agreedto step aside for new CEO Sheri McCoy.

Most surprisingly, the company was subject to aUS$10.7 billion unsolicited takeover bid fromfragrance specialist Coty Inc, a far smaller BPCcompany.

Coty made an initial bid of US$10 billion for Avon

in March 2012, after talks between the twocompanies about a possible Avon takeover of Cotyfailed. Avon rejected this, Coty counter-offered butfinally walked away in May 2012, citing Avon's lackof decisiveness. This has been a characteristic ofthe company over the review period.

As a result of this failure, Avon has seen its stockfall, and is apparently no closer to resolvingstructural problems within its business. It haslimited working capital to improve the business at atime when the bloom appears to be coming offdirect sales in many emerging markets, and thecompetitive environment is becoming far tougher,especially in its core Latin America markets.

Although the company enjoys high brandawareness, falling distributor numbers andstrengthening competitor offer means the companyneeds to rapidly evaluate strategy.

Avon in trouble

Coty's bid for Avon was based on its desire for

access to the latter's dynamic Latin Americamarkets.



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Avon Products Inc's recorded revenue grew by 3.9% in 2011, from US$10.9 billion to US$11.3 billion. Most

of this was driven by the company's success in Latin America, where direct selling is an important salesmodel, and Avon reported an increase in revenue for the region from US$4.6 billion to US$5.1 billion in2010-2011.

However, revenues fell away in other regions including North America, Central & Eastern Europe, and AsiaPacific. Avon continues to struggle make its hybrid direct sales/store model work in China, and it is losingout to other direct sellers in distributor recruitment.

The company has stated that its most criticalpriority is to rebuild top-line revenue growth.

Product development is part of this strategy,with innovations such as the successfulintroduction of the skin care brand ANEWGenics in 2011.

However, Avon still appears beset by structuralproblems, most importantly distributor supplyissues in Latin America that remain unresolved.

Yet again, it is set to undertake restructuring.Most alarmingly for its investors, operating profitdropped by 20.4% in 2011, and withoutrestructuring, this will be difficult to turn around.The failure of the Coty bid and the lack of re-capitalisation may cost Avon in the long term.

Uncertainty for AvonSTRATEGIC EVALUATION

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Avon Products Inc: Total Revenue vsOperating Profit 2006-2011

Total revenue Operating profit


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Latin America is the company's key geography and in 2011 was the main factor offsetting decline in

revenues in three of its four other regions. According to the company, sales growth in the region increasedbecause of higher average orders and an increase in the number of active representatives.

Favourable foreign exchange rates also helped, and in constant terms the 14% growth in sales in Mexicowas very encouraging.

However, the company risks compromising the performance of its main region. Sales representatives inBrazil, the key regional market, continued to suffer from poor supply, which the company blames on theimplementation of an enterprise resource planning (ERP) system in the second half of the year.

The direct sales market inBrazil and Latin America isbecoming highlycompetitive, not only withwell-established local giantssuch as Natura Cosmticos,but also new local playerssuch as Eudora (by O

Boticrio) and Jequiti, aswell as international playerssuch as Nu Skin. Avon mustaddress this if it is to remaincredible in the struggle fornew distributors.

Latin America keeping the company in growthSTRATEGIC EVALUATION

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Avon Products Inc: Total Revenues by ReportedGeographic Segment and Growth 2010-2011

Total revenues 2011 Total revenues 2010 2010-2011 % growth


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Avon's 2012 performance has confirmed the negative trends that began to emerge in 2010. Third quarter

(the three months ending 30 September) total revenues dropped from US$2.8 billion to US$2.6 billion, a y-o-y decline of 8%.

The company cited unfavourable exchange rates as a key factor in this, and reported y-o-y growth of 1%;however, Avon continues to shed distributors, and Active Representatives were down 1%.

Net income fell by 81%, suggesting that the company's loudly trumpeted cost-saving programme has yet tohave any affect, although the company cited higher employee compensation costs as the prime factor inthis.

Avon remained sustained to a certain extentby Latin America, where exchange rates drovea decline in total revenues of 6%; however, inconstant terms, sales grew by 6%, the numberof units sold grew by 5% and the number of

Active Representatives grew by 2%.Nonetheless, this is a weaker performancefrom the region than the company is

accustomed to seeing. Other regions have also performed weakly.The company finally appointed a new CEO,Sheri McCoy, in April 2012; this may see asolidifying of strategic planning going forward,something Avon would appear to require.

No turnaround in sightSTRATEGIC EVALUATION

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Netincome(US$million)

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Avon Products Inc: Total Revenues and Net

Income Q3 2011-Q3 2012

Total revenues Net income

Source: Company releaseNote: Q3 = three months ending September 30th


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STRENGTHS

OPPORTUNITIES

WEAKNESSES

THREATS

Avon is a major playerin Brazil, the mostimportant global BPCdirect selling market interms of scale anddynamism.

Brazil

The company claims90% consumer brandawareness for Avon,and it is the largestdirect selling BPC brandin the world.

Avon brand

Avon seems unable toresolve structuralproblems, in particularsupply lines in Latin

America, and hasbecome characterisedby a lack ofdecisiveness.

Structural problems

Avon remains a massbrand, despite attemptsto develop newpositions. This leaves itexposed to the intenseprice pressure of themass position indeveloped markets.

Mass-market position

The failure of the Cotydeal may have been

inevitable, but Avon'sassets, especially itsLatin American footprint,could open the door forcapitalisation via amerger.

Merger

Despite the company'sstructural problems in

the region, it continuesto enjoy growth in largemarkets such asMexico. Growth in thesemarkets will offsetweakness elsewhere.

Other Latin Americamarkets

Avon is havingproblems outside its

Latin American core asdirect selling losesdynamism. This couldbe a threat to the globalbusiness.

Business outside LatinAmerica

Avon reducedexpenditure on

advertising spend andsales in 2012 in Latin

America and saw salesslide. Lack ofinvestment maycompromise the brand.

Too many cuts

SWOT: Avon Products IncSTRATEGIC EVALUATION


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Avon's strength is based on share in emergingmarkets that are underdeveloped and have largepopulations with limited access to conventional

channels or internet sales, as well as a strongeremphasis on community living. Identifying more ofthese to grow global share is the company'snumber one strategic challenge.

The company's sales and profit problems have ledto widespread cost cutting and structuralreorganisation in an attempt to re-establish

margins. Avon needs to face this challengecarefully; its reduction in advertising spend andseller incentives (called Representative ValueProposition or RVP by the company) in Latin

America saw sales slow and rising distributordiscontent.

Avon has seen its share of the Chinese BPCmarket slide from 2.8% in 2006 to 1.1% in 2011, assales suffered a negative CAGR of 7.7% in amarket that was otherwise dynamic. The problemis with its hybrid sales model. Avon took the boldstep of bailing out of Avon Japan in 2010; it couldconsider doing the same in China, if only because

it appears to be unable to build the sales model itwants.

The company's 2010 acquisition of Liz EarleBeauty and Tiny Tillia indicate its desire to build abroader spectrum of brand positions. Greaterpremium offer, either inside or outside the directsales model, could help rebuild the top-linerevenues and profit margins the company hasmade a key objective, and it could look at further

acquisitions.

Resolving China Looking at new positions

Softly, softly for restructure New markets

Key strategic objectives and challengesSTRATEGIC EVALUATION


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MARKET ASSESSMENT


BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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Beauty and Personal Care: Top Global Players by

Value Share, Share Growth and Ranking 2007-2011

Company2007

2008

2009

2010

2011 2011

%share

Procter & GambleCo, The

1 1 1 1 1 11.5

L'Oral Groupe 2 2 2 2 2 9.7

Unilever Group 3 3 3 3 3 7.8

Colgate-PalmoliveCo

4 4 4 4 4 3.8

Avon ProductsInc

7 7 5 5 5 3.2

Beiersdorf AG 6 5 6 6 6 3.1

Este Lauder CosInc 5 6 7 7 7 2.9

Johnson &Johnson Inc

9 8 8 8 8 2.8

Shiseido Co Ltd 8 9 9 9 9 2.5

Kao Corp 10 10 10 10 10 2.1

The global BPC market is concentrated, with the top

five companies generating 36% of total sales in 2011,up from 34% in 2007. Characteristically, marketleaders' share is built on global brands; 24% ofmarket leader Procter & Gamble's 2011 sales, forexample, were generated by the Gillette brand.

Unlike many other consumer goods categories, therehas yet to emerge a top 10 player from an emergingmarket; the strong global marketing of these brands

still provides better equity and credibility than localproducers.

As a result, ranking and share among leading globalmanufacturers has remained relatively static over thereview period, although consumer trends in emergingeconomies are beginning to affect the market.

Direct sellers such as Avon and Amway, for example,

have made gains as their sales model is moreaccepted by consumers in emerging markets.However, Avon's share growth has been led by itsperformance in a single region, Latin America. Ideally,it would look to increase its footprint in otheremerging markets, in particular Asia Pacific.

Avon gains based on Latin AmericaCOMPETITIVE POSITIONING


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Beauty and Personal Care: Top Direct

Sellers by Value Share, Share Growthand Ranking 2007-2011

Company2007

2008

2009

2010

2011 2011

%share

AvonProducts

Inc

7 7 5 5 5 3.2

NaturaCosmticosSA

14 14 14 13 13 1.6

Mary KayInc

18 17 17 17 16 0.9

Amway Corp 19 19 18 18 19 0.8

OriflameCosmeticsSA

24 23 22 22 23 0.6

Like most other direct sellers, Avon's growth over the reviewperiod was based on its success in emerging markets, wherelarge rural populations, less access to conventional BPCretail channels and the attraction of supplementary incomesin communities where employment opportunities for womenmay be limited have helped the model flourish.

Conversely, large brand manufacturers may need years andmassive investment to build market share under theseconditions, and emerging markets are therefore fertile groundfor direct sellers, especially early market entrants.

However, consumers in many of these markets arebecoming more sophisticated, thanks to improving retailnetworks, and more brand savvy. While forecast growth forBPC direct sales remains solid, at 4.1% CAGR 2001-2016,

Avon may want to consider developing more premiumpositions to meet this trend.

Amway was the largest direct seller in BPC in 2011, partly asa result of specialisation; some competitors such as Amway

also deal in consumer health. Avon has widened its productpresence to include apparel and home furnishings, butspecialisation is likely to prove a competitive strength in thelong run. BPC is the largest part of the global direct sellingmarket, and simplicity and strong brand equity are thelikeliest magnets for new distributors.

Avon direct sales model best suited to emerging marketsCOMPETITIVE POSITIONING


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Avon outperformed the global BPC market at the start of the review period 2007-2011, driven by strong

growth in Latin America. However, this is masking weakness in the rest of its global operations.

Avon's lack of development outside Latin America is a concernCOMPETITIVE POSITIONING

A (2008): Despite ongoing

growth in emerging markets, theonset of the global economiccrisis hits Avon's sales in the USand Western Europe. Decliningvalues in these markets offsetgrowth elsewhere.

B (2009): Exponential growth of

18.2% in Latin America offsetsdecline of 2.9% in North Americaas mature markets struggle torecover from recession.

C (2011): Avon's failure to build

sales in Asia Pacific, as well asongoing weakness in its maturemarkets sees growth fall belowglobal averages despite theongoing strength of Latin

America.

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Avon Products Inc: Competitive Performance by Value vs Global BPC Market2007-2011

World Avon Products Inc

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Avon saw a broadly similar growth pattern to Mary Kay, Amway and Oriflame over 2006-2011. Each has

seen the increasing maturity of domestic markets in Western Europe and North America offset by growthelsewhere, as the value for money mega-trend in the mass market via retailers such as Target and Tescohas hurt value development for most BPC brands, and direct selling has lost credibility. However, unlikethese other players, Avon has so far been unable to develop sales growth in Asia Pacific.

The dynamism of emerging markets is underlined by the exponential growth shown by Brazilian operatorNatura Cosmticos, which generated 92% of its 2011 sales in its dynamic domestic market. This is enoughto make it the second largest direct seller in the world, and enabled it to maintain double-digit growth in2009 across the review period while its peers experienced more fluctuating growth.

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Avon: Value Sales Growth vs Other Top Five Direct Sellers 2006-2011

Avon Products Inc Natura Cosmticos SA Mary Kay Inc

Amway Corp Oriflame Cosmetics SA Nu Skin Enterprises Inc

Emerging market strength competitive advantageCOMPETITIVE POSITIONING


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MARKET ASSESSMENT


BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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Despite a broad market presence, three quarters of the company's sales are generated by three products -colour cosmetics (26% of 2011 value sales), skin care (25%) and fragrances (24%). Of these, skin careoffers the clearest opportunity as the largest part of the global BPC market; however, the share of Avon'ssales generated by these products dropped from 33% in 2006, as fragrances and colour cosmeticsemerged strongly for Avon.

This is in part a reflection of the company's brand strategy. The most dynamic part of the global skin caremarket has been led by higher-priced functional products, often with a clinical or scientific alignment. Newproducts from Avon such as ANEW are in line with this trend, but the bulk of its offer is mass market andtypically marketed with a glamour- or celebrity-led position (most recently, the company has added Jon BonJovi and Paula Abdul to its roster). This position could be change.

Avon sees mass products build shareMARKET ASSESSMENT

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Market size 2011 (US$ million rsp)

Avon Products Inc: BPC Presence and Growth Prospects by Category 2011-2016

Baby and child-specific products

Bath and shower

Colour cosmetics

Deodorants

Depilatories

Fragrances

Hair care

Men's grooming

Skin care

Sun care

Opportunity Zone

Note: Bubble size indicates company share of category in 2011, range displayed: 0.5-7.5%


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Latin America is clearly the company's principal opportunity. It holds a 9% share in the regional market, and50% of its 2011 value sales were generated here. The region is set to see the most dynamic growth in BPCsales over the forecast period, with a CAGR of 5.2% compared to 2.8% for the global market. Direct salesis an important channel for these products in the region, generating 29.2% of total 2011 sales compared toa global average of 12%. In terms of global absolute value growth, the region is set to generate 34% of thetotal between 2011 and 2016, equivalent to US$21.6 billion.

Only Asia Pacific is set to see stronger absolute value growth than Latin America going forward, and isforecast to generate 40% of global absolute value growth. This is where the company lacks scale, andwhere, in theory, it should have opportunity. In 2011, it held a 1.1% share of the market, but its failure tobuild sales in China and its withdrawal from Japan have seen this slide over the review period. In truth the

company needs to find resources to develop its share of this market, which is still immature and well suitedto its offer.

Avon can build in other regionsMARKET ASSESSMENT

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Avon Products Inc: BPC Presence and Growth Prospects by Region 2011-2016

Western Europe

Latin America

North AmericaEastern Europe

Asia Pacific

Australasia

Middle East and Africa

Note: Bubble size indicates company share of region in 2011, range displayed: 1.1-9.0%


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MARKET ASSESSMENT


BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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BPC products have traditionally done well in direct sales. Distributor/consumer relationships are oftenbased on friendships or family, there is less consumer cynicism about the model and consumers are morelikely to be willing to find the time for the face-to-face experience at home; unlike food and drink, forexample, these are never impulse or emergency purchases.

At global level, BPC dominates direct selling, generating 32% of total value sales in 2011. The model offerssignificant growth opportunities; BPC direct selling is set to post a CAGR of 4% over 2011-2016, comparedto 3% for global BPC.

The bulk of this will be generated in emerging markets. Asia Pacific is set to generate 32% of total absolutevalue growth between 2011 and 2016, and Latin America 60%.

There are a variety of reasons for this:consumers in these markets aregenerally more receptive to the conceptof direct selling; retail networks thereoften remain less developed; anddistributor recruitment may be easier asthere may be fewer employment

opportunities for women. The key opportunities for Avon are clear:consolidate Latin America withinvestment and better distributorsupport; and try to find a way to make

Asia Pacific work.

BPC direct sales model perfect for emerging marketsGEOGRAPHIC AND CATEGORY OPPORTUNITIES

Direct Selling: Global Value Breakdown byLeading Category 2011

Beauty and personal care

Food and drink

Consumer healthcareClothing and footwear

All other direct selling


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Avon is visibly present in eight of the 10 markets that are forecast to see strongest absolute value growth.Brazil, which is set to grow by a total of US$4.6 billion between 2011 and 2016, equivalent to 49% of totalglobal growth, is the most important market for the company.

It has a limited and falling presence in China. These two markets hold significantly more direct sellingpotential than any other; not only are they larger, but they are forecast to deliver growth well above theanticipated global CAGR of 4% over 2011-2016.

The importance of Latin America to direct sales of BPC is shown by the rest of the list; of 10 countries, sixare in this region, and Avon holds strong share in the total BPC market in each of them. Regional strengthrests in the widespread consumer acceptance of the sales model.

Clearly, the company is inan exceptionally strongcompetitive position fordirect sales of BPC.Preserving share in Latin

America will clearly be themain priority over theforecast period, whileattempting to make itsbusiness in China work. Itdoes, however, still haveinternal constraints, resultingin Avon exiting Vietnam andSouth Korea, two potentiallyhigh-growth markets.

Avon well positioned in leading BPC direct selling marketsGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Most Dynamic BPC Direct Selling Markets 2011-2016 andAvon Company Share of BPC Market 2011

Absolute value growth (US$ billion) 2011/2016

% CAGR 2011-2016

Avon Products Inc % company share of BPC 2011

Key: BR=Brazil; CN=China; MX=Mexico; KR=South Korea; IN=India; CO=Colombia; PU=Peru;AR=Argentina; TR=Turkey; VE=Venezuela


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BPC direct selling is forecast to outstrip growth in BPC in value terms over 2011-2016, with a 4% CAGRversus a CAGR of just under 3%. This growth, admittedly, is from a lower base; however, direct selling is asignificant part of the global BPC market, generating 12.0% of 2011 values.

This is an increase on the 10.6% generated in 2006. The dynamism of markets in Asia Pacific, where directselling generated 12.2% of BPC sales in 2011, and Latin America with 29.2%, means that this sales modelwill become more important in the long term. Even in Avon's domestic US market, direct selling in 2011generated more BPC value (7.7%) than beauty specialist retailers (6.5%).

Avon's Latin American strength is clearly a competitive advantage. Its mass positioning is in line withforecast global trends; globally, premium cosmetics is forecast a CAGR of 2.8% over 2011-2016 comparedto 3.0% for mass products. However, at regional level, premium is set to outperform mass in EasternEurope, Middle East and Africa, North America and Western Europe, and the development of a moresegmented offer may make strategic sense if Avon seeks to rebuild sales in these markets.

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Forecast Growth in BPC Direct Sales vs BPC Market by Region 2011-2016

BPC direct sell ing BPC total market

Global opportunity for BPC direct sales, but more nuance neededGEOGRAPHIC AND CATEGORY OPPORTUNITIES


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Latin America is Avon's core geographic opportunity. It is expected to be the most dynamic BPC marketover the forecast period, with a CAGR of 5.2% compared to a global average of 2.8%. 50% of Avon's saleswere generated there in 2011, and 28.1% from Brazil alone.

Avon is exceptionally well positioned to develop more share in the regional market. Although Braziliandirect selling giant Natura Cosmticos SA has stronger regional share and ranked third in 2011 comparedto Avon's fourth, Avon has a broader footprint - 92% of Natura's sales are generated in Brazil - andalthough Brazil is clearly the most important regional market, other countries remain immature and mayoffer strong long-term opportunities.

Most importantly for Avon,

direct selling is a whollycredible sales channel in theregion. BPC sales via thismodel have grown fromgenerating 27.9% of value in2006 to 29.2% in 2011.

Avon's mass alignment andglamour-led marketing is also

in tune with regional trends,as despite the strongeconomic growth seen inmany regional markets,average levels of disposableincome remain low.

Latin America prime focus for the companyGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Avon Products Inc: BPC Presence and GrowthProspects in Leading Latin America Markets 2011-2016

Ecuador

Peru

Colombia

Venezuela

Argentina

MexicoBrazil

Note: Bubble size indicates company share of market in 2011, range displayed: 6.0-17.4%


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Avon's mass offer is well suited to Latin America. The median age of the consumer base is 27.9 comparedto, for example, 39.7 in Western Europe, and disposable incomes are weaker. There is also less demandfor the functional products that have driven growth elsewhere; hair care, not skin care, is the largest marketcategory, and anti-agers generated 2.9% of total market sales compared to the global average of 5.2%.

The company's mix of fragrances (26% of regional sales) colour cosmetics (25%) and skin care (21%) iswell in line with this demographic base. Colour cosmetics is set to be the most dynamic of these categories,with a forecast CAGR of 5.9% compared to 5.2% for total BPC. These products are affordable and make ademonstrable difference to appearance.

Fragrances is also set above-market growth over the forecast period with a CAGR of 5.6%. Avon's 15%market share leaves it well positioned for growth, and its mass positioning is a particular advantage here;mass fragrances generated 86% of regional fragrance sales in 2011, compared to a global average of 46%,reflecting regional consumer preference for lighter, floral products.

Mass position suits Latin American demographicsGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Avon Products Inc in Latin America: Presence and Growth Prospects by Category2011-2016

Baby care

Bath and shower

Colour cosmetics

Deodorants

Depilatories

Fragrances

Hair care

Men's grooming

Skin care

Sun care

Note: Bubble size shows company share of category in 2010, range displayed: 1.3-24.5%


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Avon's multiple problems - ongoing legal cases, failureto build sales China, declining market share in Russia,falling sales in its domestic US market, mass-marketprice pressure in mature territories and falling demandfor direct sales are all offset by one thing Brazil.

60% of Latin American sales were generated there in2011, underpinning its 9% share of the regionalmarket. BPC in Brazil is forecast a CAGR of 6.6% over2011-2016, compared to a global CAGR of 2.8%.

More importantly direct sales generated 28.6% of localBPC distribution in 2011. Avon, which is only thesecond largest direct seller of BPC in the market, with ashare of 8.8% after Natura Cosmticos SA, isnonetheless perfectly positioned to exploit some of thestrongest growth in the global market. For a competentoperator, the potential is vast.

This, unfortunately, may be a problem. Avon lost shareof total BPC in 2011, after failing to correct problemswith distributor supply, and its marketing cost cuts havefurther alienated distributors. Given that the market issmoothing cracks elsewhere, Avon needs to make sureit does not lose ground to other direct sellers.

Brazil the company's life raft

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Brazil US

Russia Mexico

Venezuela

GEOGRAPHIC AND CATEGORY OPPORTUNITIES


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Avon's mass position is perfectly in line with Brazilian trends, where despite a booming economy, price-sensitivity is high and disposable incomes low for most people. There is consumer preference for a lighter,more natural look that is in line with mass products, and the premiumisation and functional trends of othermarkets are not yet as strong in Brazil. Almost 99% of its 2011 sales in Brazil were mass positioned.

Some 30% of Avon's sales come from colour cosmetics, which is forecast a CAGR of 8% over the forecastperiod compared to 3% for the global market. Avon has a market- leading 30.5%, but lost share again, from31.5% in 2010.

This was partly lost to conventional brand producers such as L'Oral and other large international brandproducers spending aggressively to build share, but Avon also saw share fall in other products such asfragrances. This saw total BPC share from 9.5% to 8.8% over 2010-2011.

The company's failure toimprove the RVP fordistributors and problemswith supply lines are themain reasons for its lossof share, however.Despite promises, it hasfailed to address this

fully, and is in factundertaking more costcuts. It may risk rapiddecline in share in whatis becoming an extremelycompetitive market.

Avon runs risk with golden gooseGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Avon Products Inc in Brazil: Presence and Growth Prospectsby Category 2011-2016

Depilatories

Sun care

Colour cosmetics

Bath and shower

Baby and child-specific products

Men's grooming

DeodorantsSkin care

Fragrances

Hair care



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The company's commitment to China has involved withdrawing from Japan to focus on the market, andinvesting in in its R&D facility in Shanghai, China to help develop products to meet market specific' needs.

However, consumer uncertainty around the sales model and distributor dissatisfaction have affected sales.

Unfortunately, Avon is not in an especially strong market position to work from. Its largest share is in thesmall deodorants market, where shares lid from 20.7% to 8.0% over the review period. Its share in the keyskin care market fell from 6.3% in 2006 to 1.9% in 2011. Over the review period, it has lost share in everycategory.

Avon's mass positioning may be partof the problem. Mass products are

forecast to see a CAGR of 7.3%2011-2016 compared to 13.5% forpremium. The premium market inChina generated 21.4% of total valuein 2011, compared to 4.7% in Latin

America. Direct selling competitorslike Amway are developing morepremium positions for the market,which may be reflection of the relation

between foreign brands andaspiration in the Chinese consumerbase. If Avon remains in the country by no means certain in its currentincarnation it needs to develop ahigher brand position.

China development may be harder to achieveGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Avon Products Inc: China BPC Presence andGrowth Prospects by Category 2011-20156


Fragrances

Colour cosmetics

Sun care

Skin care

Hair care

Bath andshower

Deodorants


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Russia is the company's third largest market, generating 7.1% of total BPC global values in 2011. However,share declined from a high of 7.7% in 2009, and ranking slid from 2nd to 4th 2006-2011. .

According to Avon, its difficulties in Russia are a result of poorly incentivised representatives. In 2010 itannounced that it was introducing a compensation plan to increase the earnings potential of its salesleaders by 25%. However, there is little evidence that its distributors have become any happier.

However, the company's principal difficulty may be that consumer interest in direct sales is sliding, asconventional retail networks improve and the consumer base becomes more sophisticated. In 2009, directsales generated 21.5% of Russian BPC sales; by 2011, this had slipped to 19.0%. Its main competitorOriflame, which was breathing down Avon's neck, also lost share in 2011 as a result of this.

The company hasidentified Russia as one ofits two key developingmarkets alongside Brazil.Like Brazil, its problemsseem to be structural, andits is struggling to correctthem. In the long term thecompetitive environmentmay harden, and Avonneeds to move quickly if itis to maintain its top fiveBPC position.

Direct sales decline in Russia impacts AvonGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Global sales of colour cosmetics are forecast to generate a CAGR of 3.0% 2011-2106, compared to 2.8%for the whole global market, and in absolute value terms will generate 13.0% of value over the forecastperiod.

These products remain an affordable luxury for consumers when disposable incomes drop or are low, anddemand is high in emerging markets where the consumer base is younger. Fashion trends like the growthof nail bars has also supported category development, and these products grew from generating 22.9% of

Avon's sales in 2006 to 25.7% by 2011.

As such Avon is very well positioned to expand on its global share of 6.7% over the forecast period. It leadsthe Latin American market with a 24.5% market share, which is forecast to be the most dynamic, andgenerated 48.8% of product values there in 2011.

Although there is a limitedamount of possible productdevelopment, consumerawareness of the Avon brandmakes it an attractiveproposition for potentialdistributors.

The difficulty with theseproducts is the maintenance ofconsumer loyalty there is notenough proprietary technologyin a lipstick, for example, towed a consumer to the product.

Colour cosmetics' affordability supports global demandGEOGRAPHIC AND CATEGORY OPPORTUNITIES

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Avon Products Inc in Global Colour Cosmetics:Presence by Category and Growth Prospects 2010-2015

Note: Bubble size shows company share of category, range displayed: 2.0-24.5%

Latin America

Asia Pacific

NorthAmerica

Western Europe

AustralasiaEasternEurope

Middle East and Africa


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Fragrances was the company's best performerover the review period, generating 34.9% of totalabsolute value growth over 2006-2011. This washelped by solid marketing spend over the reviewperiod, and revenues generated by fragrances rosefrom 20.5% to 24.3% over 2006-2011.

Almost 100% of this is mass-positioned productand the company ranked fourth in the globalfragrances market in 2011.

Unsurprisingly, growth has been strongest in Latin

America, which generated 53.4% of product salesin 2011.

Brazil is key to this share; consumers there areheavy users of mass-positioned fragrances,preferring lighter floral products, and thepremiumisation trends that have affected othermarkets have been much less important here.

Development strategy for fragrances is to keepproducing a steady stream of new products fordistributors. Recent launches in 2012 included Vivaby Fergie, and Unplugged by Jon Bon Jovi.

The company increasingly looks to add value to afragrance with a celebrity face such as Fergie. In2011, long-time "brand ambassador" ReeseWitherspoon launched three new fragrances underthe Expressions umbrella.

These trends reflect the underlying trends in theglobal market for fashion- or celebrity-led fragrancemarketing, and are an effective way to add value tothe products. However, the company may want toconsider recruiting more market-specific faces.

Mass fragrance push backed by endorsementGEOGRAPHIC AND CATEGORY OPPORTUNITIES

Avon's celebrity fragrance launches for 2012


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MARKET ASSESSMENT


BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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Direct sellers such as Avon need to develop veryclear brand positions to differentiate between

themselves and other players in the channel. This ispartly to drive consumer interest, but mostimportantly to make the business proposition asattractive as possible to potential distributors.

Avon's brand position is straightforward. It is theoldest and best known of all the direct sellers, andhas always presented itself as a businessopportunity for women; its current tagline is "the

company for women". These factors drive distributorrecruitment.

In terms of consumer branding, the Avon brand is farmore visible than most of its direct selling BPC peers.Historically, its investment in advertising has set itapart from them, and has reflected its larger scale.

However, in 2011, Avon cut investment in advertisingby 22%. As a percentage of its BPC sales,

investment in advertising fell by 24% compared to2010. The company claims that this is because ofincreased investment in RVP; however, this"investment" is more a case of making RVPinvestment acceptable to distributors and quellingunrest, rather than making great leaps forward.

The company is clearly undercapitalised, andthe failure of the Coty bid may come to be seen

as a mistake.

The brand itself is a glamour-led, mass-marketproposition. Historically, its visibility has beenhigh in the fashion press, as a result of credibleproduct development and marketing spend.However, investment in these factors faded in2011.

The company also uses high-profile "faces",including Oscar-winning actress ReeseWitherspoon. This has helped maintain brandprofile. In short, Avon has developed a positionas a more glamorous, fashion-led brand than itspeers, which is an attractive, easy sell to newdistributors.

Cost cuts risk compromising Avon brand and recruitmentBRAND STRATEGY


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Avon is an umbrella brand across almost all of the company's BPC portfolio, including ANEW, Clearskin,and Care. The company has trimmed much of its portfolio over the review period (cutting 25% of lines in

2006) in order to focus on core products.

Avon has historically been a mass brand and remains so, despite the large amounts spent on productdevelopment and marketing. This has become problematic in more developed markets, where Avon iscompeting with mass merchandisers.

Many of its positional problems, at least in these markets, lie in its status as a direct seller, rather than withthe products themselves. This is clearly not the case in developing markets, where direct sellers are viewedmore positively, but in the long term consumer habits here may come into line with developed markets.Despite the positive reviews its products receive in the fashion press, the mass position is difficult for thecompany to evolve from.

The company has sought to add value to the brand. Product development including botanicals and anti-ageing products that can be described as functional allow distributors to justify superior price positions. Inthe past, it has also sought to buy into the brand equity of designers such as Christian Lacroix, and stillrecruits celebrities. It has also spent heavily on marketing, and has started to acquire more upmarketpropositions for its developed markets; Silpada and Liz Earle are not currently marketed under the Avonumbrella.

Nonetheless, the company has maintained momentum for the brand by developing new geographies whereits status as a direct seller is less of an issue. This makes the recruitment of distributors easier. Thequestion for Avon is whether this strategy can be sustained into the long term, in particular as its directselling competitors look to develop more premium products. The Avon brand and its massive consumerrecognition is the company's key strength, but in the long term it is likely to have to spend more on making itan attractive proposition for distributors as the competitive environment toughens.

Mass position may be vulnerable in the long termBRAND STRATEGY


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In 2010, Avon made a number of acquisitions including UK-based LizEarle, a botanical skin care brand, and the US-based Tiny Tillia brand ofbath and body care products for babies. These were made to augment theRVP for its distributors in these developed markets, as Avon's massposition there has come under increasing threat from large chainedretailers such as Carrefour and Wal-Mart.

At the same time, it announced ongoing investment in its R&D facility inChina, in order to develop more market-specific products. It has alsostarted to adopt more region-specific marketing strategies; its ANEW

brand in Russia, for example, is fronted by singer Pevitsa Valeria. In 2011,the company also announced the launch of Avon Care, a value line of skincare products targeted at developing markets.

Although there has always been a certain amount of flexibility at thecompany, most notably with ongoing layoffs as well as its willingness toadaptits sales model in China, the overall portfolio has been broadlysimilar between countries.

This attempt to increase segmentation is in line with global trends for the

direct selling of BPC; Amway, the second largest BPC direct seller in theworld, has invested heavily to develop market-specific products for itsoffer, including stand-alone brands for Brazil, China and India. Again, thisis as much about improving RVP as satisfying consumer demand;potential distributors need to believe they can sell a brand locally.

Wider range of brand positions for global market

Avon's 2010 acquisitions

aimed to help distributorsin developed markets

improve their margins andgrow sales

BRAND STRATEGY


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MARKET ASSESSMENT


BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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US still the base for Avon

Unlike many direct sellers, Avon manufactures most of its offer, althoughapparel and home furnishings are outsourced to third party manufacturers.

Almost all of its BPC products are produced and packaged by the company. Itsdomestic manufacturing sites are located in Morton Grove, IL and Springdale,OH, with distribution centres in Atlanta, GA, Zanesville, OH and Pasadena, CA.The company's principal R&D facility is in Suffern, NY.

OPERATIONS

Manufacturing sites

Distribution centres

R&D

Silpada Designs

Key:


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International operations

Avon also has substantial international facilities outside the US. These include: Four manufacturing facilities, 14 distribution centres and two administrative offices in Latin America;

Three manufacturing facilities in Europe, primarily servicing Eastern Europe, Middle East and Africa, andWestern Europe;

Eight distribution centres and three administrative offices in Western Europe, Middle East and Africa;

Five distribution centres and three administrative offices in Central and Eastern Europe;

Five manufacturing facilities, eight distribution centres, and one administrative office in Asia Pacific.

Restructure

Of all the properties listed above, 35 are owned and the remaining 37 are leased. Many are used for acombination of manufacturing, distribution and administration, and the above listing is based on primaryusage.

In January 2008, Avon announced plans to realign certain Latin America distribution and manufacturingoperations. It built a new distribution centre in So Paulo, Brazil and opened a new distribution centre inColombia, both in 2011.

In July 2009, Avon announced plans to realign manufacturing operations in North America and Europe.This included the closing of manufacturing facilities in Springdale, OH in 2012, and the sale and leasebackof the manufacturing facility in Germany in 2011.

Avon facilities globally widespreadOPERATIONS


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Distributors

Avon claims to have 6.4 million Avon Representatives serving more than 300 million customers in over 100countries, selling four lipsticks every second.

These Representatives market the products via the Avon brochure, which the company claims is thelargest publication of any type in the world. A brochure introducing a new sales campaign is usuallygenerated every two weeks in the US and every two to four weeks for most markets outside the US.Generally, the Representative forwards an order for a campaign to the company. This order is processedand the products are assembled at a distribution centre and then delivered to the Representative.

R&D

To increase brand competitiveness, Avon needs to focus on new technology and product development thatprovide visible consumer benefits; this is as much to facilitate recruitment of distributors as to buildconsumer demand.

The company's global research and development facility is in Suffern, NY. Additionally, there are satelliteresearch facilities located in Argentina, Brazil, China, Mexico, Poland and South Africa.

New products

In 2011, key product launches included SuperShock Max Mascara, Moisture Seduction Lipstick, Outspoken

Intense by Fergie Fragrance, Step Into Fragrance, ANEW Genics Treatment Cream, ANEW Solar AdvanceSunscreen Face Lotion SPF 45, Solutions Youth Minerals Restorative Night Cream, Super EnchantMascara, and ExtraLasting Make-Up.

More investment in R&D to boost consumer demandOPERATIONS


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MARKET ASSESSMENT


BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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The company's mass position is ideal fordeveloping new markets, where consumer basesare younger with less disposable income.

However, premium cosmetics is set to outperformmass in many surprising markets, including China,and the company could develop more premiumoffers. Further acquisition would be ideal for this.

During the last few years, Avon was unable to hitanalysts' estimates or to fix operational problems,and the failed Coty acquisition has also cost the

company in credibility. It must resolve these issues(and its protracted legal battles over bribery) inorder to focus on rebuilding the brand.

Brazil is by far the company's most importantmarket, and continues to generate revenues thathave offset very poor performance in other parts of

Avon's global business. However, the company lostshare there in 2011, and appears to be doing thesame in 2012 thanks to cost cutting and an inabilityto sort out supply issues. It is imperative that thecompany does not lose credibility in the market,

and it must resolve these issues quickly.

Avon is the only leading direct seller not to bebuilding sales in China. It has invested in themarket but cannot yet make its hybrid sales modelwork. It may lack investment, or a clear enoughlocal brand strategy; whatever the issue, this isanother part of its business that the newmanagement will hopefully resolve quickly. If thecompany can build in China as it has built in Brazil,

it will have a very strong competitive position.

Protect Brazil Deal with China

Moving forward quickly Developing new positions

Time to reassert decisiveness and investRECOMMENDATIONS


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Avon Products Inc in Beauty and Personal Care_GMID

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