Avon Products Inc in Beauty and Personal Care - GMID

AVON PRODUCTS INC IN BEAUTY AND PERSONAL CARE (WORLD)
January 2013
SCOPE OF THE REPORT
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 are discounted. Conversely, all historical data are expressed in current terms; inflationary effects are taken into account.
Disclaimer Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors. Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies' opinions, reader discretion is advised. Avon Products Inc is the largest and best known of the world's direct sellers. However, in 2011 it began to encounter financial hardships. It has lost share in its cash cow Brazil, whose performance over the review period was still able to offset poor performances elsewhere, notably in China. The company needs to generate rapid investment to reverse these trends; this is certainly possible, as Avon is among the best-known BPC brands in the world.
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
Euromonitor International
BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC
PASSPORT 2
STRATEGIC EVALUATION COMPETITIVE POSITIONING MARKET ASSESSMENT GEOGRAPHIC AND CATEGORY OPPORTUNITIES BRAND STRATEGY OPERATIONS RECOMMENDATIONS
STRATEGIC EVALUATION
Key company facts (1)

Avon Products Inc Headquarters: Regional involvement: New York, NY, USA Global Baby and child-specific products, bath and shower, colour cosmetics, deodorants, depilatories, fragrances, hair care, men's grooming, skin care, sun care Avon Products Inc is a US-based manufacturer and direct seller, primarily of beauty and personal care (BPC) products. It is the leading direct selling company in the world, and ranked fifth in the global BPC market in 2011 with a 3.2% market share. Avon also operates a chain of conventional retail outlets called Beauty Boutiques in China alongside a limited direct sales operation, as well as sales via catalogues and websites in selected markets. The company is primarily a BPC retailer, although in some markets its BPC distributors also sell jewellery, clothing and home furnishings. Like its BPC peers, the company has built share on emerging markets. In 2011, 49.9% of total BPC sales were generated in Latin America, where it ranked fourth in BPC in 2011 with a 8.6% share, up from 37.1% in 2006. The company is predominantly a mass-market operator; 97.5% of its 2011 BPC sales were generated by mass cosmetics. Its core products are colour cosmetics (25.7% of 2011 value sales), skin care (24.8%) and fragrances (24.3%).
Category involvement:
World BPC value 3.2% share 2011: World BPC value 3.1% growth 2011:
PASSPORT 4
Key company facts (2)

In 2011, Avon Products reported sales and distribution operations in over 100 countries, operated by around 6.4 million distributors. Its domestic North American market is becoming less important to the company, as it seeks to develop its presence in more dynamic emerging markets. As a result, Avon Products launched a restructuring in 2009 in order to better reflect its international growth. This has involved widespread layoffs and streamlining global manufacturing. The company plans to shut plants in the US (Ohio) and Germany by 2013, in order to focus on new territories. This also lay behind its 2010 decision to pull out of the Japanese market in order to focus efforts on China. In December 2012, it followed this with the announcement it will exit South Korea and Vietnam. The company has performed poorly in 2012, and announced in its third quarter earnings release that it looking to make cost savings of at least US$400 million by the end of 2015, largely in Selling, General and Administrative expenses.
Avon Products Inc: Sales by Reported Geography 2011

(US$ million)
Avon has also sought to diversify its brand position in BPC, primarily through acquisition. In 2010, it acquired UK-based Liz Earle Beauty, a botanical skin care brand, and the Tiny Tillia brand of bath and body care products for babies.
Latin America North America Central & Eastern Europe Western Europe, Middle East & Africa
Asia Pacific
PASSPORT 5
Avon in trouble
Despite retail sales growth of 3.1% in 2011, Avon has undergone a chaotic 2012. The company has found itself in difficulty after failing to deal quickly with poor results in important overseas markets, as well as distributor supply problems in Brazil, its key market. The company is also facing a federal probe into allegations of bribery of officials in China and Latin America that has led to widespread investor dissatisfaction with CEO Andrea Jung, who agreed to step aside for new CEO Sheri McCoy. Most surprisingly, the company was subject to a US$10.7 billion unsolicited takeover bid from fragrance specialist Coty Inc, a far smaller BPC company. Coty made an initial bid of US$10 billion for Avon in March 2012, after talks between the two companies about a possible Avon takeover of Coty failed. Avon rejected this, Coty counter-offered but finally walked away in May 2012, citing Avon's lack of decisiveness. This has been a characteristic of the company over the review period.
Coty's bid for Avon was based on its desire for access to the latter's dynamic Latin America markets.
As a result of this failure, Avon has seen its stock fall, and is apparently no closer to resolving structural problems within its business. It has limited working capital to improve the business at a time when the bloom appears to be coming off direct sales in many emerging markets, and the competitive environment is becoming far tougher, especially in its core Latin America markets. Although the company enjoys high brand awareness, falling distributor numbers and strengthening competitor offer means the company needs to rapidly evaluate strategy.
PASSPORT 6
Uncertainty for Avon

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 sales model, and Avon reported an increase in revenue for the region from US$4.6 billion to US$5.1 billion in 2010-2011. However, revenues fell away in other regions including North America, Central & Eastern Europe, and Asia Pacific. Avon continues to struggle make its hybrid direct sales/store model work in China, and it is losing out to other direct sellers in distributor recruitment. Avon Products Inc: Total Revenue vs The company has stated that its most critical Operating Profit 2006-2011 priority is to rebuild top-line revenue growth. 12,000 1,400 Product development is part of this strategy, with innovations such as the successful 1,200 10,000 introduction of the skin care brand ANEW 1,000 Genics in 2011. 8,000 However, Avon still appears beset by structural problems, most importantly distributor supply issues in Latin America that remain unresolved. Yet again, it is set to undertake restructuring. Most alarmingly for its investors, operating profit dropped by 20.4% in 2011, and without restructuring, this will be difficult to turn around. The failure of the Coty bid and the lack of recapitalisation may cost Avon in the long term.
Total revenue (US$ million) 800
6,000
600 4,000 400 2,000 0 2006 2007 2008 2009 2010 2011 200 0
Total revenue
Operating profit
PASSPORT 7
Operating profit (US$ million)
Latin America keeping the company in growth

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 increased because 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 Mexico was very encouraging. However, the company risks compromising the performance of its main region. Sales representatives in Brazil, the key regional market, continued to suffer from poor supply, which the company blames on the implementation of an enterprise resource planning (ERP) system in the second half of the year. The direct sales market in Brazil and Latin America is becoming highly competitive, not only with well-established local giants such as Natura Cosmticos, but also new local players such as Eudora (by O Boticrio) and Jequiti, as well as international players such as Nu Skin. Avon must address this if it is to remain credible in the struggle for new distributors. Avon Products Inc: Total Revenues by Reported Geographic Segment and Growth 2010-2011
6,000 5,000 US$ million 4,000 3,000 2,000 1,000 15 12 % y-o-y growth 9 6 3 0 -3 -6
0
Latin America North America Central & Western Eastern Europe Europe, Middle East & Africa Total revenues 2010 Asia Pacific
-9
Total revenues 2011
2010-2011 % growth
PASSPORT 8
No turnaround in sight
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$2.6 billion, a yo-y decline of 8%. The company cited unfavourable exchange rates as a key factor in this, and reported y-o-y growth of 1%; however, Avon continues to shed distributors, and Active Representatives were down 1%. Net income fell by 81%, suggesting that the company's loudly trumpeted cost-saving programme has yet to have any affect, although the company cited higher employee compensation costs as the prime factor in this. Avon Products Inc: Total Revenues and Net Avon remained sustained to a certain extent Income Q3 2011-Q3 2012 by Latin America, where exchange rates drove 2,800 200 a decline in total revenues of 6%; however, in constant terms, sales grew by 6%, the number 2,700 150 of units sold grew by 5% and the number of Active Representatives grew by 2%. Nonetheless, this is a weaker performance 2,600 100 from the region than the company is accustomed to seeing. 2,500 50
Total revenues (US$ million)
Other regions have also performed weakly. The company finally appointed a new CEO, Sheri McCoy, in April 2012; this may see a solidifying of strategic planning going forward, something Avon would appear to require.
2,400
Q3 2011
Total revenues Source: Company release Note: Q3 = three months ending September 30th
Q3 2012
Net income
PASSPORT 9
Net income (US$ million)
SWOT: Avon Products Inc

STRENGTHS WEAKNESSES
Avon brand
Brazil
Mass-market position
Structural problems
The company claims Avon is a major player 90% consumer brand in Brazil, the most awareness for Avon, important global BPC and it is the largest direct selling market in direct selling BPC brand terms of scale and in the world. dynamism.
Avon remains a mass Avon seems unable to brand, despite attempts resolve structural to develop new problems, in particular positions. This leaves it supply lines in Latin exposed to the intense America, and has price pressure of the become characterised mass position in by a lack of developed markets. decisiveness.
THREATS
OPPORTUNITIES
Other Latin America Merger markets Despite the company's The failure of the Coty structural problems in deal may have been the region, it continues inevitable, but Avon's to enjoy growth in large assets, especially its markets such as Latin American footprint, Mexico. Growth in these could open the door for markets will offset capitalisation via a weakness elsewhere. merger.
Too many cuts Avon reduced expenditure on advertising spend and sales in 2012 in Latin America and saw sales slide. Lack of investment may compromise the brand.
Business outside Latin America Avon is having problems outside its Latin American core as direct selling loses dynamism. This could be a threat to the global business.
PASSPORT 10
Key strategic objectives and challenges

Resolving China Avon has seen its share of the Chinese BPC market slide from 2.8% in 2006 to 1.1% in 2011, as sales suffered a negative CAGR of 7.7% in a market that was otherwise dynamic. The problem is with its hybrid sales model. Avon took the bold step of bailing out of Avon Japan in 2010; it could consider doing the same in China, if only because it appears to be unable to build the sales model it wants. Looking at new positions The company's 2010 acquisition of Liz Earle Beauty and Tiny Tillia indicate its desire to build a broader spectrum of brand positions. Greater premium offer, either inside or outside the direct sales model, could help rebuild the top-line revenues and profit margins the company has made a key objective, and it could look at further acquisitions.
Softly, softly for restructure

The company's sales and profit problems have led to widespread cost cutting and structural reorganisation in an attempt to re-establish margins. Avon needs to face this challenge carefully; its reduction in advertising spend and seller incentives (called Representative Value Proposition or RVP by the company) in Latin America saw sales slow and rising distributor discontent.
New markets
Avon's strength is based on share in emerging markets that are underdeveloped and have large populations with limited access to conventional channels or internet sales, as well as a stronger emphasis on community living. Identifying more of these to grow global share is the company's number one strategic challenge.
PASSPORT 11
COMPETITIVE POSITIONING
Avon gains based on Latin America

Beauty and Personal Care: Top Global Players by Value Share, Share Growth and Ranking 20072011 Company Procter & Gamble Co, The L'Oral Groupe Unilever Group Colgate-Palmolive Co Avon Products Inc Beiersdorf AG Este Lauder Cos Inc Johnson & Johnson Inc Shiseido Co Ltd Kao Corp 2011 % share 11.5 9.7 7.8 3.8 3.2 3.1 2.9 2.8 2.5 2.1 2007 2008 2009 2010 2011 The global BPC market is concentrated, with the top five companies generating 36% of total sales in 2011, up from 34% in 2007. Characteristically, market leaders' share is built on global brands; 24% of market leader Procter & Gamble's 2011 sales, for example, were generated by the Gillette brand. Unlike many other consumer goods categories, there has yet to emerge a top 10 player from an emerging market; the strong global marketing of these brands still provides better equity and credibility than local producers. As a result, ranking and share among leading global manufacturers has remained relatively static over the review period, although consumer trends in emerging economies are beginning to affect the market. Direct sellers such as Avon and Amway, for example, have made gains as their sales model is more accepted by consumers in emerging markets. However, Avon's share growth has been led by its performance in a single region, Latin America. Ideally, it would look to increase its footprint in other emerging markets, in particular Asia Pacific.
1 2 3 4 7 6 5 9 8 10
1 2 3 4 7 5 6 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
PASSPORT 13
Avon direct sales model best suited to emerging markets

Beauty and Personal Care: Top Direct Sellers by Value Share, Share Growth and Ranking 2007-2011 Company Avon Products Inc Natura Cosmticos SA Mary Kay Inc 2011 % share 3.2 2007 2008 2009 2010 2011 Like most other direct sellers, Avon's growth over the review period was based on its success in emerging markets, where large rural populations, less access to conventional BPC retail channels and the attraction of supplementary incomes in communities where employment opportunities for women may be limited have helped the model flourish. Conversely, large brand manufacturers may need years and massive investment to build market share under these conditions, and emerging markets are therefore fertile ground for direct sellers, especially early market entrants. However, consumers in many of these markets are becoming more sophisticated, thanks to improving retail networks, and more brand savvy. While forecast growth for BPC direct sales remains solid, at 4.1% CAGR 2001-2016, Avon may want to consider developing more premium positions to meet this trend. Amway was the largest direct seller in BPC in 2011, partly as a result of specialisation; some competitors such as Amway also deal in consumer health. Avon has widened its product presence to include apparel and home furnishings, but specialisation is likely to prove a competitive strength in the long run. BPC is the largest part of the global direct selling market, and simplicity and strong brand equity are the likeliest magnets for new distributors.
14 14 14 13 13
1.6
18 17 17 17 16
0.9 0.8 0.6
Amway Corp 19 19 18 18 19
Oriflame Cosmetics SA
24 23 22 22 23
PASSPORT 14
Avon's lack of development outside Latin America is a concern

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 Products Inc: Competitive Performance by Value vs Global BPC Market 2007-2011
12 10 % y-o-y growth 8 6 4 2
C
2008 World 2009 Avon Products Inc 2010 2011
0 2007
A (2008): Despite ongoing growth in emerging markets, the onset of the global economic crisis hits Avon's sales in the US and Western Europe. Declining values in these markets offset growth elsewhere.
B (2009): Exponential growth of 18.2% in Latin America offsets decline of 2.9% in North America as mature markets struggle to recover from recession.
C (2011): Avon's failure to build sales in Asia Pacific, as well as ongoing weakness in its mature markets sees growth fall below global averages despite the ongoing strength of Latin America.
PASSPORT 15
Emerging market strength competitive advantage

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 growth elsewhere, as the value for money mega-trend in the mass market via retailers such as Target and Tesco has hurt value development for most BPC brands, and direct selling has lost credibility. However, unlike these 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 operator Natura Cosmticos, which generated 92% of its 2011 sales in its dynamic domestic market. This is enough to make it the second largest direct seller in the world, and enabled it to maintain double-digit growth in 2009 across the review period while its peers experienced more fluctuating growth. Avon: Value Sales Growth vs Other Top Five Direct Sellers 2006-2011
40 35 30 25 20 15 10 5 0 -5 -10 2006-07 2007-08 Avon Products Inc Amway Corp 2008-09 Natura Cosmticos SA Oriflame Cosmetics SA 2009-10 Mary Kay Inc Nu Skin Enterprises Inc 2010-11
% y-o-y growth
PASSPORT 16
MARKET ASSESSMENT
Avon sees mass products build share

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 care offers the clearest opportunity as the largest part of the global BPC market; however, the share of Avon's sales generated by these products dropped from 33% in 2006, as fragrances and colour cosmetics emerged strongly for Avon. This is in part a reflection of the company's brand strategy. The most dynamic part of the global skin care market has been led by higher-priced functional products, often with a clinical or scientific alignment. New products from Avon such as ANEW are in line with this trend, but the bulk of its offer is mass market and typically marketed with a glamour- or celebrity-led position (most recently, the company has added Jon Bon Jovi and Paula Abdul to its roster). This position could be change. Avon Products Inc: BPC Presence and Growth Prospects by Category 2011-2016
6 % CAGR 2011-2016 5 Opportunity Zone 4 3 2 1 0 -20,000 Baby and child-specific products Bath and shower Colour cosmetics Deodorants Depilatories Fragrances Hair care Men's grooming 0 20,000 40,000 60,000 80,000 100,000 120,000 Skin care
Sun care
Market size 2011 (US$ million rsp) Note: Bubble size indicates company share of category in 2011, range displayed: 0.5-7.5%
PASSPORT 18
MARKET ASSESSMENT
Avon can build in other regions

Latin America is clearly the company's principal opportunity. It holds a 9% share in the regional market, and 50% of its 2011 value sales were generated here. The region is set to see the most dynamic growth in BPC sales over the forecast period, with a CAGR of 5.2% compared to 2.8% for the global market. Direct sales is an important channel for these products in the region, generating 29.2% of total 2011 sales compared to a global average of 12%. In terms of global absolute value growth, the region is set to generate 34% of the total between 2011 and 2016, equivalent to US$21.6 billion. Only Asia Pacific is set to see stronger absolute value growth than Latin America going forward, and is forecast to generate 40% of global absolute value growth. This is where the company lacks scale, and where, in theory, it should have opportunity. In 2011, it held a 1.1% share of the market, but its failure to build sales in China and its withdrawal from Japan have seen this slide over the review period. In truth the company needs to find resources to develop its share of this market, which is still immature and well suited to its offer. Avon Products Inc: BPC Presence and Growth Prospects by Region 2011-2016
8 % CAGR 2011-2016 6 4 2 0 -2 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Australasia Eastern Europe North America Western Europe Middle East and Africa Latin America Asia Pacific
Market size 2011 (US$ million rsp) Note: Bubble size indicates company share of region in 2011, range displayed: 1.1-9.0%
PASSPORT 19
GEOGRAPHIC AND CATEGORY OPPORTUNITIES
BPC direct sales model perfect for emerging markets

BPC products have traditionally done well in direct sales. Distributor/consumer relationships are often based on friendships or family, there is less consumer cynicism about the model and consumers are more likely to be willing to find the time for the face-to-face experience at home; unlike food and drink, for example, these are never impulse or emergency purchases. At global level, BPC dominates direct selling, generating 32% of total value sales in 2011. The model offers significant growth opportunities; BPC direct selling is set to post a CAGR of 4% over 2011-2016, compared to 3% for global BPC. The bulk of this will be generated in emerging markets. Asia Pacific is set to generate 32% of total absolute value growth between 2011 and 2016, and Latin America 60%.
There are a variety of reasons for this: consumers in these markets are generally more receptive to the concept of direct selling; retail networks there often remain less developed; and distributor recruitment may be easier as there may be fewer employment opportunities for women.
The key opportunities for Avon are clear: consolidate Latin America with investment and better distributor support; and try to find a way to make Asia Pacific work.
Direct Selling: Global Value Breakdown by Leading Category 2011
Beauty and personal care Food and drink Consumer healthcare Clothing and footwear All other direct selling
PASSPORT 21
Avon well positioned in leading BPC direct selling markets

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$4.6 billion between 2011 and 2016, equivalent to 49% of total global growth, is the most important market for the company. It has a limited and falling presence in China. These two markets hold significantly more direct selling potential than any other; not only are they larger, but they are forecast to deliver growth well above the anticipated global CAGR of 4% over 2011-2016. The importance of Latin America to direct sales of BPC is shown by the rest of the list; of 10 countries, six are in this region, and Avon holds strong share in the total BPC market in each of them. Regional strength rests in the widespread consumer acceptance of the sales model. Clearly, the company is in Most Dynamic BPC Direct Selling Markets 2011-2016 and an exceptionally strong Avon Company Share of BPC Market 2011 competitive position for 5,000 14 direct sales of BPC. 12 4,000 Preserving share in Latin 10 3,000 8 America will clearly be the 6 2,000 main priority over the 4 forecast period, while 1,000 2 attempting to make its 0 0 business in China work. It BR CN MX KR IN CO PU AR TR VE does, however, still have Absolute value growth (US$ billion) 2011/2016 internal constraints, resulting % CAGR 2011-2016 in Avon exiting Vietnam and Avon Products Inc % company share of BPC 2011 South Korea, two potentially Key: BR=Brazil; CN=China; MX=Mexico; KR=South Korea; IN=India; CO=Colombia; PU=Peru; high-growth markets. AR=Argentina; TR=Turkey; VE=Venezuela
Euromonitor International BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC Absolute value growth (US$ billion) 2011/2016
PASSPORT 22
% CAGR 2011-2016 and company share
Global opportunity for BPC direct sales, but more nuance needed
BPC direct selling is forecast to outstrip growth in BPC in value terms over 2011-2016, with a 4% CAGR versus a CAGR of just under 3%. This growth, admittedly, is from a lower base; however, direct selling is a significant 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 direct selling generated 12.2% of BPC sales in 2011, and Latin America with 29.2%, means that this sales model will become more important in the long term. Even in Avon's domestic US market, direct selling in 2011 generated 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 with forecast global trends; globally, premium cosmetics is forecast a CAGR of 2.8% over 2011-2016 compared to 3.0% for mass products. However, at regional level, premium is set to outperform mass in Eastern Europe, Middle East and Africa, North America and Western Europe, and the development of a more segmented offer may make strategic sense if Avon seeks to rebuild sales in these markets. Forecast Growth in BPC Direct Sales vs BPC Market by Region 2011-2016
% value CAGR 2011-2016 8 6 4
2
0 -2 World Asia Pacific Australasia Eastern Europe Latin America Middle East and Africa North America Western Europe
BPC direct selling
BPC total market
PASSPORT 23
Latin America prime focus for the company

Latin America is Avon's core geographic opportunity. It is expected to be the most dynamic BPC market over the forecast period, with a CAGR of 5.2% compared to a global average of 2.8%. 50% of Avon's sales were generated there in 2011, and 28.1% from Brazil alone. Avon is exceptionally well positioned to develop more share in the regional market. Although Brazilian direct selling giant Natura Cosmticos SA has stronger regional share and ranked third in 2011 compared to Avon's fourth, Avon has a broader footprint - 92% of Natura's sales are generated in Brazil - and although Brazil is clearly the most important regional market, other countries remain immature and may offer strong long-term opportunities. Avon Products Inc: BPC Presence and Growth Most importantly for Avon, Prospects in Leading Latin America Markets 2011-2016 direct selling is a wholly 9 credible sales channel in the 8 Ecuador region. BPC sales via this 7 Peru model have grown from 6 generating 27.9% of value in Colombia 5 2006 to 29.2% in 2011. Venezuela 4 Avon's mass alignment and Argentina 3 glamour-led marketing is also Mexico 2 in tune with regional trends, Brazil 1 as despite the strong 0 economic growth seen in -10,000 0 10,000 20,000 30,000 40,000 50,000 many regional markets, Market size 2011 (US$ million rsp) average levels of disposable Note: Bubble size indicates company share of market in 2011, range displayed: 6.0-17.4% income remain low.
Euromonitor International BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC % CAGR 2011-2016 PASSPORT 24
Mass position suits Latin American demographics

Avon's mass offer is well suited to Latin America. The median age of the consumer base is 27.9 compared to, for example, 39.7 in Western Europe, and disposable incomes are weaker. There is also less demand for the functional products that have driven growth elsewhere; hair care, not skin care, is the largest market category, 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%) is well 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 a demonstrable 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. Avon Products Inc in Latin America: Presence and Growth Prospects by Category 2011-2016
% CAGR 2011-2016 10 8 6 4 2 0 -2,500 0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 Baby care Bath and shower Colour cosmetics Deodorants Depilatories Fragrances Hair care Men's grooming Skin care Sun care
Market size 2011 (US$ million rsp) Note: Bubble size shows company share of category in 2010, range displayed: 1.3-24.5%
PASSPORT 25
Brazil the company's life raft

Avon's multiple problems - ongoing legal cases, failure to build sales China, declining market share in Russia, falling sales in its domestic US market, mass-market price pressure in mature territories and falling demand for direct sales are all offset by one thing Brazil. 60% of Latin American sales were generated there in 2011, underpinning its 9% share of the regional market. BPC in Brazil is forecast a CAGR of 6.6% over 2011-2016, compared to a global CAGR of 2.8%. More importantly direct sales generated 28.6% of local BPC distribution in 2011. Avon, which is only the second largest direct seller of BPC in the market, with a share of 8.8% after Natura Cosmticos SA, is nonetheless perfectly positioned to exploit some of the strongest growth in the global market. For a competent operator, the potential is vast. This, unfortunately, may be a problem. Avon lost share of total BPC in 2011, after failing to correct problems with distributor supply, and its marketing cost cuts have further alienated distributors. Given that the market is smoothing cracks elsewhere, Avon needs to make sure it does not lose ground to other direct sellers.
US$ million
Forecast Direct Selling of BPC in Avon's Five Largest Markets 2011-2016

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2011 2012 2013 2014 2015 US Mexico 2016
Brazil Russia Venezuela
PASSPORT 26
Avon runs risk with golden goose

Avon's mass position is perfectly in line with Brazilian trends, where despite a booming economy, pricesensitivity 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 other markets 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 forecast period compared to 3% for the global market. Avon has a market- leading 30.5%, but lost share again, from 31.5% in 2010. This was partly lost to conventional brand producers such as L'Oral and other large international brand producers spending aggressively to build share, but Avon also saw share fall in other products such as fragrances. This saw total BPC share from 9.5% to 8.8% over 2010-2011. The company's failure to Avon Products Inc in Brazil: Presence and Growth Prospects improve the RVP for by Category 2011-2016 Depilatories 12 distributors and problems Sun care with supply lines are the 10 Colour cosmetics main reasons for its loss 8 Bath and shower of share, however. Baby and child-specific products 6 Despite promises, it has Men's grooming failed to address this 4 Deodorants fully, and is in fact Skin care 2 undertaking more cost Fragrances 0 cuts. It may risk rapid Hair care -2,000 0 2,000 4,000 6,000 8,000 10,000 decline in share in what Market size 2011 (US$ million rsp) is becoming an extremely competitive market. Note: Bubble size shows company share of category in 2011, range displayed: 0.3-30.5%
Euromonitor International % CAGR 2011-2016 BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC PASSPORT 27
China development may be harder to achieve

The company's commitment to China has involved withdrawing from Japan to focus on the market, and investing 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 the small deodorants market, where shares lid from 20.7% to 8.0% over the review period. Its share in the key skin care market fell from 6.3% in 2006 to 1.9% in 2011. Over the review period, it has lost share in every category. Avon Products Inc: China BPC Presence and Avon's mass positioning may be part Growth Prospects by Category 2011-20156 of the problem. Mass products are 18 forecast to see a CAGR of 7.3% 16 2011-2016 compared to 13.5% for Sun care 14 premium. The premium market in Skin care Fragrances China generated 21.4% of total value 12 Colour cosmetics in 2011, compared to 4.7% in Latin 10 America. Direct selling competitors Hair care 8 Deodorants like Amway are developing more premium positions for the market, 6 Bath and which may be reflection of the relation shower 4 between foreign brands and 2 aspiration in the Chinese consumer base. If Avon remains in the country 0 -4,000 -2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 by no means certain in its current incarnation it needs to develop a Market size 2011 (US$ million rsp) higher brand position. Note: Bubble size shows company share of category in 2010, range displayed: 0.4-8.0%
Euromonitor International BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC % CAGR 2011-2016 PASSPORT 28
Direct sales decline in Russia impacts Avon

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 it announced that it was introducing a compensation plan to increase the earnings potential of its sales leaders 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, as conventional retail networks improve and the consumer base becomes more sophisticated. In 2009, direct sales generated 21.5% of Russian BPC sales; by 2011, this had slipped to 19.0%. Its main competitor Oriflame, which was breathing down Avon's neck, also lost share in 2011 as a result of this. The company has identified Russia as one of its two key developing markets alongside Brazil. Like Brazil, its problems seem to be structural, and its is struggling to correct them. In the long term the competitive environment may harden, and Avon needs to move quickly if it is to maintain its top five BPC position. Russia: BPC Direct Selling vs BPC Total Sales 2006-2011
(y-o-y % growth)
30 % y-o-y growth, US$ fixed exchange rate 25 20 15 10 5 0 -5 2006-2007 2007-2008 2008-2009 2009-2010 Total sales 2010-2011 Direct selling
PASSPORT 29
Colour cosmetics' affordability supports global demand

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 forecast period. These products remain an affordable luxury for consumers when disposable incomes drop or are low, and demand is high in emerging markets where the consumer base is younger. Fashion trends like the growth of 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 leads the Latin American market with a 24.5% market share, which is forecast to be the most dynamic, and generated 48.8% of product values there in 2011. Although there is a limited amount of possible product development, consumer awareness of the Avon brand makes it an attractive proposition for potential distributors. The difficulty with these products is the maintenance of consumer loyalty there is not enough proprietary technology in a lipstick, for example, to wed a consumer to the product. Avon Products Inc in Global Colour Cosmetics: Presence by Category and Growth Prospects 2010-2015
8 Middle East and Africa % CAGR 2011-2016 6 4 2 Eastern Europe 4,000 6,000 8,000 10,000 12,000 Latin America North America
Asia Pacific
Australasia
Western Europe 14,000 16,000 18,000
0
0 2,000 Market size 2011 (US$ million rsp) Note: Bubble size shows company share of category, range displayed: 2.0-24.5%
PASSPORT 30
Mass fragrance push backed by endorsement

Fragrances was the company's best performer over the review period, generating 34.9% of total absolute value growth over 2006-2011. This was helped by solid marketing spend over the review period, and revenues generated by fragrances rose from 20.5% to 24.3% over 2006-2011. Almost 100% of this is mass-positioned product and the company ranked fourth in the global fragrances market in 2011. Unsurprisingly, growth has been strongest in Latin America, which generated 53.4% of product sales in 2011. Brazil is key to this share; consumers there are heavy users of mass-positioned fragrances, preferring lighter floral products, and the premiumisation trends that have affected other markets have been much less important here. Development strategy for fragrances is to keep producing a steady stream of new products for distributors. Recent launches in 2012 included Viva by Fergie, and Unplugged by Jon Bon Jovi.
Avon's celebrity fragrance launches for 2012
The company increasingly looks to add value to a fragrance with a celebrity face such as Fergie. In 2011, long-time "brand ambassador" Reese Witherspoon launched three new fragrances under the Expressions umbrella. These trends reflect the underlying trends in the global market for fashion- or celebrity-led fragrance marketing, and are an effective way to add value to the products. However, the company may want to consider recruiting more market-specific faces.
PASSPORT 31
BRAND STRATEGY
Cost cuts risk compromising Avon brand and recruitment

Direct sellers such as Avon need to develop very clear brand positions to differentiate between themselves and other players in the channel. This is partly to drive consumer interest, but most importantly to make the business proposition as attractive as possible to potential distributors. Avon's brand position is straightforward. It is the oldest and best known of all the direct sellers, and has always presented itself as a business opportunity for women; its current tagline is "the company for women". These factors drive distributor recruitment. In terms of consumer branding, the Avon brand is far more visible than most of its direct selling BPC peers. Historically, its investment in advertising has set it apart from them, and has reflected its larger scale. However, in 2011, Avon cut investment in advertising by 22%. As a percentage of its BPC sales, investment in advertising fell by 24% compared to 2010. The company claims that this is because of increased investment in RVP; however, this "investment" is more a case of making RVP investment acceptable to distributors and quelling unrest, rather than making great leaps forward.
The company is clearly undercapitalised, and the failure of the Coty bid may come to be seen as a mistake. The brand itself is a glamour-led, mass-market proposition. Historically, its visibility has been high in the fashion press, as a result of credible product development and marketing spend. However, investment in these factors faded in 2011. The company also uses high-profile "faces", including Oscar-winning actress Reese Witherspoon. This has helped maintain brand profile. In short, Avon has developed a position as a more glamorous, fashion-led brand than its peers, which is an attractive, easy sell to new distributors.
PASSPORT 33
BRAND STRATEGY
Mass position may be vulnerable in the long term

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 product development and marketing. This has become problematic in more developed markets, where Avon is competing with mass merchandisers. Many of its positional problems, at least in these markets, lie in its status as a direct seller, rather than with the products themselves. This is clearly not the case in developing markets, where direct sellers are viewed more 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 the company to evolve from. The company has sought to add value to the brand. Product development including botanicals and antiageing products that can be described as functional allow distributors to justify superior price positions. In the past, it has also sought to buy into the brand equity of designers such as Christian Lacroix, and still recruits celebrities. It has also spent heavily on marketing, and has started to acquire more upmarket propositions for its developed markets; Silpada and Liz Earle are not currently marketed under the Avon umbrella. Nonetheless, the company has maintained momentum for the brand by developing new geographies where its status as a direct seller is less of an issue. This makes the recruitment of distributors easier. The question for Avon is whether this strategy can be sustained into the long term, in particular as its direct selling competitors look to develop more premium products. The Avon brand and its massive consumer recognition is the company's key strength, but in the long term it is likely to have to spend more on making it an attractive proposition for distributors as the competitive environment toughens.
PASSPORT 34
BRAND STRATEGY
Wider range of brand positions for global market

In 2010, Avon made a number of acquisitions including UK-based Liz Earle, a botanical skin care brand, and the US-based Tiny Tillia brand of bath and body care products for babies. These were made to augment the RVP for its distributors in these developed markets, as Avon's mass position there has come under increasing threat from large chained retailers such as Carrefour and Wal-Mart. At the same time, it announced ongoing investment in its R&D facility in China, in order to develop more market-specific products. It has also started 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 skin care products targeted at developing markets.
Although there has always been a certain amount of flexibility at the company, most notably with ongoing layoffs as well as its willingness to adapt its sales model in China, the overall portfolio has been broadly similar 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 the world, has invested heavily to develop market-specific products for its offer, including stand-alone brands for Brazil, China and India. Again, this is as much about improving RVP as satisfying consumer demand; potential distributors need to believe they can sell a brand locally. Avon's 2010 acquisitions aimed to help distributors in developed markets improve their margins and grow sales
PASSPORT 35
OPERATIONS
US still the base for Avon
Key: Manufacturing sites Distribution centres R&D Silpada Designs
Unlike many direct sellers, Avon manufactures most of its offer, although apparel and home furnishings are outsourced to third party manufacturers. Almost all of its BPC products are produced and packaged by the company. Its domestic 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.
BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC PASSPORT 37
OPERATIONS
Avon facilities globally widespread

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, and Western 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 a combination of manufacturing, distribution and administration, and the above listing is based on primary usage. In January 2008, Avon announced plans to realign certain Latin America distribution and manufacturing operations. It built a new distribution centre in So Paulo, Brazil and opened a new distribution centre in Colombia, 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 leaseback of the manufacturing facility in Germany in 2011.
PASSPORT 38
OPERATIONS
More investment in R&D to boost consumer demand

Distributors Avon claims to have 6.4 million Avon Representatives serving more than 300 million customers in over 100 countries, selling four lipsticks every second. These Representatives market the products via the Avon brochure, which the company claims is the largest publication of any type in the world. A brochure introducing a new sales campaign is usually generated 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 processed and 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 that provide visible consumer benefits; this is as much to facilitate recruitment of distributors as to build consumer demand. The company's global research and development facility is in Suffern, NY. Additionally, there are satellite research 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 Advance Sunscreen Face Lotion SPF 45, Solutions Youth Minerals Restorative Night Cream, Super Enchant Mascara, and ExtraLasting Make-Up.
PASSPORT 39
RECOMMENDATIONS
Time to reassert decisiveness and invest

Protect Brazil Brazil is by far the company's most important market, and continues to generate revenues that have offset very poor performance in other parts of Avon's global business. However, the company lost share there in 2011, and appears to be doing the same in 2012 thanks to cost cutting and an inability to sort out supply issues. It is imperative that the company does not lose credibility in the market, and it must resolve these issues quickly. Deal with China Avon is the only leading direct seller not to be building sales in China. It has invested in the market but cannot yet make its hybrid sales model work. It may lack investment, or a clear enough local brand strategy; whatever the issue, this is another part of its business that the new management will hopefully resolve quickly. If the company can build in China as it has built in Brazil, it will have a very strong competitive position.
Moving forward quickly

During the last few years, Avon was unable to hit analysts' 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) in order to focus on rebuilding the brand.
Developing new positions

The company's mass position is ideal for developing new markets, where consumer bases are younger with less disposable income. However, premium cosmetics is set to outperform mass in many surprising markets, including China, and the company could develop more premium offers. Further acquisition would be ideal for this.
PASSPORT 41
Experience more...
This research from Euromonitor International is part of a global strategic intelligence system that offers a complete picture of the commercial environment. Also available from Euromonitor International: Global Briefings Timely, relevant insight published every month on the state of the market, emerging trends and pressing industry issues. Interactive Statistical Database Complete market analysis at a level of detail beyond any other source. Market sizes, market shares, distribution channels and forecasts. Strategy Briefings Executive debate on the global trends changing the consumer markets of the future. Global Company Profiles The competitive positioning and strategic direction of leading companies including uniquely sector-specific sales and share data. Country Market Insight Reports The key drivers influencing the industry in each country; comprehensive coverage of supply-side and demand trends and how they shape future outlook. Learn More To find out more about Euromonitor International's complete range of business intelligence on industries, countries and consumers please visit www.euromonitor.com or contact your local Euromonitor International office: London +44 0 20 7251 8024 Chicago +1 312 922 1115 Singapore +65 6429 0590 Shanghai +86 21 6372 6288 Vilnius +370 5 243 1577 Dubai +971 4 372 4363 Cape Town +27 21 552 0037 Santiago +56 2 915 7200 Sydney +61 2 9275 8869 Tokyo +81 3 5403 4790 Bangalore +91 80 4904 0500
PASSPORT 42

Avon Products Inc in Beauty and Personal Care - GMID

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AVON PRODUCTS INC IN BEAUTY AND PERSONAL CARE (WORLD)

SCOPE OF THE REPORT

Beauty and Personal Care US$425,840 million

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Key company facts (1)

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Key company facts (2)

Avon Products Inc: Sales by Reported Geography 2011

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Uncertainty for Avon

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Operating profit (US$ million)

Latin America keeping the company in growth

Total revenues 2011

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Net income (US$ million)

SWOT: Avon Products Inc

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Key strategic objectives and challenges

Softly, softly for restructure

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Avon gains based on Latin America

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Avon direct sales model best suited to emerging markets

0.9 0.8 0.6

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Avon's lack of development outside Latin America is a concern

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Emerging market strength competitive advantage

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Avon sees mass products build share

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

Avon can build in other regions

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

BPC direct sales model perfect for emerging markets

Direct Selling: Global Value Breakdown by Leading Category 2011

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Avon well positioned in leading BPC direct selling markets

% CAGR 2011-2016 and company share

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

BPC direct selling

BPC total market

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Latin America prime focus for the company

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Mass position suits Latin American demographics

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Brazil the company's life raft

Forecast Direct Selling of BPC in Avon's Five Largest Markets 2011-2016

Brazil Russia Venezuela

BEAUTY AND PERSONAL CARE: AVON PRODUCTS INC

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Avon runs risk with golden goose

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

China development may be harder to achieve

GEOGRAPHIC AND CATEGORY OPPORTUNITIES