To Andrea Jung, a persistently rotten economy is a beautiful thing. Sounds like you Jay!
In a Dull Economy, Avon Finds a Hidden Gloss
By CLAUDIA H. DEUTSCH
Andrea Jung, chief of Avon Products, says sales representatives will not defect to more upscale rivals when the economy improves.
To Andrea Jung, a persistently rotten economy is a beautiful thing.
Others may see falling sales, lower profits and layoffs. Ms. Jung, the chief executive of the Avon Products Company, sees an ever larger pool of women she can recruit to sell Avon products to an equally large pool of women who cannot afford department store creams.
"I always knew there was a lot more organic growth in Avon's direct sales methods, but even I thought it would take longer to see it," Ms. Jung, 44, said.
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Indeed, Avon's army of sales representatives — the modern title for the anachronistic "Avon ladies" — grew by 10 percent last year, to nearly four million. At the same time, Avon's unit sales rose 13 percent worldwide — and by 40 percent in Russia and other parts of Eastern Europe, a region that Ms. Jung calls "Avon heaven." The company says that more than 60 percent of its sales are outside the United States.
And younger customers are joining the Avon fold. In 1999, when Ms. Jung became the first woman to head Avon, its typical customer was 43; today she is 37.
"Society is overstored and underserviced," said George Rosenbaum, chairman of Leo J. Shapiro & Associates, a market research firm in Chicago. "The upshot is that Avon's ancient technique of face-to-face selling has become highly contemporary and relevant again."
Investors, too, think that Avon, which has met or beaten Wall Street earnings expectations the last two years, is on a roll. According to Thomson First Call, Avon has the strongest buy recommendations of companies that sell personal-care products. Avon shares have climbed more than 15 percent over the last year, hitting a record of $60.89 on Friday.
The company is also attracting some high-style publicity. "Avon products are all over Allure, Marie Claire and other glossy magazines where they were never mentioned before," said William H. Steele, an analyst at Banc of America Securities.
Amy Low Chasen, an analyst at Goldman Sachs, was more effusive. "This is one of the highest-quality growth stocks that I cover," she said.
Avon's sales in the first quarter rose 7 percent, to $1.46 billion, and profit increased 3 percent, to $98.9 million. For all of 2002, sales rose 4 percent, to $6.17 billion, while profit jumped 20 percent, to $534.6 million.
But if Avon is such a winner in a losing economy, will it be a loser in a winning one?
"Avon does well in a recession, because it provides low-cost items that are sold by women who cannot move up in the workplace," said Allan G. Mottus, a consultant to the beauty industry and publisher of The Informationist, a trade publication. "In a full economy, a lot of good people are going to defect."
In an interview, Ms. Jung said that such defections never followed past economic upturns — and that new incentive programs, product lines, pricing strategies and an overall image-burnishing strategy would hold customers and sales representatives in place anyway. She noted that Avon had wrenched costs out of its purchasing and manufacturing procedures and that its cash flow and operating margins were climbing.
But industry experts are sounding alarm bells. They note that rivals, many of which have more money to spend on marketing, are revving up their new-product mills.
Mr. Mottus points to the inroads that L'Oréal and others are making in the Hispanic market, which Avon was among the first to cultivate. Procter & Gamble, meanwhile, recently introduced Olay Regenerist, an anti-wrinkle cream aimed squarely at women 35 and older, Avon's core market.
"Sure, Avon is in the crowd of competitors that want to compete with Olay, but we've got sophisticated products and I'm just not worried," said Bobbie Jo Ehlers, the North American brand manager for Olay Skin Care.
Investors are becoming jittery. "I've never been comfortable with Avon's heavy reliance on direct sales," said Alison Kerivan, a managing director at David L. Babson & Company, an investment firm in Cambridge, Mass. She said she saw Procter & Gamble and other, more diversified household products companies as a safer bet. "If I'm going to buy a pricey stock," she said, "I'd prefer one that gets its growth from a more diverse group of products."
Diversification has never been Avon's strong suit. In the last two decades it has tried — and failed — at upscale retailing (it even owned Tiffany's from 1979 to 1984), and at using toll-free telephone numbers for ordering. "They'd try a strategy, and if it didn't work, six months later they'd try something else," Ms. Chasen of Goldman Sachs recalled
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Y November 1999, when most companies were riding an economy-driven high, Avon's board was fed up with the company's floundering. It replaced Charles R. Perrin — whom Avon had brought in from Duracell International just 18 months earlier — with Ms. Jung, who had come to Avon in 1994 from Neiman Marcus.
Some of Ms. Jung's diversification attempts have fizzled, too. Earlier this year, she struck a deal to have J. C. Penney carry beComing, Avon's new line of midpriced cosmetics. Penney pulled the brand after just a few months.
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"We wouldn't have given up a product that was profitable," a Penney spokeswoman said. She added that Penney is using the space to display fashion jewelry, which she said yields higher returns than cosmetics.
Ms. Jung, who said she believed that Penney had not done enough to build up a big cosmetics presence in the stores, is philosophical about the failure. "We didn't bet the ranch on it," she said, "and it was a good learning experience."
Retail does not fit into her current strategy, anyway. For some time she has been seeking ways to make Avon immune to economic and demographic swings, anything beyond its immediate control. Her conclusion, apparently, has been that it is better to deepen Avon's reach than to broaden it.
She has thought her strategies through. During a nearly three-hour interview at Avon's headquarters in Midtown Manhattan, she exuded confidence but not cockiness. When presented with a list of looming and seemingly formidable obstacles, she calmly ticked off her solutions:
• Is Avon's core baby-boomer market aging? She has weeded out apparel, toys and other products that do not fit Avon's self-image as a personal-care company for women. In place of those lines, Avon is promoting vitamins, weight-control programs and other "wellness" offerings aimed at women 35 and over. In August, it will introduce Mark. cosmetics, to be used — and sold — by young women. (The punctuation is part of the name because "it emphasizes young women making their mark," Ms. Jung explained.) Avon expects to jump-start the line by having representatives introduce it to their daughters.
• Is its image down-market and dated? She has introduced classier brochures printed on glossier papers. And she is promoting Avon's upscale spa on Fifth Avenue in New York, an easy walk from Bergdorf Goodman, Henri Bendel and other tony emporiums that Avon customers are unlikely to patronize. "That spa gives us the `wow' factor, which makes it wonderful image advertising," Ms. Jung said.
• Will sales representatives flee to better jobs when the market picks up? She has made their jobs more lucrative. Avon has helped about 100 sales representatives open their own Avon kiosks at various shopping malls. It has helped its best sales representatives create Web pages of their own. And it has dusted off an old Avon program, called Sales Leadership, in which they are taught how to recruit, train and supervise their own stable of representatives.
• Will women be able to afford higher-priced products in an upturn? Avon, once stuck on keeping most prices under $10, has introduced Ultimate, a line of skin creams that cost $30, and has other midpriced products in the pipeline. Ms. Jung has designated $100 million to build a new research and development center and has set up research partnerships with universities and other companies, all aimed at churning out more such products. "Our items will still be less expensive than equivalent items from Maybelline or L'Oréal or Olay, but we can certainly command more than the $8.99 we might charge now," she said.
OST of the changes are aimed at improving the image that Avon presents to the outside world. But many are lifting internal productivity, too. One byproduct of the Sales Leadership program is that Avon has not had to hire more regional managers even as the number of sales representatives has grown.
"With this program, the sales representatives replicate the district managers many times over," said Angelo Rossi, group vice president for sales and customer care at Avon in the United States.
Once the Sales Leadership program is entrenched, Ms. Jung may even again consider diversifying product lines. If Avon is a master of direct sales, why not use its representatives to sell financial services and such? If women are becoming more health conscious, why not add more wellness products — or open more Avon spas?
"The concept of being a multibrand, multichannel company is still here," she said. "But it's the single brand and single channel that's going to take us through 2007." |
