Bloomberg News

Jung’s Outside Successor May Shake ‘Entrenched’ Avon Culture

December 16, 2011

Dec. 15 (Bloomberg) -- Replacing Avon Products Inc.’s Chief Executive Officer Andrea Jung with an outsider may inject fresh energy into a company where the leader and much of her board have served for more than a decade.

The cosmetics seller’s management needs someone “to shake them out of their entrenched ways of doing things,” said Ali Dibadj, an analyst at Sanford Bernstein & Co. in New York who has covered Avon since 2007.

Avon, which generates more than 80 percent of revenue outside the U.S., said Dec. 13 that Jung will step aside as CEO next year and remain chairman while it contends with slowing sales and profit growth. The new CEO should be an operations person with strong emerging-markets knowledge, Dibadj and other analysts said in interviews. The trick will be to find someone who can allow Jung to continue her role as an embodiment of the 125-year-old brand, they said.

The new executive will enter an environment quite unlike the one Jung encountered when she became CEO in 1999. Because she had a marketing background, the New York-based company surrounded her with executives with operating experience, said Connie Maneaty, an analyst at BMO Capital Markets in New York.

In recent years, Jung ran the company without benefit of executives like Liz Smith, who left two years ago after leading the North American operations and global brands as president.

While Jung, 53, had a laudable “vision of connecting women to economic independence through direct selling,” her execution was lacking, Maneaty said in an interview.

Succession Planning

Smith, who left to head OSI Restaurant Partners LLC, was considered a potential heir apparent at a company that had given succession planning short shrift, Dibadj says. With no obvious internal candidates, Avon must hire an outsider.

The person need not be knowledgeable about Avon’s direct- selling model, Dibadj said.

“It could be someone from a completely different background,” he said

Jung’s successor also will inherit an internal probe into potential violations of the Foreign Corrupt Practices Act, which led to the firing of four executives over bribes to officials in China. The U.S. Securities and Exchange Commission is also looking into the cosmetics company’s actions, Avon said in an Oct. 27 regulatory filing.

It’s not as though Avon’s direct-selling model is broken, said Victoria Collin, an analyst at Atlantic Equities in London. While the strategy is increasingly irrelevant in the U.S., where sales growth has lagged, it remains effective in such emerging markets as China and Brazil, she said.

Under Jung, Avon has boosted sales overseas by focusing more on small towns than big cities where rivals like Procter & Gamble Co. and Estee Lauder Cos. have concentrated.

Lower Prices

Between 2005 and 2010, Avon ranked second after Colgate- Palmolive Co. in sales growth measured in local currencies and sells quality products at lower prices than comparable goods from L’Oreal SA and Revlon Inc., Maneaty said.

“If you live in the provinces in China, you are more likely to encounter an Avon product than an Estee Lauder product,” Collin said.

Avon should cut spending at home -- or even exit the U.S. altogether -- and put more resources into emerging nations, Dibadj says. The company needs to attract a wealthier cohort of middle-class customers in China and Brazil, and doing so will require putting money and effort into creating a “cohesive global brand,” he said.

“Invest less where you are mature, invest more where you’re not mature,” he said. Avon hasn’t “been effective on where they’ve been spending money.”

Various restructurings, including a four-year plan announced in 2009 to eliminate 1,200 jobs and close plants in Ohio and Germany, have yet to pay off, Collin said.

Power Vacuum

While a power vacuum in the executive suite has prompted potential acquirers to take a run at companies in the past, Avon may be too big for a private-equity takeover, Dibadj said. The company also would be hard to value because there’s “no clarity on what the free cash flow is,” he said.

Strategic suitors also are unlikely because the direct- selling model would give them pause, Collin said.

As executive chairman, Jung “will work really closely with the CEO and board on the overall strategic direction and brand position,” Jennifer Vargas, a company spokeswoman, said yesterday in an interview.

Jung, who sits on the board of Apple Inc. and General Electric Co., remains an asset for Avon -- and that’s why it makes sense for her to remain chairman, leaving the nuts-and- bolts operational tasks to someone else, Collin said.

“They can keep Andrea as sort of the flagship face,” she said. “But they need to run the business divisions operationally much better.”

Investors seemed to agree: Avon rose 5.1 percent to $16.96 yesterday in New York.

--Editors: Robin Ajello, Kevin Orland

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To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net -0- Dec/14/2011 21:21 GMT


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