A Makeover Has Avon Looking Good


By Diane Brady She may seem like some gag from an earlier era: the smiling, perfectly coiffed woman who knocks at the door and says, "Avon calling!" But don't knock the Avon Lady. The global leader in direct sales of beauty products, Avon (AVP) is sitting pretty while other beauty companies are crying for business. Not only did it ring up one of its best years on record in 2001 but it has also expanded the number of direct-sales representatives through incentive programs.

On Jan. 15, Avon CEO Andrea Jung delivered an equally optimistic prognosis for 2002. Argentina? Not a problem, Jung assured investors, even though the crisis-wracked country accounts for about 5% of Avon's $5.7 billion in annual sales. Jung declared: "We continue to target double-digit earnings growth for 2002 -- even if the Argentine peso devalues further." (For an interview with Jung and Avon President Susan Kropf, see BW Online, 1/22/02, "Meet the Avon Ladies-In-Chief.")

U.S. sales are booming, with the events of September 11 having done nothing to dampen growth, estimated at 10% in the fourth quarter. Europe is strong. And the company's continued push to cut costs, reduce inefficiencies, and move into new ways of selling is paying off. Analysts expect Avon to earn about $2.31 per share this year, according to Thomson Financial/First Call, up from an estimated $2.09 per share in 2001.

THE RIGHT MIX. Small wonder, then, that Jim Gingrich, an analyst with Sanford C. Bernstein, just raised his rating on the company to market outperform from market perform. He expects the stock to hit $55 a share in the not-too-distant future. On Jan. 17, it closed at $46.89, up 14 cents for the day. While Avon faces a number of long-term challenges, Gingrich points out that it's doing "a lot of smart things to help revitalize the business."

The most important thing may be that it's finally getting the products right. Instead of 18 kitschy varieties of soap-on-a-rope and numerous regional brands, Avon has cleared away the clutter to focus on such heavy hitters as Skin-So-Soft moisturizer and the Anew skin-care line, as well as the new beComing cosmetics brand that was launched in J.C. Penney stores last year. Add to that list Avon Wellness, a year-old line that includes aromatherapy products, nutritional supplements, and fitness equipment.

The risk, of course, is that an ambitious Avon will again careen into other lines of businesses. Indeed, at one point its expanded portfolio included upscale jeweler Tiffany & Co., a health-products company, and even a chemical maker. Avon has long since trimmed back to its core business -- but some investors worry that it may again be stepping outside its area of expertise. "I can't see women going through Avon to get, say, yoga mats," says one institutional investor. "For that matter, I can't see Avon customers doing yoga."

RETAIL PUSH. Maybe not, but shifting the demographic is another challenge that Jung is determined to conquer. The typical view of the Avon shopper is that she is older, less affluent, and less educated than most cosmetics buyers and shops from Avon because a sister, neighbor, or co-worker happens to be an Avon representative, as the sellers are now called.

Jung wants to grab the malleable -- and lucrative -- youth market with a new "teen business" headed by former Glamour magazine publisher Deborah Fine, as well as urban shoppers and professional women who tend to buy in stores. Doing so would not only expand the company's reach but should allow it to sell higher-margin goods.

A more daunting challenge is how Jung will expand into retailing without alienating her global base of more than 3.4 million independent sales reps. Avon has tried to step around that thorny issue by emphasizing the lack of crossover in retail vs. home shoppers. (She makes the point, however, that post-September 11 jitters have kept some shoppers out of malls.) More important, the company has beefed up sales-rep training and incentives in an effort to recruit new Avon Ladies into the fold. So far, it's working.

MOVING TO THE WEB. In the U.S., Avon has about 500,000 sellers -- a total that grew about 3% last year and 2% in 2000. President Susan Kropf adds that the company is also trying to get more of its reps to migrate to the Web, where they can sell and order. "We have 21% or 22% of our reps doing business with us now over the Web," says Kropf. By yearend 2002, she says, "that will be up to around 50%."

At the end of the day, beauty is all about image -- and few makeovers have been more radical than the one Avon itself has enjoyed. The brochures and advertisements are slicker, cleaner, and less cluttered with those little doodads and teasers. Even the models seem more upscale, looking like their next gig will be on a runway rather than in a discount department-store catalog.

The biggest makeover, of course, is of senior management itself. With Jung's rise to CEO in 1999 and to chairman in September, 2001, Avon got a new direction as well as its first female leader. Kurt Schansinger, a senior portfolio manager of Merrill Lynch Balanced Capital Fund, which owns about 2 million Avon shares, admits that there "were some reservations" about Jung at first because of her lack of operational experience. But, says Schansinger, "she has been a real home run."

PRICE ADVANTAGE. He credits her with having strong vision, high standards, deep knowledge of the business, and enough confidence to delegate key tasks to Kropf, a longtime operational veteran at the company. "There's clearly a strong division of labor there, and it works," he says.

Jung is quick to admit that it's going to be tough to top her record of 2001. But, she says, "That's just the way of business today." After all, she points out, the company has endured the meltdown in Argentina, Sears backing out of a partnership, a recession, and various other hurdles while managing to deliver results. "If we had delivered eight consecutive quarters in a bullish economy with no curve balls and tailwind, I would feel great but less proud," she says. Moreover, Avon has an advantage that could prove especially strong in a recession: Its products are cheaper than those from many other cosmetic and skin-care companies.

Even bad times won't stop Jung from trying to squeeze higher margins from the business. It wouldn't be a surprise if more investors start calling on Avon. Brady is an associate editor for BusinessWeek in New York


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