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Avon: More Than Cosmetic Changes


In 2005, Avon Products Inc.'s (AVP) success story turned ugly. After six straight years of 10%-plus growth and a tripling of earnings under CEO Andrea Jung, the company suddenly began losing sales across the globe. Developing markets such as Central Europe and Russia, the engine of Avon's amazing run, stumbled just as sales in the U.S. and Mexico stalled. The global diversity that had long propped up the company's performance suddenly began to weigh it down.

This dramatic turn of events hit investors by surprise. In May, Jung had predicted Avon would exceed Wall Street's already high expectations. By September, problems in China, Eastern Europe, and Russia were mounting, and Jung was backpedaling at full speed. Angry shareholders bailed out. The stock price, which had risen 181% during Jung's first 5 1/2 years at the helm, plummeted 45% between April and October.

Over the past 18 months, Jung has tried to figure out what went wrong and how to fix it. While it's far too soon to celebrate at Avon, the company is emerging from Wall Street's doghouse. Avon sells Skin So Soft and anew skin-care products as well as makeup and other items through a network of 5 million independent representatives. Its stock had jumped 39%, to 36.65, by Feb. 27, from its lows of last August. Investors are happy about, among other things, Avon's progress signing up 399,000 new salespeople in China, where a fast-growing middle class is compelling enough to outweigh the government's tight reglation of direct sellers. Renewed growth in Central Europe and the U.S. is helping, too. For the fourth quarter of 2006, revenue rose 9%, to $2.6 billion, while net income stayed flat at $184 million.

PAINFUL CUTS

Although she acknowledges continuing problems, Jung felt comfortable enough with the company's progress to give BusinessWeek her first extensive interview since Avon's 2005 collapse. An expert in building brands, Jung had no turnaround experience when she arrived in her job. At times she doubted that she could make the deep staff cuts needed to right the company. "I'd never done anything like that before," said the 48-year-old Jung on Feb. 15. "My first reaction was: 'I get it. I see the numbers, but I just don't know if I, or we, have the stomach for it."

One of Jung's most important moves has been forcing managers to make decisions based on fact rather than intuition. In the past year, she has reorganized Avon's management structure, taking away much of the autonomy from country managers, in favor of globalized manufacturing and marketing. Previously, Avon managers from Poland to Mexico ran their own plants, developed new products, and created their own ads, often relying as much on gut as numbers. In Jung's words they were "king or queen of every decision."

Now Jung has trimmed out seven layers of management, bringing the total from 15 down to 8, and finally launched the kind of numbers-heavy return-on-investment analysis that most large consumer products companies have been doing for decades. That analysis is directed from New York headquarters by an executive team stocked with more people from the outside. Recent recruits have come from larger, more analytical consumer-products companies such as Gillette, Procter & Gamble (PG), PepsiCo (PEP), and Kraft (KFT). "When she speaks about what we have to do to achieve our goals, she is so much closer to the operations" now, says board member Paula Stern. "She has her hands directly on the levers that have to be moved."

At the height of Jung's problems, in December, 2005, management guru Ram Charan gave her a piece of pivotal advice. He advised Jung to go home that Friday night and imagine she had been fired. Then, he said, return Monday morning with the mindset of someone brought in from the outside. "If you can be that objective and blend in your institutional knowledge and relationships, you're going to have an advantage," he told her. A month later Jung was flying around the globe on a CEO roadshow, addressing audiences of her top 1,000 global managers. Her message: By the end of this year, one-quarter of you will be gone. "I put a lot of people in those jobs," says Jung, "You can imagine it was the toughest time to walk the halls."

ANALYZE THIS

Avon's new executives and their new data were on display at the annual analysts' conference, held in New York on Feb. 15. Traditionally, this show was heavy on product announcements and ad clips. But this year's edition contained nearly four hours' worth of PowerPoint slides. In them, the company provided a detailed explanation of what had gone wrong in many of its 114 worldwide markets.

One revelation: The roster of products for sale in Mexico had ballooned to 13,000. Another: Decreasing the payoffs for adding new representatives had stalled the U.S. business. At times analysts seemed amazed that Avon could have been so out of touch with the basic forces that drove its own business. "Why," asked Deutsche Bank (DB) analyst Bill Schmitz, about 3 1/2 hours into the meeting, "did it take a year and 8,000-plus [representative] surveys to figure out that people want to work less and earn more?"

It was a rebuke, but one Schmitz made with good humor. Schmitz is one of five analysts (out of 15) who rate the stock a buy. Avon's appeal to them is that it gets 70% of sales outside the U.S., much of that from still-developing markets. Even Jim Cramer, who put Jung on his "CEO wall of shame" and recommended selling the stock last summer, has changed his mind, apologizing to Jung on his show Mad Money just a week before the analysts' event.

Avon's new data-centric approach isn't just about creating a good set of slides, however. It's also helping to change Avon's marketing and product development. Avon sells many thousands of products, and 1,000 of those have been introduced in the past 12 months. Savings from centralized manufacturing and other initiatives are being put into advertising and research and development, a strategy Jung hopes will get earnings climbing again.

Avon increased its ad budget from $136 million in 2005 to $249 million in 2006. This was a big factor in the company's 6% sales growth in 2006. Avon had planned to raise advertising to $200 million, but good returns on TV ads in Brazil, the U.S., and Russia, along with other marketing pushes, persuaded management to add a further $49 million, for a total increase of 83%. Avon is also doing more marketing to spark recruiting. Last year the company ran TV and newspaper ads supporting 1,400 recruiting events in China. In Russia the company sponsors a TV show featuring a character who sells Avon.

Jung's No. 1 role continues to be communicating the company's new strategy. In the weeks leading up to and just after the February analysts' gathering, Jung visited Bangkok, Hong Kong, London, S?o Paulo, Shanghai, and Warsaw. All that travel comes at a sacrifice. Jung has a daughter who will graduate from high school this spring and a son who is 9. She says she has completely re- prioritized her life in the past two years, skipping business dinners and formal evening affairs in order to be sure she sees them when she's in New York. But she also tells her children that she loves the company and the work, even if it has been grueling in recent months. "I think it's important they know that," she says. "Otherwise why would you do this?"

By Nanette Byrnes


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