Avon looking through Economy Scope


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Avon looking through Economy Scope

  1. 1. AVON- Looking through Economy-scope<br />BUS 517: “Avon” Analysis<br />Chatham University<br />Economic Analysis for Managerial Decisions<br />Instructor Dr. Connolly<br />Contents TOC o " 1-3" h z u Introduction PAGEREF _Toc259446534 h 3Vision PAGEREF _Toc259446535 h 3Mission PAGEREF _Toc259446536 h 3Business description: PAGEREF _Toc259446537 h 4Customers PAGEREF _Toc259446538 h 5Factors affecting Demand and Supply PAGEREF _Toc259446539 h 6Population PAGEREF _Toc259446540 h 7Consumer preferences. PAGEREF _Toc259446541 h 7Income PAGEREF _Toc259446542 h 7Substitutes available in market PAGEREF _Toc259446543 h 8Technology. PAGEREF _Toc259446544 h 8Substitute price PAGEREF _Toc259446545 h 8Avon’s Strategies and competitive advantage PAGEREF _Toc259446546 h 8Global strategy PAGEREF _Toc259446547 h 8Product Strategy. PAGEREF _Toc259446548 h 9Future Outlook PAGEREF _Toc259446549 h 9Last three months for Avon PAGEREF _Toc259446550 h 10performance PAGEREF _Toc259446551 h 10Conclusion PAGEREF _Toc259446552 h 11<br />Introduction<br />Avon products Inc. is a New York based company, pioneer in the field of consumer goods under personal care products industry since 1886. In 1939, name of California Perfume Company was changed to Avon. Paramount among Avon’s principals is “to meet fully the obligations of the corporate citizenship by contributing to the well being of the society, and environment in which it functions.”Avon, the company for women, is one of the leading global beauty companies, with $10 billion in annual revenue. Avon’s total revenue for 2009 was $ 10.38 billion with total assets worth of $6.8 billion and total liabilities worth $ 5.5 billion. It’s an indexed member of S&P 100, S&P 500 and S&P 1500 and is ranked 255 in fortune 500 companies. It has around 41,000 employees (6000 from US and 35,000 from rest of the world) who are directly working for Avon. Avon’s product line includes beauty products, fashion jewelry and apparel, and features such well-recognized brand names as Avon Color, Anew, Skin-So-Soft, Advance Techniques, Avon Naturals, and Mark. The products are not limited to women products but also expanding to men, showing Avon’s ability to notice the changing trends of modern times. <br />Vision<br />To be the company that best understands and satisfies the product, service and self-fulfillment needs of women - globally.<br />Mission<br />The Global Beauty Leader<br />We will build a unique portfolio of Beauty and related brands, striving to surpass our competitors in quality, innovation and value, and elevating our image to become the Beauty Company most women turn to worldwide.<br />The Women's Choice for Buying<br />We will become the destination store for women, offering the convenience of multiple brands and channels, and providing a personal high touch shopping experience that helps create lifelong customer relationships.<br />The Premier Direct Seller<br />We will expand our presence in direct selling and lead the reinvention of the channel, offering an entrepreneurial opportunity that delivers superior earnings, recognition, service and support, making it easy and rewarding to be affiliated with Avon and elevating the image of our industry.<br />The Best Place to Work<br />We will be known for our leadership edge, through our passion for high standards, our respect for diversity and our commitment to create exceptional opportunities for professional growth so that associates can fulfill their highest potential.<br />The Largest Women's Foundation<br />We will be a committed global champion for the health and well-being of women through philanthropic efforts that eliminate breast cancer from the face of the earth, and that empower women to achieve economic independence.<br />The Most Admired Company<br />We will deliver superior returns to our shareholders by tirelessly pursuing new growth opportunities while continually improving our profitability, a socially responsible, ethical company that is watched and emulated as a model of success.<br />Business description:<br />Avon Products Inc. is the world’s largest direct seller of beauty and beauty related products. To remain at the forefront of the highly competitive beauty industry, Avon constantly develops quality, effective and affordable breakthrough products that cater to the needs of its customers. Its current product offerings fall into three categories:<br />Beauty: Cosmetics, Fragrances, Skincare, Toiletries (72% in 2009)<br />Fashion: Fashion, Jewelry, Watches, Apparel, Accessories (17% in 2009)<br />Home: Home Products, Gifts and Decorative Products (11% in 2009)<br />Product CategoryRevenues (millions) 2009 2008Beauty$ 7,408.4$ 7,603.7Fashion $ 1,768.0$ 1,863.3Home $ 1,108.3$ 1,121.9Net Sales $10,284.7 $10,588.9Other Revenue$ 98.1 $ 101.2Total $10,382.8 $10,690.1<br />Customers:<br />Anyone who wants to have healthy skin and look good is Avon’s customer. As the world's largest direct seller, Avon markets to consumers in more than 100 countries through 6.2 million independent Avon Sales Representatives.<br />RegionRevenues (millions) 2009 2008Latin America$4,103.2$3,884.1North America $2,262.7$2,492.7Central and Eastern Europe $1,500.1$1,719.5Western Europe, Middle East and Africa $1,277.8 $1,351.7Asia Pacific$ 885.6 $ 891.2China$ 353.4$ 350.9Total $9,938.7 $10,690.1<br />Factors affecting Demand and Supply<br />Total revenue decreased 3% in 2009, with unfavorable foreign exchange accounting for 9% points of the revenue decline. Constant $ revenue increased 6%, with increases in all segments except North America and China. Active representatives increased 9%.<br />On a category basis, Constant $ Beauty sales increased 7%, while Fashion increased 1% and Home increased 5%. Within the beauty category, constant $ sales of skincare decreased 1%, fragrance increased 8%, personal care increased 9% and color cosmetics increased 13%. On a reported basis, the decrease in revenue for 2009 was primarily driven by a decrease of 3% in beauty sales, with decreases in all sub-categories of beauty except color cosmetics.<br />There are many factors that affect demand and supply of the Avon products. The demand of personal care products is always growing. The major factors that affect the demand are:<br /><ul><li>Population: Additional consumers result in additional demand at every cost. The increase in the population shifts the demand curve to the right thus increasing it. In addition to that, by entering countries like China and India, Avon increased the probability of demand by manifolds.(Figure A)</li></ul> PricePrice<br />D1D2 D1 D2<br />QuantityQuantity<br />FIGURE AFIGURE B<br /><ul><li> Consumer preferences.
  2. 2. Price is not a major concern for the consumers as they don’t want to compromise with their skin, and looks. So, the Avon products are always in demand due to their high quality and competitive price. (FIGURE A) Marketing plays an important role in changing consumer preferences. According to Avon’s annual report, they had decreased their advertising budget by 3%. However, it can be justified by their increased IT budget, as more and more consumers are preferring e-commerce.
  3. 3. Income: As the income changes, customers move to a different quality/brand. This also tends to shift the demand. Example of this is growing demand of Avon products in India and China where the income of people has grown over the past decade. This growth is well reflected in Avon’s third quarter report for 2008 which has shown 6% increase in revenue in Asia pacific and 25% increase in China. Contrarily, the revenues had fallen in the US by 9.2% during 2008-2009, peak period of economic downturn. This also shows that Avon revenue is also hit if the unemployment rate goes high as in that case, the income would go down.
  4. 4. Substitutes available in market: Although there is a medium threat from the substitutes, however still the threat is there. For example, instead of buying cosmetics from Avon, consumers could buy organic beauty products because they will get the same service but in a natural way. Avon being at number 5, faces a tough competition by other companies in skin care industry.(FIGURE B)
  5. 5. Technology: Avon sales increased in 2008 since they started online shopping. Avon has continued to enhance their e-commerce options in 2009 by increasing IT budget by 3%.
  6. 6. Substitute price: If the price of substitute products goes down, the demand for Avon products would decrease because of the market structure. ( FIGURE B)</li></ul>Avon’s Strategies and competitive advantage<br />Avon’s biggest strategic asset is its direct selling strategy. Avon has a pool of 6.2 million independent direct selling agents earning around $6 Billion annually. Advantages of direct selling are:<br /><ul><li>Avon products are available in each and every part of the globe where e-commerce is not available.
  7. 7. It reduces the cost of opening retail stores.
  8. 8. To reach a maximum number of customers its best to go to the customer, instead of waiting for the customer to come to you. Avon makes it possible with independent direct sales representatives. </li></ul>Due to this global strategy, Avon has been able to take advantage of its wide geographical coverage. Avon is present in more than 100 countries expanded across all over the globe. This is evident from the fact that 80% of Avon’s revenue comes from outside of the US.<br />This wide geographical coverage when combined with its direct selling strategy becomes Avon’s secret of success and its strongest competitive advantage.<br />Product Strategy: Avon has come a long way from their pink lady image and has grown to meet the changing market trends. Avon has introduced products regularly to capture the market niches which emerge time to time in skin care and beauty products industry. For example, even being a women company, Avon understood the market and launched Mark, its product line for men. Same is true for youth market, aging women’s health.<br />Future Outlook<br />According to a report by Barren’s future of Avon looks very positive and bright. Major factors pointed out by Barren’s for this conclusion were:<br /><ul><li>Direct sales commission based workforce
  9. 9. Recent cost cuttings
  10. 10. Wide global coverage and presence</li></ul>The biggest announcement by Avon about their future plans is to open a state-of-the-art regional Research and Development center in Shanghai in the People's Republic of China. The new regional R&D center in Shanghai will be Avon's largest R&D facility outside of the U.S. Located in the Jinqiao Hi-Tech Park, the stand-alone 40,000 sq.-ft building will span six floors and have additional capacity to expand Avon's overall scientific capabilities in China and Asia. <br />Avon said that the new regional R&D center will house scientific experts in the areas of product development, safety and quality testing, microbiology, chemical engineering and consumer research. In addition, the new center will enable Avon to grow and leverage its R&D alliances in China as well as hire and retain world-class scientists. The center is expected to open in late 2010. <br />Avon said that the new R&D center will primarily serve China but also support other markets in the Asia Pacific region, while reporting directly to the Global R&D Center located in Suffern, N.Y., (near New York City).<br />Avon's Chairman and Chief Executive Officer, Andrea Jung, said, " We're delighted to be opening our new R&D center in Shanghai. This reflects our continuing commitment to the China market, which remains a significant long-term growth opportunity.<br />Last three months for Avon<br />Last three months for Avon brought some good and some bad news. While dealing with the downturn of the economy, Avon managed to acquire another company, thus making its product line even stronger. On March 25th 2010, Avon announced its acquisition of Liz Earle Beauty Co. Limited, a fast-growing, privately-held brand of naturally active skincare products sold primarily through direct-to-consumer channels. The U.K. brand will become part of Avon's global skincare portfolio, broadening Avon's leadership position in anti-aging skincare with Liz Earle's expertise in botanical ingredients and natural positioning.<br />Secondly, on February 4, 2010, Avon Products, Inc. announced that, effective with the beginning of its 2010 fiscal year, Avon will account for Venezuela as a highly inflationary economy. Effective January 11, 2010 the Venezuelan government devalued its currency and moved to a two-tier exchange structure. The official exchange rate moved from 2.15 to 2.60 for essential goods and to 4.30 for non-essential goods and services. Although no official rules have yet been issued, most of Avon’s imports are expected to fall into the non-essential classification. As a result of the change in the official rate to 4.30, revenue and operating profit for Avon’s Venezuela operations will be negatively impacted by $85 million when translated into dollars at the new official exchange rate. performance<br />The company is worth of $6.8 billion and there has been 12.5% increase in company’s total assets. Because of Avon’s strategies, Avon has been able to survive in economic downturn successfully. The reason behind this is their vast geographical presence and cost reduction by restructuring and investing more in recruitments of sales representative, which lead to sales growth. To compensate the losses incurred in this period, Avon has already announced a long term investment in Chinese market, showing their understanding of the market trends and economical changes.<br />Conclusion<br />Avon is one of the oldest and leading cosmetic companies. It has maintained high standards of quality since 1886, and with their direct door to door selling strategy, they are able to maintain their revenues. Although the current economic crisis is clearly visible in their annual report, but still a new ray of hope is there with increased sales in Asian countries. The biggest reason of ever growing popularity of Avon products is their availability, thanks to door to door sales strategy. In my opinion, looking at the current financial crisis, Avon should look into their inventory and make sure the production is in sync with the current market demand as investing in production during inflation period and economic crisis can cause them losses in future. At last, no matter how diversified the Avon is in the product range, it has clearly made a mark in a modern woman’s day to day life, and as quoted by Andrea Jung, CEO of Avon products inc, “Avon is a true force for good, improving, and changing the lives of others as we continue to fulfill our vision as the company for the women.”<br />