Avon's latest scent sweet smell of success?

0 Comments | Deseret News (Salt Lake City), Oct 22, 2007 | by Ellen Byron The Wall Street Journal

Two years ago, Avon chief Andrea Jung faced some tough decisions. Growth was slowing in the company's most important global markets, its stock plunging. Famed for its door-to-door sales, Avon found itself with the venerable business model faltering in the U.S. even as it prospered in developing markets. And the company was saddled with a crowded stable of products and far too many managers.

In November 2005, Jung told investors she was willing to make bold changes. She announced plans to spend $500 million over several years restructuring. Since then, Avon has cut employee ranks by 10 percent and management by nearly 30 percent. She cut back on the number of products Avon catalogs offer, devoting more space to the most successful products and eliminating the rest. She almost tripled Avon's ad spending over the past two years, and she has made headway building Avon's overseas presence, winning the first direct- selling license in China and swelling its sales force there to more than 700,000.

Early results are positive. Sales rose 12 percent in the June quarter over a year ago after annual sales rose 7.6 percent in 2006, although restructuring costs have hurt earnings. Avon has warned that its profit margins won't "approach" prerestructuring levels until next year. While Avon shares are up 16 percent since the beginning of the year, investors are still looking for definitive evidence that the turnaround is working.

In a recent interview with The Wall Street Journal, Jung discussed the viability of door-to-door sales in the U.S., the economic opportunity of being an Avon sales representative in a developing country and why shareholders should be patient with her turnaround efforts. Excerpts:

WSJ: Many say that selling products door-to-door is outdated. Why do you think it still can work in the U.S.?

Jung: Things have changed in many ways, but one thing hasn't -- the need for personalized service. We're firm believers that our model -- when modernized with technology -- can be extraordinarily competitive. So my mantra certainly is high-touch meets high-tech.

WSJ: What about in developing markets?

Jung: Our advantage is clearly the opportunity to give earnings opportunity to (developing-market) sales representatives. That differentiates us from other great manufacturers of mass beauty products. In addition to great branded products for good value, first and foremost we offer women in those markets the opportunity to be economically independent and run their own businesses. In many ways we're the largest micro-lender because we front our sales representatives their first order and that "mini loan" is paid back after they sell their first order. That gets women into business for the first time.

WSJ: And you don't have to wait for retail channels in those markets to develop?

Jung: There's a Russia way beyond Moscow and St. Petersburg -- if you go to the smaller towns, 5,000 or less, Avon is there. We don't have to wait for a retail infrastructure to slowly grow. That's the beauty of it. In China, over 80 percent of our business is outside the Eastern seaboard cities.

WSJ: In addition to all the responsibilities of a CEO of a large, multinational company, you also play chief motivator for your sales representatives. Why do you choose both roles?

Jung: It's a critical part of the job. Motivation is integral to our business model. The Avon story is all about bringing together women from all walks of life who believe that when they join the company they can change their lives. The beauty of direct selling is the ability to inspire women to do things like run their own businesses and be successful in ways they never thought they could be. Attracting people to the earnings opportunity, the great brand, and the ability to sell and service customers as well as having pride in the company is very important.

I'm off to China, for example, (this) week, and every time I go to any of our key markets I try to be with our sales representatives in the field. It's very renewing. With all the stresses and strains of being a CEO of a publicly held company -- I've been one now for eight years, or 32 quarters -- I get a tremendous amount of energy from getting out with the front lines of sales representatives.

WSJ: Avon has experimented over the years with selling its products in stores. Given the recent wave of department-store consolidation and the increasing emphasis mass-market stores are putting on their beauty departments, would you try it again?

Jung: Right now our focus really is on the direct-selling channel, and we're committed to improving our representative value proposition. Focusing our investment and all of our energies on reinvigorating their earnings opportunities has the best payback and has gotten the most sales growth, whether in the U.S. or in developing and emerging markets.

WSJ: How has the beauty consumer changed during your tenure?

Jung: The expectation of innovation and technology is just light years ahead of where it was. When I started in this business years ago, color cosmetics was really more about shades. The concept of using innovation, that a lipstick actually has to do something now, not just have 20 fabulous shades, is a night-and-day change. There's innovation in packaging, formulas, skin-care technologies that get transferred to color technologies. SPF used to be in sunscreen only, now there is hardly a product that doesn't have it. You have to be part of a technology-driven and technology-resourced beauty company to win over the long run now.