ANDREA JUNG’S MAKEOVER OF

AVON PRODUCTS INC.

GROUP-F3

CASE STUDY I

Case Overview

Company History

From Charles Perrin to Andrea Jung

Improvement of Avons Image

Current Situation

Competition Summary ChartCompany Name 2000 Revenues

(Overall) 2000 Revenues(CFT)

L'Oreal    $10.6      $10.3     

Proctor & Gamble     $40.1      $7.3     

Estee Lauder      $4.4      $4.4     

Avon $5.7      $3.5

Alberto-Culver      $2.3      $2.2     

Coty $1.8 $1.8     

LVMH $9.7      $1.7     

Johnson & Johnson    

$29.1      $1.5     

Revlon  $1.5      $1.5     

Mary Kay      $1.2 $1.2

In billions

Major Competit0rs

Company Sales

Revenue Sales Growth from FY2007

Gross Profit

Operating Margin

Net Profit Margin

% of Sales from Outside

U.S.

Avon Products (AVP)

$10,690 7.5% $6,741 12.5% 8.2% 76.7%

L'oreal (LRLCY) $24,600 2.8% $1,730 15.5% 11.1% 76.2%

Estee Lauder Companies (EL)

$7,910 12.4% $5,914 10.2% 6.0% 53.1%

Bare Escentuals (BARE)

$556.2 8.8% $401.5 31.5% 17.6% 1.2%

Revlon (REV) $1,346 -1.5% $855.9 11.5% 4.3% 42%

Elizabeth Arden (RDEN)

$1,141 1.2% $466 36.6% 1.7% 39.8%

FY 2008 AVP vs. Competitors (millions)

1. What is your assessment of ceo’s performance as chief strategist at the company? What he/she has done well? What overall grade would you give the ceo’s for the job he/she has done?

CEO’s Performance As Chief Strategist

Developing a Strategic Vision and Mission

Setting Objectives

Crafting a Strategy

Implementing and Executing the Strategy

Evaluating Performance and Initiating Corrective Actions

Developing Vision &Mission

Vision- to be the company that best understands and satisfies the product, service and self-fulfillment needs of women globally.

Mission- 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 world’s most trusted beauty company.

Strategic Objectives

Grow global beauty category sales. Greater career opportunities. Reduce inventory levels. Improve Operating Margin by 50-100

basis. Launch new products. E-commerce opportunities.

1997 – 2000

2001 - 2004

Sales growth 9% 10%+Beauty growth 10% 12%+Operating margin improvement

+3.2 points 50+ basis points/year

Cash flow from operations

$350 million

$700 million

Capital expenditures

$200 million (2000)

$225 million average/year

Financial Objectives

Basic EPS for 2009 is 0.47%

Dividend growth rate is 13.75%

Declared a regular quarterly dividend

on its common stock of $.21 per

share, payable September 1, 2009

Crafting A Strategy

Respond to changes

New market conditions

Grow business

Achieve performance targets

Implement And Execute Strategy

Market transformations

Supply chain improvement

Sales leadership

International expansion

Avon-Worldwide

2. What is strategic vision of CEO for the company? Do you approve of the company’s new strategic decision? Was it time for company to fundamentally change direction? Why?

PROBLEMS FACED BY AVON

Financial problems

Problems for the customers

Poor logistics

Effect of crisis

Failure of non core business

STRATEGIC VISION

“ our vision is to be the company that best understands and satisfies the product, service and self-fulfillment needs of women globally. Our dedication to supporting women touches not only beauty- but health, fitness, self empowerment and financial independence.”

STRATEGIC VISION BY JUNG

Change in customer need and

expectation

Aggressively pursuing promising markets

Strategy to outrun competitors

Focus on profitable retail business and e-

commerce

Invest in growing product category

U.S. CFT MARKET SIZES BY PRODUCT CATEGORY, PROJECTIONS FOR 2005

 

Product Category

Hair care

Fragrance

Cosmetics

Skin care

Bath products and

other personal care

Total

2005

Dollar value Percent of

(in billions) total

$8.6 21.6%

6.0 15.0

8.4 21.1

9.4 23.7

7.4 18.6

$39.8

 

3. What is your assessment of the financial & strategic objectives CEO has to set for the company? Do they contain too much stretch? Too little stretch?

STRATEGIC OBJECTIVES

Marketing Transformations 2000 2004

Active beauty product SKUs 5,000 4,000Breakthrough innovation frequency 3 years 2 yearsProduct development (average) 88 weeks 50 weeksCampaign development 52 weeks 26 weeks Supply chain improvement 2000 2004

Days of Inventory 119 8-10Forecasting accuracy Baseline +30%Order fill rate 68% 90%

Sales Leadership 2000 2004

Leadership down lines per U.S. district 110 214Representatives per U.S. district 322 440Growth in active representatives 2%-3% 2%-3%Growth in average rep earnings -- 25%-30% E-commerce and Internet 2000 2002

E-Representative participation 13% 50%Representative support cost savings $3 million +$20 millionGeographic market penetration U.S., Japan, Taiwan 20 markets International 2000 2004

Local currency sales growth 50% 20%-30%Representative growth 25% 20%-30%Sales outlets (China) 3,463 6,000

FINANCIAL OBJECTIVEFinancial 1997 – 2000 2001 – 2004

Sales growth - 9% 10%+

Beauty growth- 10% 12%+

Operating margin

improvement - +3.2 points 50+ basis points/year

Cash flow from

operations - $350 million $700 million

Capital expenditures - $200 million (2000) $225 million

average/year

OTHER FINANCIAL OBJECTIVES

Reduce inventory which is currently at

40% of total current asset.

Reduce the long term debt which had

increased 58% in 2000 vis-à-vis 1999.

To improve the operative margin by

0.50% every year to achieve higher net

profits.

4. What has been the key elements of company’s strategy been under previous CEO’s. What new & different strategy elements have been initiated by the CEO? How well does new strategy, if any, seem to match features of the global industry & company’s resource strengths, competitive capabilities & culture?

Strategy Under Previous CEO: Charles Perrin

Advertising, marketing and promotional strategy

Develop new products Improve its image Use of technology to aid sales

representatives Development of Avon’s Leadership

Opportunity program.

eRepresentative sales concept Information technology and use of the

Internet Concept of Sales Leadership Beauty Advisors program Store-within-a-store concepts

Strategy Under Current CEO: Andrea Jung

New Strategy: Match Features

GLOBAL INDUSTRYCOMPETITORS STRATEGIES

highly fragmented with distribution channels beyond direct selling

Market was segmented by consumer demographics and by geography.

Country-specific differences in consumer preferences

Sales driven by product innovation

product innovation ; Acquisition; Diversification; ExpansionProducts were

available at discount stores,

supermarkets, and drug stores

department stores, retail stores & Internet

5. How well has company’s new strategy been implemented so far? What are company’s strategic successes so far? What problems or missteps do you see? How important has the important staff (identify) been to implementation efforts? Were they A good choice? Why or why not?

Implementation & Executing Strategy

BUSINESS PROCESS REENGINEERING

eliminate non-value adding costs from its value chain

cost savings of more than $150 million delivered

saved $56 million annually after cutting its number of suppliers from 300 to 75

reduce transportation costs by $22 million, shipping segmentation costs by $17 million, and order entry costs by $8 million.

SALES REPRESENTATIVES

The changing face of Avon’s sales force is shown below:

Employees asOn Dec 08:

Age New Reps Total Reps

Under 35 52% 17%

35+ 48% 83%

Total US Employee,

6100

Employees in other coun-tries; 35900

IMAGE ENHANCEMENT

Increase in company’s expenditures for advertising by 50% to $90 million in 2000

The U.S. brand image indexes of Avon and selected competitors in June 1999 and March 2001 are shown below: Brand June 1999 March 2001 ChangeCover Girl 150 146 -4Clinique 150 138 -12Revlon 138 131 -7Mabelline 107 107 --Avon 89 96 +7Mary Kay 96 96 --L’Oreal 104 96 -8Oil of Olay 86 93 +7

PRODUCT DEVELOPMENT Avon’s new products aided in market share

gains of 0.8% in color cosmetics, 2.2% in anti-aging, and 0.3% overall share.

Avon’s sales by product category for the years ended Dec. 31

Company’s Strategic Successes

Avon held the title of world’s largest direct seller of beauty related products

Avon’s common shares had increased by approximately 90%, while indexes such as the S&P 500 had fallen by nearly 25%.

Avon’s sales growth had increased from 1.5% to 6%

BPR had saved more that $400 million in costs and improved operating margins by more than 350 basis points.

international sales grew at double-digit rates

INTERNATIONAL

In China, Avon brand awareness improved from 41%

to 53%,annual usage rates increased from 26% to

31%, sales improved by 47%

In EEMEA markets, Share makeup subcategory from 8.7% to

11.5% increased its share of fragrance sales from

6.5% to 9.3%, market share in the skin care category

raises from 7.7% to 10.6%

Performance of Avon Product Inc stock price versus the S&P 500 index

Avon’s Revenue v/s Its Competitors Revenue

REVENUE 2009

Missteps or Problems

Misstep: Avon pursued business diversification to

boost its revenues by acquisition of Tiffany & company in 1979, Giorgio Beverly Hills and Parfums Stern in 1987.

This diversification left the company with a large amount of debt and in a vulnerable financial position.

Problems: Any initiative by the company to expand

beyond its direct sales model is met with fierce opposition by its sales representatives.

Any effort to sell via the Internet and through retail channels has been rejected by the representatives.

Brand name reputation Dependence on one sales model Single line of business To many manual processes

6. Has CEO been effective in evaluating the company’s performance, monitoring new developments & initiating corrective adjustments? Does CEO appear to have personal traits well suited to refining & fine-tuning the company’s strategy & implementation efforts? Are his/her strengths better suited to instituting sweeping changes & quickly moving to A new project?

Jung’s ‘Pre-CEO’ association with Avon

Jung’s ‘Post-CEO’ performance

Corrective adjustments

New developments

Financial Results

Operating Profit of Avon

AVP FY2006-2008 Financial Metrics (millions)

Metric FY2008 %

Change FY2007

% Change

FY2006

Net Sales Revenue

$10,690. 7.6% $9,939 13.4% $8,764

Gross Profit

$6,640 12.5% $5,904 12.2% $5,261

Operating Margin

12.5% 3.7% 8.8% 0.1% 8.7%

Net Income

$875 64.7% $531 11.1% $478

Quarter To Quarter Analysis

AVP Q2 FY2009 Financial Metrics (millions)

Metric 3Mon ended Q2 FY2009 % Change 3Mon ended Q2

FY2008

Total Revenue $2,470 -9.8% $2,736

Gross Profit $1,511 -12.0% $1,718

Operating Margin 7.4% -6.3% 13.7%

Net Income $82.3 -64.0% $234

Revenue, Net Income & Net Margin

Regional Revenue Comparisons ($mn)

B) Does the CEO have personal traits well suited to implementing sweeping changes and quickly moving to new project?

Personal Traits

Working hard and earning her wants and desires

Decisiveness and no nonsense style Ambitious Good balance of aggressive and humane

approach Generating innovative options to solve

problems Taking initiative wherever necessary Focused Ability to deliver Never say die spirit

7. What additional actions would you recommend CEO take to help the company to achieve its long term strategic & financial objectives? Are any changes needed in the company’s vision? Its objective? Its strategy? Its implementation efforts? What challenges might the new strategy present to avon's top management team? What risks do you see?

Actions/Recommend To Achieve Its Strategic & Financial Objectives

To sign contracts with premium brand ambassadors

To increasingly employ more male sales representatives for men’s products

To progressively increase expenditure on R&D

To reduce costs of production To conservatively increase the

dependence on debt Improve the current ratio of the

company Implement more effective risk

management techniques

Are any changes needed in the company’s vision?

In their vision they could along with women also cater to the beauty needs of men

Strategy and Challenges

STRATEGY CHALLENGES

To be more focused in its growth

To focus & innovate more in areas of CFT market which show promising growth

To resort to a little more aggressive retailing

To focus more on Mass merchandisers and specialty stores in retailing

To hedge foreign currency and interest rate transactions

Increased costs of retailing

Deal with the huge sales force

Increase in borrowings

Forex fluctuations

Recent Data

U.S. Sales of Cosmetics, Fragrances, and Toiletries by Retail Channel, 1996, 2000

1996 2000 CAGR

ChannelDollar value

(in billions)

Percent of total

Dollar value

(in billions)

Percent of total

(1996 – 2000)

Supermarkets

$4.6 17.9% $5.3 16.3% +3.6%

Drug stores 4.8 18.7 5.4 16.6 +3.0Mass merchandisers

5.6 21.8 8.0 24.6 +9.3

Department Stores

5.5 21.4 6.8 20.9 +5.4

Specialty stores

2.3 8.9 3.3 10.2 +9.4

U.S. Cosmetics, fragrances, and toiletries market sizes by product category, 1996, 2000

1996 2000 2005 CAGR

Product Category

Dollar value

(in billions)

Percent of

total

Dollar value

(in billions)

Percent of

total

Dollar value

(in billion

s)

Percent of

total

(1996 –

2000)

Hair care $6.6 25.9%

$8.2 25.2%

$8.6 21.6%

5.3%

Fragrance 4.7 18.4 5.1 15.6 6.0 15.0 1.7Cosmetics 4.6 17.8 6.4 19.7 8.4 21.1 8.7Skin care 4.3 16.7 6.3 19.5 9.4 23.7 10.3Bath products and other personal care

5.4 21.2 6.5 20.1 7.4 18.6 4.6

Total $25.7 $32.5 $39.8

Risks

Political, legal and regulatory risks in the

Global Market

Currency Fluctuation Risks

Interest Rate Risk

Credit Risk of Financial Instruments

THANK YOU!

Andrea Jung has achieved success through "not by

abandoning the seemingly outdated Avon Lady, but by reviving her"

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