Avon Products Inc - 2009

POLYTECHNIC UNIVERSITY OF THE PHILIPPINESCollege of Accountancy and Finance

Sta. Mesa, Manila

AVON PRODUCTS INC.2009

Submitted by:Group #6

BSAH 3- 2

BECERIL, Crystal DawnCASTAÑEDA, Chiara Jolene

ECHALAS, LejanieFLORES, CharmaineGECHA, Mark Paul

NUAS, VangieSARATE, Charisse

Submitted to:Dr. Celso Jovy D. Torreon

Professor, Business Policy and Strategy

TABLE OF CONTENTS

TIME CONTEXT . . . . . . . . . 3

VIEWPOINT . . . . . . . . . 3

CENTRAL PROBLEM . . . . . . . . . 3

OBJECTIVES

Must Objectives . . . . . . . . 6

Want Objectives . . . . . . . . 7

SWOT ANALYSIS

Strengths . . . . . . . . 8

Weaknesses . . . . . . . . 9

Opportunities . . . . . . . . 10

Threats . . . . . . . . 13

ALTERNATIVE COURSES OF ACTION. . . . . . . 15

RECOMMENDATION . . . . . . . . 19

DETAILED PLAN OF ACTION . . . . . . . . 21

TIME CONTEXT

We, Group 6 of BSAH 3-2 assumes the year of 2009 as this case’ time context.

VIEWPOINT

We put ourselves as the consultants hired by the company to give recommendations that

will help managers make efficient and effective decisions.

CENTRAL PROBLEM

The sudden decrease in the market price per share of the Avon Products Inc. which

fell from P39.75 to P24.07.

Theoretically, shareholders’ wealth maximization appears to be the most important

objective for any business to pursue. It is a long-term objective as opposed to the profit

maximization objective usually followed in the short-run. Shareholder’s wealth is the value of the

company generally expressed in the value of stock. So they must maintain the high price of a stock.

The value of stock of Avon Products Inc. increased by 18.51% from the year 2006 to 2007. Then it

dropped by 39.17% in the year 2008. These changes may affect the firms operation in the future.

Stock prices change every day as a result of market forces. By this we mean that share

prices change because of supply and demand. If more people want to buy a stock (demand) than

sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy

it, there would be greater supply than demand, and the price would fall. The question is what makes

people dislike the stocks of Avon.

Three different categories of factors affect stock price movements. The first category

includes factors relating to the company itself, such as its balance sheet, profitability, sales forecasts

and position within the industry. The next category includes factors relating to the larger economy,

such as legislative changes, economic climate and global issues.

http://www.investopedia.com/terms/d/demand.asp

http://www.investopedia.com/terms/s/supply.asp

The general cause of the decrease in the stock price is the decline in earnings of a firm and

lower or suspended dividends. But in the case of Avon Products Inc., their earnings increase by a

significant amount as well as the dividends declared in the year 2008. It’s facie evidence that Avon

operated well this year. We see lowered payout ratio as one of the problem of lower stock price.

Even though the dividends declared by the board of directors increased, still, the percentage

declared out of the earnings decreased. The payout ratio in 2007 and 2008 are 61.2% and 39.2%

respectively. The large difference in the payout ratio is significant in the view point of the

shareholders. Since the Avon Products Inc. is a large and well-established company, they must

return a larger percentage of earnings to their stockholders. Nevertheless, dividend payout ratio is

not the only thing we consider in the decline of stock price.

The Avon’s high level of liabilities is threatening to the company. Having a debt ratio of

88.89% means that 88.89% of company’s asset is financed by debts which may result in higher

leverage thereby increasing risk. It is also critical to pay attention to the debt/equity ratio of the

company because if it is increasing, the company is being financed by creditors rather than from its

own financial sources which may be a dangerous trend. Lenders and investors usually prefer low

debt-to-equity ratios because their interests are better protected in the event of a business decline.

Substantial increases in the debt-to-equity ratio can indicate a company is borrowing heavily. The

high debt ratio and high debt/equity ratio negatively affect the firm’s share market price. Many

shareholders view company with high financial leverage negatively. As a result, many of them will

sell their stocks because they are nervous. High debt means high interest. This high interest may

decrease EPS in future then lower share price. If a company, in the worst case, goes bankrupt, the

stockholders are the last to be paid retribution, if at all. Leverage has also negative effect on future

investments.

In order for a company to be attractive to the investors, the company’s image must be good.

The price movement of a stock indicates what investors feel a company is worth. The problem with

Avon is that their brand image is weak. The name ‘Avon” is not associated with most of the

products. And Avon lagged behind seven of their cosmetics companies in their customer loyalty,

probably because their marketing strategy is direct selling. A company using direct selling has

limited customers. Avon’s customer will purchase only if Avon’s representative will sell directly to

them. Avon’s major competitor like Revlon sells in many prestige department stores that generally

catches many customers. When compared to product quality, Avon’s competitors like Revlon and

Mary Kay are leading. It’s because of their high pricing strategy that usually link to quality of

product and brand image.

The stock price is a measure of company’s financial health. For this reason, a company's

stock price is a matter of concern. If performance of their stock is ignored, the life of the company

and its management may be threatened with adverse consequences, such as the unhappiness of

individual investors and future difficulties in raising capital.

OBJECTIVES

A business objective acts as guidance for a company's growth or development in a specific

area. It serves as a framework for delegating personnel resources, determining what kinds of policy

changes need to be made to accommodate the objective, and understanding how the objective will

allow the company to be more competitive in the marketplace.

Creating defined objectives allows your business to stay focused on the core principles that

the company was founded on. Your objectives define what your company’s goals are.

Thus, in our endeavor in seeking out the best alternative among the alternative courses of

action provided, we formulated objectives that Avon should employ in order to progress and

eventually, attain success.

The objectives are sorted according to their time frames, whether short- term or long term.

The former for the Must objectives and the latter for the Want objectives. These objectives were

founded on the SMART principle. (Specific, Measureable, Attainable, Realistic and Time-bound)

A. MUST OBJECTIVES

1. Employ the decision that will best benefit the company’s owner through

increase in sales.

Increasing the sales of the company, eventually ascends profit. Thus, increasing the

earnings per share of the company and investors would then be compensated with higher

dividends. Delivering less risk and increasing investor confidence.

2. Implement the alternative that will increase the company’s market value

and profitability.

To achieve the ultimate goal of maximizing owners’ wealth, it is important also that

we first meet its prerequisite- that is ensuring the profitability of the company. Increase of

profitability, in reference to the market trend will increase the market price per share. And

as market price per share increases, investors’ confidence will ascend.

3. Implement decisions that will be able to minimize performance gap and

increase performance by 60% to 100%.

By being able to minimize performance gap and increase performance by 60% to

100%, companies often experience a cultural "multiplier effect." Over time, as strategies are

successfully turned into performance, leaders in these organizations become much more

confident in their own capabilities and much more willing to make the kinds of stretching

commitments needed to inspire and transform large companies. In turn, individual

managers who keep their commitments are rewarded with faster progression and fatter

pay checks, reinforcing the behaviours needed to drive any company forward.

B. WANT OBJECTIVES

1. To provide beneficial advantage for the society by providing more products

that is health-friendly.

Businesses are not always about profit and money. Businesses also respond to the

needs of the society as a whole. Providing health-friendly products, such as organic

cosmetics for Avon, is a way of showing their appreciation as well participation to the

society. A win-win situation will then be established, where both the society and the

company itself will benefit. The society for being ensured that the products they use are of

less health hazards and the company being given due recognition for it.

2. To protect the interest of the stakeholders.

Every business should be able to protect the interest of the people who participates

on their day to day activities to be able to ensure the continuity of its operation. They need

to give protection to the best interest of their Employees, Creditors, Customers, suppliers,

owners, the Government, And the General Public. Through this, the company will be able to

magnify and eventually reinforce the behaviours vital to drive the company’s progress.

3. To foster a norm of over performance within the organization.

Through this, investors will start giving management the benefit of the doubt when

it comes to bold moves and uncertain news. The result is a performance premium on the

company’s stock – one that further rewards stretching commitments and performance

delivery. Before long, the company’s reputation with potential recruits rises and a virtuous

circle is created, where talent begets performance, performance begets rewards, rewards

beget even more talent. Thus, company’s success is ensured.

SWOT ANALYSIS

STRENGTHS

1. High liquid assets that can cover current obligations.

A higher current and quick ratio indicates greater degree of liquidity. The operation

of the company, its revenues and earnings brought a high liquidity ratio, which is a great

indication that Avon’s operation is doing well with regards to meeting its obligations. This

may give the company a high credit rating. Although the liquidity ratio has declined from

2006 to 2008, the ratio from 1.31 to 1.22, it is still acceptable because the company was also

affected by the global crisis and recession.

2. Efficient Utilization of Assets

The assets in Avon Product, Inc. are efficiently utilized. The company has been doing

a good job in managing their assets to garner the most benefit it can obtain. In fact, the

company pursues resource-based strategies that attempts to exploit company resources in

a manner that offers value to customers in ways rivals are unable to match. Avon is

pursuing a cost-based advantage that invests in super-efficient distribution centers that

gives it the capability to distribute its products at a lower cost than rivals. The return on

assets of 14.85% also showed the overall effectiveness of management in generating profits

with its available assets, the ratio is also acceptable within the industry as well.

3. Increasing operation effectiveness

Since the company is highly leveraged, which means that most of its financing comes

from debt, Avon is very conscious that they will be able to cover its contractual interest

payments to the creditors. The operating profit of Avon showed a large margin of safety that

secures their interest payments and other current obligations like taxes. This may also

probably contribute to the company’s credit rating. Their operation resulted to have a very

good standing in the market. Focusing on direct selling as the channel of distribution, sales

revenue and net income largely increased.

WEAKNESSES

1. Inventory is sold slower and company is having too much stock.

The company’s inventory is taking quite some time before they are actually sold in

the market. The ratio from 2006 to 2008, which is 3.81% to 3.92%, showed that inventory is

sold even slower than the preceding years. The longer the products are stocked, the higher

is the cost to keep them, thus increasing Avon’s expenses.

2. Collection and credit policy implementation

Avon is known for its one (1) month to pay policy from the date of purchase, but the

ratio in 2008 showed that the company has been collecting its credits more than a month,

specifically 40 days, which means the credit and collection policy is not strictly

implemented, resulting to a high average receivable turnover. If this situation continues, the

company may have problems in generating cash for its operations, like meeting its current

obligations and the like.

3. Declining operating margins

Avon’s operating margins for the North American region declined by 1.3% in 2009,

as compared to 2008. The decline was mainly due to the incremental costs of restructuring

initiatives. Lower revenues with fixed overhead expense and higher obsolescence expense

were also contributing factors for this decline. The declining profit margin indicates poor

cost management and increase in the company's sales, general and administrative expenses.

It also indicates that the benefits of restructuring initiatives are yet to be realized fully by

the company. A further decline in the margins would decrease the company's profit

generation capability and increases the probability of loss in the future.

OPPORTUNITIES

1. Restructuring initiatives for organizational effectiveness

The company has taken multi-year restructuring initiatives in the recent years. The

move is primarily aimed at increasing revenue growth, profit margins and strengthening

overall performance. The company reorganized its business into six geographic business

units towards the end of 2007 to increase its effectiveness. The company started managing

Central and Eastern Europe and China as separate operating segments since 2006, and

increased the number of reportable segments to six: North America; Western Europe,

Middle East and Africa; Central and Eastern Europe; Latin America; Asia Pacific; and China.

Besides, the restructuring involved realignment and downsizing in each region of operation,

which resulted in a leaner management with about 7 or 8 levels, as compared with the prior

15. The company also closed down its unprofitable operations including the closure of the

Avon Salon & Spa, the closure of operations in Indonesia, the exit of a product line in China

and the exit of the beComing product line in the US. In addition to this, the company

reorganized its certain functions, primarily sales-related department. In February 2009, the

company announced a new restructuring program under its multi-year turnaround plan

(the "2009 Program"). The restructuring initiatives under the 2009 program is expected to

focus on restructuring its global supply chain operations, realigning certain local business

support functions to a more regional basis to drive increased efficiencies, and streamlining

transaction-related services, including selective outsourcing. The company expects to incur

restructuring charges and other costs to implement these initiatives in the range of $300

million to $400 million before taxes over the next several years. Avon is targeting $200

million as annualized savings under the program, upon full implementation by 2012-13.

The cost savings would give the company flexibility in product pricing. Since Avon operates

in the value cosmetic segment, flexibility in product pricing would give it an edge over its

competitors as the company can reduce prices so as to target greater market share. Besides,

the cost-saving initiatives would help the company in generating more free cash and profit

margins essential for further international expansion.

2. Re-branding strategy to drive consumer demand

The company, as a part of strategic initiative, plans to engage in aggressive

marketing and focus on the development of innovative products. The company has

increased its advertising outlay since 2006 with the exception of 2009 when advertising

expense was flat due to difficult economic conditions. Advertising investments were $390.5

million, $368.4 million, and $248.9 million during 2008, 2007, and 2006, respectively while

it declined by $38 millions in 2009 as compared to the previous year. However, the

advertising expenditure is expected to rise in 2010. The huge advertisement outlay has

supported the new product launches, such as, Anew Reversalist Serum/Cream, Anew

Dermafull Helix, Spectra Lash mascara, SpectraColor Lip, 24-K Gold Lipstick,

Supercurlacious Mascara and Spotlight fragrance. Besides, the company is also focusing on

enhancing the representative value proposition, the benefits given to sales representatives.

During 2009, the company invested approximately $56 million incrementally in the

Representatives through Representative Value Proposition program (RVP) by continued

implementation of the Sales Leadership program, enhanced incentives, increased sales

campaign frequency, improved commissions and new e-business tools. The aggressive

marketing would help the company in increasing the brand awareness and boost sales.

Besides, direct-selling companies like Avon depend upon the motivation of its

representatives. Measures like RVP would help to boost their motivation levels and

encourage the sales.

3. Use of Social Media and Technology to drive online sales

The popularity of social media continues to gain ground with internet sites such as

Facebook, Twitter and MySpace. Avon already has a presence on the social media giant

Facebook’s site with their brand “Mark”. They have been on the forefront of leveraging this

technology to produce more sales.

4. Emerging markets enhances the scope of growth for the Avon's value cosmetic

products

The increasing popularity of beauty contests and increasing disposable incomes

have spurred the emerging markets such as Brazil, Russia, India and China. These markets

are becoming increasingly important to cosmetics companies like Avon. In China, Avon

Products was granted a direct selling license by China's Ministry of Commerce in 2006. The

company has expanded its operations in China since then becoming the second largest

cosmetics market in Asia after Japan.

THREATS

1. Competitive environment in the global cosmetics industry

Like all companies in the cosmetics industry Avon has faced considerable

competitive pressures in recent years, both from its direct selling rivals as well as

established retail brands. The company has been witnessing strong competition in beauty

segment from companies such as Oriflame, Revlon, L'Oreal, Procter & Gamble, Unilever and

Estee Lauder. These companies have increased their focus to gain market share in beauty

and personal care products in the US as well as emerging markets. Also, in non-beauty

segments, global brands such as Amway and PartyLife have remained a cause of concern for

the company. In addition, even drugstore operators such as CVS, Walgreen's are also

increasing their focus on beauty products due to better margins. In recent years, brand

recognition has emerged as key differentiator and companies across the globe have

invested heavily on advertising, promotional campaigns and innovative marketing

strategies to increase market share. Avon has also increased its advertising outlay

considerably as mentioned above. The rise in advertising expenses would further put

pressure on already eroding operating margins.

2. Company's revenues are tied to the performance of the sales representatives

Avon sales, both in the domestic and global markets, are contributed largely from

the company's global sales representatives. The 6.2 million Representatives that Avon

employs are independent contractors that receive a percentage commission for their sales.

Negative sentiments like lower commissions and negligible employee benefit create dissent

which could result in lesser interest by the representatives in enhancing the Avon sales.

Allegations and other dissatisfaction among the representatives could bring down the

productivity of the sales force hampering the growth of Avon in the longer run.

3. A diversified global operation exposes Avon to currency fluctuation risks

Avon derives nearly 80% of its revenues from the markets outside the US, making

the company very sensitive to currency fluctuations and the strength of the dollar. In 2009,

the adverse dollar movement against other currencies negatively impacted the company's

revenue and operating figures. Total revenues declined by almost 9.0% and operating

margin declined by an estimated 2.5 points (Avon, 2010). Further, in the first quarter of

2010, Avon had a 64% decrease in net income compared to first quarter of 2009, due to the

devaluation of Venezuelan currency, despite total revenue increasing 14% (“Avon Products

Q1…”, 2010). Unfavorable currency fluctuation, if not hedged properly, could adversely

impact the profits and revenue of the company in the future.

ALTERNATIVE COURSES OF ACTION

ACA 1: Decrease debt ratio through increasing internal financing by issuance of new shares

Advantages: Disadvantages:

1. Capital is immediately available 1. Expensive because internal financing is not

tax-deductible

2. No interest payments 2. No increase of capital

3. No control procedures regarding

creditworthiness

3. Not as flexible as external financing

4. Spares credit line 4. Losses (shrinking of capital) are not tax-

deductible

5. No influence of third parties 5. Limited in volume (volume of external

financing as well is limited but there is more

capital available outside - in the markets - than

inside of a company)

ACA 2: Strengthening direct selling strategies and Reaching markets globally through online

advertising


1. Increase in sales 1. Additional costs

2. Increase in customers 2. Risky

3. Improve employee skills 3. Can be annoying and be ignored by web users

4. Fast improvement on product and service 4. Transaction issues/internet fraud

5. Easy update on products

6. Less costly way of advertising

7. Provides wider market reach

8. Faster relay of information

9. Global access to the company

ACA 3: Investing on Research and Development of “green” products


1. Reduced Utility Costs 1. Increased Capital Outlays

2. Decreased Environmental Impact 2. Decreased Productivity

3. Improved Public Image 3. Products are more expensive

4. Rebates and Tax Benefits 4. Customer Backlash

5. Increased Business Opportunities

ACA 4: Factoring of receivables


1. Maintenance of the receivables account 1. The cash price of the invoices is discounted by

the factor company

2. Collection of receivables 2. Possible harm to customer relation

3. Protection against the default in payment by

debtors

3. May be viewed as a sign of financial crisis or

weakness by customers and other creditors

4. Helps in enhancing the liquidity of the firm

and efficient capital management

4. Maintenance of credit and collection

department is expensive

5. Does not infringe upon the rights of the

customers.

RECOMMENDATION

Among the alternatives presented above, the second alternative is the best possible

solution. Strengthening direct selling strategies will help the company to increase its market price

per share.

Direct selling is one of the core competencies that the Avon Products Inc. has. The company

is the world’s largest direct seller with 5.4 million Avon representatives in over 100 countries.

Avon’s business model provides for the company to sell its products to its representatives on credit,

so that for most part, the representatives do not pay the company until they get paid by their

customers.

For promoting direct-sales through consumer and the business; one is to offer incentives to

its customers and second is to motivate the business to promoting its products by advertisements,

establishing sales competition for employees, participating in conventions, personal and

entrepreneurial skills development trainings.

Promoting Avon’s products and high chance of increasing direct-sales is to offer incentives

to its consumers. Incentives provide a positive motivational influence to encourage and excite

buyers to buy the products. Such incentives, appropriate for this situation, are coupons, rebates,

product samples and awards. Coupons can be attached in mail, beauty magazines, newspapers, and

advertisements on mail or on the internet company’s official website. Rebates can be offered also to

attract more buyers to buy the products. Rebates can be advertised also on coupons through mail

or the internet.

Another successful way of attracting consumers is by offering samples of Avon’s cosmetic

products, which can be done door-to-door or attached on an advertisement through mail. Finally,

awards through prizes and contests can offer consumers the chance to win something small or big

like cash or free-trips. Also, prizes can be offering a free gift whenever a consumers purchase one of

Avon’s products.

Motivate the Avon business to reach its goals of promoting its products and gaining sales

through advertisements, sales competition and participating in conventions. Advertising is the key

to attracting consumers and the outcome is high sales. Such advertisement is done through media

(television), mail, or the internet. The more awareness from the public of the company likely to

attract more buyers and the outcome is high sales.

The next strategy is to encourage Avon’s sales representatives with awards/prizes that

reached their sales goals within a period of time. Another is participating in conventions and this is

more likely to increase sales through direct contact with customers.

Another is to provide regular training to representatives that will help to further develop their

communication skills and entrepreneurial abilities which could contribute in increasing the

company’s sales. These programs should include proper product usage, policies to be implemented

like credit and collection policies as well as recruitment benefits they may get in conducting the

business.

Through these strategies, sales can be increased thereby increasing profits as well. As profit

increases, the company’s earnings per share will increase thus enabling them to declare higher

dividends. Higher dividends normally, give confidence to potential investors attracting them to

purchase more shares. Having new investors will help increase the market price per share that will

have a big impact on the maximization of shareholder’s wealth which is the ultimate goal of the

company. New investors give the company enough funds that they can utilize for future use.

DETAILED PLAN OF ACTION

OBJECTIVE STRATEGY PERSON

RESPONSIBLE

TIME RESOURCE

Identify the problems with

the current direct selling

strategies

Develop a clearly defined plan consisting of actions to be

taken to improve direct selling

Avon Management 3-4 months Thru this, the company will have a guideline to use

their resources effectively

Make Avon’s website more

customer friendly

Redesigning the website

IT Department 1-2 months It would cost the company to redesign the

website but later on the benefits of a good website will

be seen.

Use innovation Launching new products in

convention or fairs, which are not only low in

cost but also high in quality

Research and development department, Production Department

6 months The company can use the

appropriated fund it earns. This will

benefit the company in terms of increase in sales

growthTo encourage the public to patronize the

product

Advertise through

media, mail, or the internet

Marketing Department Every 4-5 months

Use the fund set aside for

advertising purposes. Thru

this people will be encourage to buy

and try the product

To ensure that the

representatives contribute to the

company

Provide awards, rewards or commission changes to

representatives if they meet the

quota

Human Resource Department

12 months In this way, the representative will

be encourage to put more effort in selling to get the

reward

To ensure effective

performance of

Proper selection and training of

sales

Human Resource Department

1-6 months The company will incur training cost

but then trained

sales representatives

representatives representative can be an asset to the

companyTo know if the plan has been effective in its

implementation

Follow-up Evaluation

Accounting and Finance Department as

well as the Top management

6 months to 1 year

The company can take an

adjustment in its plans once it has figured out the

difference between the

planned and actual result

Avon Products Inc - 2009

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