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Slimming Down at Avon: Company Restructures To Become More Nimble

Avon Products has drafted a plan to overhaul its corporate structure, as part of its multiyear restructuring effort to bolster sales and profitability.

NEW YORK — Avon has taken the first steps to become a more nimble beauty firm.

In the initial phase of its already-announced multiyear restructuring effort, the company said Wednesday that it would consolidate its top management. At the same time, Avon’s chairman and chief executive officer, Andrea Jung, will become more closely involved in the day-to-day oversight of the firm’s business units through the creation of an “office of the chairman,” which also will include president and chief operating officer Susan Kropf.

Avon declined to discuss the number of job losses that will result from the reorganization, which Jung first revealed at the company’s annual meeting in November without providing details. The restructuring is expected to cost $300 million to $500 million before taxes over the next several years, and will have the largest impact in 2006.

“By flattening the organization, strengthening integration and centrally managing the global brand and supply chain functions, we will significantly increase speed and flexibility in decision-making, become closer to our representatives and customers and achieve our goal of delivering world products at world-class cost,” Jung said in a statement Wednesday.

The new structure seeks to make the company more agile and ready to respond to encroaching competition from mass market players such as L’Oréal and Procter & Gamble.

Earlier this fall, the $7.7 billion direct seller reduced its full-year 2005 earnings forecast. It now expects full-year earnings to grow in the low- to midsingle digits. Avon also expects full-year revenues to rise by midsingle digits, and operating profits for the year to be flat to down.

The reorganization calls for a new, “delayered” reporting structure for senior management and the addition of two geographic regions, namely Central and Eastern Europe and China. The aim, according to Avon, is to bring the company’s senior managers closer to key business areas.

Avon now will manage its business through six regions, called commercial business units: Central and Eastern Europe; China; North America; Latin America; Western Europe; Middle East and Africa, and Asia Pacific.

The company also will streamline its brand marketing and supply chain functions into global business units, with regional staff reporting to leaders of these functions.

The leaders of the six commercial business units and the global business units will report to the newly established office of the chairman. Previously, business unit leaders reported directly to Kropf.

“We believe the tone has fundamentally changed, with chief executive officer Andrea Jung determined to make necessary changes to overcome challenges of direct selling in mature markets and increasing competition in developing ones,” wrote Deutsche Bank analyst William Schmitz in a research note following Wednesday’s announcement.

Jung had hinted in November that the effort would include thinning out the company’s top management, integrating global brand and supply chain functions and streamlining administrative services, saying: “There are too many layers between the decision makers and the consumer.”

Savings from the cost-cutting initiatives will be funneled, in part, into increased advertising. The company plans to double its advertising spending by 2008, and increase support for its midtier brands. In 2004, the company did increase its media spending outside the U.S. market by 40 percent, but deceased its U.S. support by 50 percent.

As part of the realignment, Avon announced several executive changes, which will be effective Jan. 1. Bennett Gallina, former senior vice president of Asia Pacific, will serve as senior vice president overseeing China and Western Europe, Middle East and Africa. John Higson, previously area vice president for Central and Eastern Europe, will assume the post of senior vice president for that region. James Wei, formerly vice president of new markets and strategic planning for Asia Pacific, will become senior vice president for Asia Pacific.

On the global business unit side, John Owen, previously senior vice president for Europe, Middle East and Africa, will become senior vice president of global supply chain. Geralyn Breig, former president of the premium chocolate brand Godiva International, will join Avon as senior vice president and brand president, reporting to Elizabeth Smith, Avon’s executive vice president and president for North America.

The effort also seeks to ready Avon for its mission to expand its global reach. The company already operates in 120 countries and aims to increase its presence in new markets, such China and India.