Avon Products Inc. has a message for cash-strapped consumers: We want you.
The direct seller has dialed up recruitment advertising — recall the splashy Super Bowl ad in January — and emphasized its value-priced products.
Avon began to see consumers shy away from higher-priced brands and shift to the value tier at the start of 2009. It’s a trend the firm is working to capitalize on.
During the company’s earnings and investor conference Thursday, Avon’s chairman and chief executive officer Andrea Jung cited findings from a recent study by McKinsey & Co., noting that “87 percent of facial cosmetics users said they did not plan to return to using higher-priced products when the economy rebounds.”
Jung said 38 percent of consumers continue to trade down, and of those who have swapped to lower-priced goods, 46 percent say the products are exceeding their expectations.
“This is Avon’s opportunity, structurally, going forward,” declared Jung, noting that Avon allocates 65 percent of its research and development spending on new innovation, up from 49 percent in 2006.
To court value-conscious consumers, Avon has emphasized its “smart value” items, or products priced at $5 and below. The challenge Jung issued to her team was to offer value items, while also maintaining the strides Avon has made on offering premium-priced products, particularly in skin care and fragrance. Referring to the balancing act, Jung said, “We have to walk and chew gum at the same time.” So far, Avon is succeeding on that front. “The units are up across all price tiers.…We have been able to do this without sacrificing gross margin.”
As part of its turnaround strategy implemented in 2006, Avon has polished its image with a wave of celebrity and designer alliances — Reese Witherspoon, Patrick Dempsey, Courteney Cox and Derek Jeter, to name a few — and most recently singer Fergie, frontwoman of the Black Eyed Peas. Together, Avon’s celebrity-backed initiatives have resulted in $750 million in sales since 2006, said Jung.
She credited that multiyear turnaround strategy with helping Avon to buffer this year’s strong economic headwinds.
When the economy turned sour, “We went on the offense to gain market share,” said Jung, emphasizing Avon’s value offering and recruitment efforts. “It’s working.”
“We have embedded this constant turnaround mentality in the company,” said Jung, repeating a mantra put in place in 2006. “We are fixing the roof when the sun is shining.”
Since Avon unveiled its strategy in late 2005, the direct seller has implemented global supply chain efficiencies; trimmed underperforming stockkeeping units, reshaping the portfolio to include more beauty and less home items; flattened the organization from 14 layers to eight, and expanded management capability and capacity. Jung said, “This organization remains flatter and closer to the market.”
The company also tripled funding for analytics, said Jung, noting, “[Analytics] are fully embedded in every resource and business decision that we make.” As a result, beauty sales during the 2006 to 2008 period have gained 8 percent. In the non-beauty side of the business, analytics suggested shifting out of low-margin items, namely a M&M candy coin bank, to high-margins products, like hair extensions.
Avon’s 2009 restructuring program is expected to result in approximately $200 million in annualized savings by 2012 to 2013, with costs to implement all initiatives expected to be in the range of $300 million to $400 million. As part of its cost-cutting efforts, going forward Avon will have one selling brochure for U.S., Canada and Puerto Rico.
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