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Beauty Inc issue 06/18/2010

Andrea Jung’s piano teacher may not be pleased with her performance—he dropped her as a student after she continually had to reschedule their lessons—but Avon’s board most certainly is.

This story first appeared in the June 18, 2010 issue of WWD. Subscribe Today.

 

A decade into her tenure as chief executive officer of the $10.4 billion company, Jung has evolved the nearly 125-year-old firm from its “Ding-dong, Avon calling” heritage into a technology-enabled direct seller of mass and premium brands that empowers women through earnings opportunities.

 

For his part, the piano teacher told his delinquent pupil, “I’ll pick you up when you retire,” Jung recalls, during a wide-ranging interview in her spacious corner office 27 floors above Sixth Avenue in New York.

 

But though she laughingly recounts the anecdote, the executive shows no signs of slowing down—or retiring— anytime soon.

 

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Geralyn Breig, Avon’s senior vice president and president of North America, recalls, “Last year, when faced with the economic crisis, the company had to make a decision: Do we want to aggressively move forward and try to seize market share or do we hunker down and get more conservative in the moment? Andrea made the decision that we were going to go for it.…She met with the executive committee, set a vision and we aligned on it. This message of ‘yes we can’ started with Andrea and then cascaded around the world.”

 

“Andrea would see her natural leadership style as more the visionary, future-thinking, strategic leader focused on the essence of the brand and what we offer to the representatives,” says John Higson, senior vice president of global direct selling and business model innovation.

 

But when tough times and the global recession emerged, he says, “we watched her go from the big picture down into almost hourly execution.…At that point, she really dug down into the details. She was in weekly steering meetings on the turnaround agenda, and really got into the detail of the tactics and the execution of the daily turnaround in each of the markets, which was a very different Andrea [than] the one who we were used to working with.”

 

Jung’s strategy was threefold. At the beginning of last year, as the economic crisis worsened, Avon emphasized lower-price items in its portfolio, moving these “smart value” products to the front of its brochures. It also launched the most massive representative recruitment campaign in its history, which included a Super Bowl TV ad. Finally, it refocused its fragrance strategy, striking more celebrity and designer scent deals to bolster its premiumprice tier. All the while, Avon maintained its “constant turnaround mentality,” a phrase that has been deeply ingrained in the company’s corporate vernacular since it implemented a multiyear restructuring effort in 2005.

 

The recession “playbook”—in Jung speak—seems to have worked. In Avon’s most recent quarter ended March 31, revenues rose 13.9 percent to $2.49 billion from $2.19 billion. Beauty sales gained 14 percent to $1.78 billion, compared with the year-ago quarter, on active representative growth of 6 percent, which includes gains in all regions but China.

 

Avon expects to achieve at least midsingle-digit annual revenue growth this year, excluding the impact of foreign currency rates.

 

“We’ve had a lot to do in terms of reshaping the business and the financials, but the purpose of empowering women is something that, day after day, after all these years, continues to not only resonate, but makes me feel more passionate about Avon,” says Jung. “By definition, I’m probably an impatient person, but if you asked me 10 years ago where we would be, some things have happened so much faster than I thought and some things probably took longer because they are structural changes. But a lot of processes and platforms have been built. The brand has come into its own. It’s been an interesting moment.”

 

Jung, who joined the direct seller 16 years ago as president of the product marketing group for Avon U.S., has seen Avon—a global company with more than 6 million representatives across more than 100 countries— weather tough times before: the Russian ruble meltdown in 1998, a U.S. recession in 2001 and the dramatic decline of the Ukrainian hryvnia two years ago.

 

Faced with the current recession, she viewed the brewing storm as an opportunity to attract women looking for a way to make money as the ranks of the unemployed swelled. “Our strategy was to be the solution,” says Jung. “The economy was tough, unemployment was high and we went out to tell the message about what a wonderful opportunity Avon was.”

 

She adds, “There’s a psychographic shift in terms of people wanting to own their own destiny….[By selling Avon,] you are running your own business. The idea that you can’t get laid off or fired is an attractive one. We continue to see our worldwide recruiting numbers grow very strongly.”

 

Earlier this year, Jung, who also serves as chairman of Avon’s board, once again presented an aggressive plan—this time to lay the groundwork for recovery—that included launching new product categories and technologies and stronger support programs for representatives.

 

The idea, says Jung, is to offer the representatives more to sell so the customer orders more, and the basket size— and the company—grows.

 

More products, particularly those at higher price points, are a cornerstone of Avon’s plan to retain its broadening ranks of active representatives, which last year grew 9 percent, the highest rate in five years. “If you fall in love with the community, the products and how great the innovation is for the price, then you’ll stay with us,” says Jung. “That’s been our strategy: Bring them in and keep them by giving them more products to sell.”

 

Earlier this year, Avon surprised industry watchers by making two acquisitions—its first acquisition since buying Discovery Toys in 1997. (It has since been sold.) Though small in size, the acquired brands—the premium natural skin care range Liz Earle and the baby care line Tiny Tillia—expand the company’s portfolio into two new categories, natural skin care and baby care, respectively, both of which Jung believes hold enormous potential. “If you study consumer spending on baby care, even in a tough economy, it’s the one thing people don’t give up,” she says, noting that in the U.K., women spend two-and-a-half times more on baby care than they do on beauty. The same is true in the U.S. For its part, Liz Earle gives Avon the opportunity to expand its offering in the premium-price tier.

 

More acquisitions are most likely on the horizon. “Close to the core acquisitions are definitely something we will look at very closely,” says Jung. “We have such a great global footprint, so we’re looking for businesses we can perhaps take global. We really have an opportunity to penetrate the developing and emerging markets quickly.”

 

Avon’s global might is a significant competitive advantage. The company has 90 percent brand recognition around the world, fueled by millions of representatives and robust marketing. Since 2005, Avon has nearly tripled its advertising spending to $400 million in 2008.

 

Research and development is another key focus area. In 2009, Avon spent $66.7 million on R&D, developing new products and improving existing ones. Its global R&D operations are based in Suffern, N.Y., with satellite facilities in Argentina, Brazil, China, Japan, Mexico, Poland and South Africa. Avon plans to open a regional R&D center in Shanghai late this year, which will be its largest outside the U.S.

 

Avon does not break out sales by category, but last year, beauty sales increased 7 percent in constant currency (on a reported basis, sales decreased 3 percent). Within beauty, in constant currency, sales of fragrance gained 8 percent, personal care increased 9 percent and color cosmetics grew by 13 percent. Skin care sales decreased 1 percent.

 

In skin care, Avon has ambitious plans to build its existing Anew franchise—which launched in 1992 with the industry’s first alpha hydroxy acid–infused cream, an ingredient credited with jump-starting the antiaging revolution. “When I came to Avon in 1994, it was one item: the industry’s first alpha hydroxy [acid] cream,” recalls Jung. Last year, Anew was the number-one antiaging brand, and this year, it ranks number two, according to data from Euromonitor Inc., provided by Avon.

 

Jung’s goal is to transform the $1 billion Anew into a $2 billion masterbrand. Recent innovations include Anew Reversalist, a new antiaging range targeting women in their 40s, and Anew Clinical Derma-Full X3 Facial Filling Serum, which is intended to reduce the appearance of wrinkles and regain facial fullness with a formulation that, according to Avon scientists, contains the same injectable grade hyaluronic acid facial filler used by dermatologists.

 

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“We think there’s an opportunity to double [sales to $2 billion],” Jung says. “We can extend it to sun, to men’s, to color cosmetics and hand and body.”

 

On the fragrance front, Avon’s business has grown despite a tough climate in North America. Last year, sales grew 8 percent, outpacing market growth of about 4 percent and driven largely by Latin America and Central and Eastern Europe. Avon’s scent strategy centers around a coterie of celebrity and designer alliances that stem from the turnaround strategy implemented in late 2005. Its fragrance portfolio now includes In Bloom by Reese Witherspoon, Unscripted by Patrick Dempsey, U by Ungaro, Eternal Magic fronted by Zoe Saldana and the upcoming Outspoken by pop star Fergie. Most recently, Avon aligned itself with the fashion house Hervé Léger, best known for its impossibly tight bandage dresses.

 

“There is an authenticity and a belief that as spokespeople, they have the power to talk about their pride in being associated with Avon,” says Jung of the fragrance alliances. “That certainly has translated from an image point of view, and [fragrance] is certainly a high-image category. These brands in the portfolio have really made a step-change difference in our fragrance business.”

 

Hair care presents another untapped opportunity, Jung believes. Citing Euromonitor data, Avon said that, in 2008, the category represented 21 percent of the cosmetics, toiletries and fragrance business for the industry overall, but only 5 percent of Avon’s total sales. Avon will try to develop the category into a major platform by emphasizing premiumprice treatments and a regimen approach by repositioning its existing Advance Techniques line into a masterbrand. As with AHAs in skin cream, Avon believes it has a gamechanging technology—a patent-pending frizz-reducing technology said to mimic the results of an in-salon hairsmoothing treatment—which will launch in a product called Advance Techniques Frizz Control Lotus Shield in July. The serum claims to control frizz for three days. Avon plans to support Lotus Shield with television spots, marking the first time it has supported the hair care category with TV ads.

 

In terms of nonbeauty items, Jung believes jewelry offers an opportunity to polish the company’s image and style authority. “We’ll be more intense on our growth drive for jewelry and accessories worldwide,” she says. “The U.S. has a large business in those categories, but we’re underpenetrated worldwide. That’s something we’ll be expanding.”

 

As she talks about the business, Jung is warm but intensely focused, leaving the Diet Snapple in front of her untouched during an hour-plus interview. She looks intently at the interviewer, and organizes her thoughts into sweeping paragraphs that efficiently punctuate each point she intends to make.

 

For as much as the company has worked to seize hold of growth opportunities within its key categories, Avon has long been criticized for relying on an antiquated sales model of representatives knocking on doors of women who are no longer home, as they have long since joined the workforce. Over the years, Avon has encouraged its representatives with office jobs to sell to fellow co-workers, but the company is still dogged by comments like, “Dingdong, no one’s home,” a play on Avon’s iconic ad campaign from the Sixties, “Ding-dong, Avon calling.”

 

Wall Street, too, has grown impatient as Avon works to turn around its U.S. business, which has struggled over the last decade and accounts for about 20 percent of the firm’s revenue, according to analysts.

 

In the company’s most recent quarter ended March 31, revenue in North America declined 2 percent, dragged down by lower average order sizes. Sales of nonbeauty items—which include categories such as holiday decor and household goods—declined 6 percent.

 

In April, during Avon’s U.S. Sales Leadership Conference, held annually in Las Vegas, Breig outlined a growth plan for the North American market that called for moving deeper in certain categories, namely hair care; entering new ones, as the company has done by acquiring Liz Earle and Tiny Tillia, and retrenching, to some extent, away from nonbeauty segments.

 

The goal is to increase sales to $3 billion, up from $2 billion, with beauty sales targeted to increase to 65 percent from 55 percent of sales, as Avon works to de-emphasize nonbeauty categories, reports Caris & Co. analyst Linda Bolton Weiser, who attended the conference. She writes, “Order fill rates improved in 2009 from abysmal lows, with more improvement expected in 2010 and 2011.”

 

Bolton Weiser notes that studies show 60 million U.S. women want to buy Avon, yet only 10 million do, partly because representative attrition leaves potential customers “stranded.” Avon aims to solve that problem with a pilot program called “Customer Connect,” which gives representatives incentives to submit customer lists for reassignment.

 

Goldman Sachs analyst Andrew Sawyer writes in a research note dated April 19: “North America is a key trouble spot for Avon, with sales down high-single digits in 2009 and operating margin falling to a multidecade low of 6 percent.” He continues, “The company spelled out several initiatives at the Leadership Conference, but we expect limited traction in the near term. We maintain our forecast that North American sales will fall 4 percent to 5 percent in 2010 with profit down 7 percent to 8 percent.”

 

Some industry watchers have gone so far as to question Avon’s relevance in the U.S. market, but BMO Capital Markets analyst Connie Maneaty disagrees.

 

“Direct selling is very relevant, both outside the U.S. and inside the U.S. market. It represents an opportunity for people to supplement their earnings,” says Maneaty. “The ability to supplement household income makes it relevant no matter what you think of the channel.”

 

Avon has worked to make the selling and ordering process easier for representatives, largely by harnessing the Internet and, more recently, social media. Jung has decreed technology the single biggest game changer in the business. “It’s the role of the Internet married with the traditional successful role of the personal relationship that changes the channel and the industry for direct sales,” she says. “It’s the biggest change that allows us to keep up and to continue to make direct sales relevant and new for the next generation, and literally change the productivity opportunity of how much a representative can sell and how easy it is to sell— regardless of whether gas prices are high.”

 

In 14 of Avon’s 100-plus markets, 100 percent of the representatives are online, and many operate e-boutiques or personalized online stores. In the U.S., nearly 80 percent of representatives use online tools.

 

“[The Internet] allows the representatives to do business with the company and with the customer,” says Jung. “It’s a game changer. It simplifies the effort and it changes the experiences. The representative can have more interaction with their customer.”

 

Mark, Avon’s lively beauty and fashion brand for young women, has taken the lead on the technology front by introducing iPhone apps and one of the first digital social selling applications on Facebook.

 

Avon will likely pursue the same initiatives, and all Internet initiatives will also be designed as mobile applications, which are particularly suited for developing and emerging markets where household computers are scarce in comparison with mobile phones.

 

Last fall, during a meeting with analysts, Avon declared it planned to commit $50 million over the next several years to its social networking strategy.

 

Still, Wall Street remains unconvinced. “Technology is great for productivity and for morale, but it doesn’t move volume,” says Deutsche Bank analyst Bill Schmitz, who notes the average representative in the U.S. makes roughly $2.85 an hour per 10-hour work week. “For the Avon representative, the earnings opportunity isn’t compelling enough,” he continues. “Avon has to move into the higher price tier,” where direct-selling competitors such as Nu Skin play.

 

In the midst of trying to drive market share growth across the globe, Avon has been rocked by a bribery probe. Information that alleged Avon executives in China bribed Chinese government officials came to Jung in the form of a letter. In October 2008, Avon first disclosed that it had begun a voluntary investigation into the allegations, and said the company began the investigation under the oversight of its audit committee and conducted by outside counsel. It reported the allegations to the U.S. Securities and Exchange Commission as well as the Department of Justice.

 

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But recent reports that the probe had widened to include all of Avon’s international regions sent the company’s stock down nearly 8 percent on April 13 in New York Stock Exchange trading. The day before, Avon’s stock price had reached $34.76, the stock’s year-to-date high [as of press time]. In late May, the stock closed at $27.06. Avon emphasizes the allegation that triggered the investigation was in China only. Still, questions persist.

 

At the firm’s annual shareholders meeting last month, one attendee declared, “I hope we get periodic updates from the company. This is bad publicity.”

 

Despite Avon’s voluntary actions to dig into the allegations, one Wall Street source said, “It’s an embarrassment.”

 

Jung has taken the crisis in stride. A decade of leadership allows a lot of time for things to go right and for things to go wrong. Reflecting on her years at the helm, she says: “You have to be in something long enough to write a chapter. It’s been a decade of transformation of the company that is positioned to really take off to a new level now. So, I’m looking forward with actually more optimism and energy. On one hand, [the decade] feels like it went by in a flash. On the other hand, there’s been an enormous amount of heavy lifting that we’ve done to take the brand and the channel to where it is today, and these large transformations take time.”

 

Key to her transformation vision is a repurposing of Avon itself, from a beauty firm into the company for women, as reflected in its new mission statement, which was unveiled in May and reads, in part: “This is the company that puts mascara on lashes and food on tables, that fights wrinkles with one hand and breast cancer with the other. That knows the value of a perfect lip, but still opens its mouth and speaks out against domestic violence and for women’s financial independence.”

 

To that end, the company vigorously champions women’s causes, including the eradication of breast cancer and, most recently, domestic violence. In March, Jung announced a $1.2 million grant to Vital Voices and a partnership with various world governments to help combat violence against women, in a ceremony attended by First Lady Michelle Obama and Secretary of State Hillary Rodham Clinton.

 

Since its inception in 1955, the Avon Foundation has raised and awarded $725 million toward these causes, as well as for emergency and disaster relief. And being a part of that is a large part of what drives Jung.

 

“At the very simplest level, I knew from the day I joined that this was an unusual company in terms of its purpose,” she says. “The decade hasn’t been just a great career, but I’m actually able to get up in the morning and make difference.”

 

Jung recalls that, after graduating from Princeton University, where her daughter is now a student, she considered not-for-profit work or joining the Peace Corps. “But I needed to earn money. I needed a job,” she says. “I thought before that the two [paths] were distinctly different. That you had to go into business or, if you were going to do not-for-profit work, you couldn’t do it in a for-profit job. This company has changed that for me. In a way, I feel like I am doing both. I get to have the satisfaction that the work really matters, that it actually makes a difference in society, that it makes a difference for women and in the community, and at the same time, it’s been an extraordinary career opportunity. Not too many people get to do both.”

 

Waving to the dense collection of picture frames that line her office windowsill, Jung says: “If you look at some of these pictures, I’ve been here so long and a lot of the faces have changed and a lot of great new talent [has joined]. Some days I come in and I say, ‘Wow, I’m in a different company, but it’s still called Avon.’”

 

The vision has not changed. “The goal is not just to make people beautiful, but to literally make them economically empowered,” she says. “When you visit other countries, you see women just rising into independence— into not only independent income, but independent thought leadership in their societies. It’s a really great thing to be part of a company that can actually help that.”

 

With sales outside North America accounting for nearly 80 percent of Avon’s revenue, Jung spends a great deal of time traveling—usually visiting one or two international markets a month—to “feel the pulse” of the business in each of Avon’s six regions.

 

For the quarter ended March 31, by region, Latin America’s revenue was up 22 percent on a reported basis; revenue in Central and Eastern Europe climbed 28 percent from the year-ago period; revenue in Western Europe, the Middle East and Africa gained 23 percent, and revenue in Asia-Pacific increased 10 percent.

 

The exception to strong international gains was China, where revenue slid 31 percent, which Avon attributes to a planned transition away from its retail model of beauty boutiques toward a pure direct-selling business.

 

Jung recalls one whirlwind travel day in particular through Central and Eastern Europe in January, saying: “I was in three countries in one day. I had breakfast in Moscow, lunch in Kiev and was in Bucharest late that evening.”

 

Her travel companion on that trip, Charles Herington, Avon’s executive vice president of Latin America and Central and Eastern Europe, remembers, “In four days we had visited six or seven countries. The pace was grueling.” He remembers days that started at 4 a.m. and ended close to 11 p.m. “One night, I saw myself in the mirror and said, ‘I cannot believe I let Andrea see me like this.’”

 

Did Jung show signs of fatigue? “She looked camera ready,” he says.

 

In fact, the executive is known for her flawless appearance, generally comprising red lipstick; smooth, shoulder-length hair, and a strand of gumball-size pearls. Is it any wonder that Mattel made an Andrea Jung Barbie especially for her? The doll sits in a glass case behind her desk.

 

At the same time, though, Jung has remained remarkably down to earth. Breig recalls that on the day of her first business review with Jung, she got a phone call 10 minutes before the meeting informing her that her son had been injured on the soccer field and was being rushed to the hospital in an ambulance. After frantically calling her husband, her nanny and a neighbor to meet him at the hospital, Breig arrived in Jung’s office five minutes late, briefly explained her tardiness and assured her boss she was ready for the meeting. Breig recalls, “Andrea looked at me and said, ‘You have to go home.’ And she called a car to take me to the hospital, which was two hours away.” She continues, “Andrea is aggressive about the business and about the mission and purpose of the company, but she has never forgotten that this is a business that is fundamentally about people.”

 

Herington says, “She expects your best. Her standards are very high.…If you are not on the right track, she will definitely let you know [that] very clearly.” But he adds she’s quick to laugh during fleeting moments of downtime. He recalls that, at a hospital ribbon-cutting ceremony in Brazil, Jung took a tumble and scraped her knee. “As she picked herself up, she was laughing at herself,” he says, adding she even joked that she picked the right place to fall: a hospital.

 

Jung, who also has a 12-year-old son and who sits on the boards of the General Electric Co. and Apple, says she tries to balance work and home by compartmentalizing. “I’m certainly better at it than I was 10 years ago,” she says. “I force that discipline.”

 

She does travel for pleasure, on occasion, and in March visited Paris with her daughter. But Avon called in the form of a group of representatives visiting from Tokyo, who they bumped into on Avenue Montaigne.

 

After a decade of leadership, Jung shows no signs of tiring of the job, saying only: “I continue to be committed to Avon for the long term,” when asked of her plans. Some industry observers suggest she plans to log another decade at the helm before retiring.

 

“She is an incredible visionary leader,” says Higson. “She always has a viewpoint on where we are going—long before anybody else thinks the current method is running out of steam.…She has the ability to paint the big picture: ‘This is the journey and here are all the steps. And when we get there, it will look like this.’ She seems to make it very embracing to take the next step.”

 

Jung says, “I have a real love affair with the company.… The job is never an easy job, but I always find my source of inspiration and source of energy, usually from our field [of representatives].…They are the same all over the world: They come to Avon to make their dreams come true.”

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