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WWDStyle issue 02/25/2011

Several weeks after fielding terse questions from Wall Street analysts following a disappointing fourth-quarter performance, Avon Products Inc. has responded with sweeping changes to its management structure.

This story first appeared in the February 25, 2011 issue of WWD. Subscribe Today.

On Thursday, the direct-selling company said it will reorganize its six commercial business units into two major business groups: the Developed Market Group and the Developing Market Group. The change comes with a management realignment, effective March 1.

The Developed Market Group is comprised of the former commercial business units of North America and Western Europe, the Middle East and Africa, and includes the recently acquired Silpada and Liz Earle businesses. The Developing Market Group includes the former business units of Latin America, Central and Eastern Europe and Asia Pacific, which now includes China.

During the company’s presentation on Thursday afternoon at the Consumer Analyst Group of New York Conference, held in Boca Raton, Fla., Avon’s chairman and chief executive officer Andrea Jung said, “We are implementing a very comprehensive management realignment to sharpen operational focus.” She also outlined the reorganized management team’s 2011 priorities, namely restoring growth in Brazil and Russia, stabilizing the North American business, reigniting the high-margin skin care category and delivering operating margin expansion.

In connection with the organizational changes, Avon made two senior management appointments. Charles “Chuck” Cramb, 64, vice chairman and chief finance and strategy officer, has been named vice chairman of Avon’s Developed Market Group. Cramb will continue to oversee corporate strategy. He will also continue to service as chief financial officer on an interim basis until a new cfo is hired. Charles Herington, 51, executive vice president for Latin America and Central and Eastern Europe, has been named executive vice president of the Developing Market Group.

Both Cramb and Herington, and the yet-to-be hired cfo, will report to Jung.

Avon also made five other management changes connected with the realignment, with two in Developed Market and three in Developing Market, which includes an external search for a new commercial business unit leader to oversee Latin America, Avon’s largest region.

Stifel Nicolaus analyst Mark Astrachan wrote in a research note Thursday, “We believe the realignment reflects the urgency with which the company needs to correct underperforming results in recent years and builds upon management comments on the fourth-quarter earnings call regarding the execution of its business plans. That said, investors are concerned only with results and we continue to believe improvement in operating margin is the key to share price outperformance.” He pointed out that external hires were largely missing from the new structure. “While we believe the realignment may better utilize management, this is effectively the same team that produced underperformance in the business in recent years. As a result, we believe if the new structure does not result in an improvement in results, the credibility of both management and the board of directors could become permanently impaired.”

Prior to the announcement of this new structure, three executives oversaw the six business units, namely Charles Herington, who, as mentioned above, has been promoted to oversee the Developing Market Group; Geralyn Breig, Avon’s senior vice president and president of North America, who will take on a special assignment, reporting to Jung, that is focused on global pricing until midyear, and Bennett Gallina, senior vice president, Western Europe, Middle East & Africa, Asia Pacific and China, who was placed on administrative leave in connection with Avon’s previously disclosed internal investigation into allegations that Avon executives in China bribed Chinese government officials. He subsequently retired on Feb. 22.

Avon’s challenges in its most recent quarter, which Jung said were “executional rather than structural challenges,” prompted analysts to unleash a spate of concerns.

The company’s issues ranged from product outages and delays in Brazil due to an e-invoicing change, imposed in June, coupled with Avon’s aging technology systems to a new tax rule for entrepreneurs in Russia that siphoned off earnings for first-year sales leaders.

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