This was the third cases study from my Leadership & Management course. It’s on Andrea Jung, CEO of Avon, as she struggles to revive the cosmetics giants flagging sales.
After 4 years of strong growth under Andrew Jung, Avon’s earnings have gone flat and the share price has fallen more than 30%. Because 70% of Avon’s revenue are in overseas developing markets, any flat growth means that Avon is losing to competitors and will eventually collapse if growth cannot be renewed. Andrea Jung has charged herself with renewing growth like any outsider would, while using her knowledge of the company to streamline the process.
Jung had faced similar challenges at Avon when she became a member of the executive team in the mid-nineties, as she pressed for unified production schemes instead of the splintered manufacturing they had in dozens of local markets. By the time she became CEO in 1999, she had largely succeeded and the company was well off. By more directly aligning the company with its mission — which she interpreted as being to improve women’s lives — the company gained an improved image through donations to breast cancer research and self-testing campaigns run through sales representatives.
The company’s revenue and profits also increased dramatically after Jung’s ascension, as she significantly strengthened research & development in all areas. With help from Susan Kopf, Avon reduced its material suppliers from 300 to 75, and made ordering and fulfillment significantly more automated. While this allowed them to introduce online sales, Jung deliberately kept that opportunity low-key in order to retain direct representatives as Avon’s main outlet —and the faster ordering system meant that sales representatives could spend more time selling and less time filling out forms.
Unfortunately, by 2005 Avon’s growth had largely stalled. Competitors in developed markets offered better prices by selling online and through stores, while a number of competitors had entered emerging markets, providing Avon’s first real competition in an area which its continued existence depends on. Avon needs to reinvigorate growth if it hopes to remain relevant in the developing world.
Opportunities & Threats
Avon faces a number of threats. Most notably, the company gets 70% of its revenues from overseas markets despite the fact that a consumer in the USA spends nearly twice as much on toiletries and beauty as a single Russian, four Chinese, and four Indian consumers combined (notice that these numbers pair overseas consumers with US consumers in rough proportion to total population). The fact that overseas markets are growth markets does not mitigate Avon’s significant decline in US sales, and companies that maintain strong domestic sales will be better-financed in their attempts to capture other markets. Nonetheless, Avon’s pre-existing sales representative network in these countries give it a strong organizational advantage in making new clients.
China’s WTO accession has required it reinstate direct selling, and Avon’s expertise in direct selling (and previous sales network) give it a great opportunity with important company strenghts in that country. Of course, the ban on direct selling might have accustomed consumers to store shopping, in which case competitors with a stronger retail focus may have the advantage. Avon will need to remain nimble if it hopes to remain relevant in the large and growing market that is China.
Decisions To Face
Jung & Avon face a number of important decisions. As always, Avon, could expand into retail marketing. The company is organizationally resistant to such an idea, but retail offerings cost less and produce higher profit margins since they do not require sales representatives, with the requisite commissions.
Avon further needs to decide how it will approach China. At present, the company maintains retail stores there, but China has recently lifted restrictions on direct selling, so Avon could attempt to rebuild its sales representative network throughout the country.
Additionally, Avon must determine why demand has slumped so sharply in the developed markets. Are its products directly unpopular? Are there not enough sales representatives? Are high-volume consumers of beauty products unaware of the brand?
Finally, Jung could again redirect Avon’s capital, as she did at the beginning of her tenure by dramatically increasing research & development.
Alternatives & Analysis
These decisions turn out to be a choice between 2 main alternatives: Avon can either focus on the domestic or the overseas markets, and it can do so while either maintaining its direct-sale methodology or by switching to a retail model.
Avon has a great deal of expertise in the direct-selling method, but direct-selling is becoming less and less viable in the developed markets as consumers have become accustomed to retail shopping and resentful of salespeople knocking on their door. Nonetheless, Avon’s previous retail entrance strategies have failed rather dramatically, and something would need to change that. Jung demonstrated the impact a single well-placed individual can have, so if she could poach a retail expert from competitors Avon might be able to formulate a successful entrance strategy.
In China, Avon can either maintain its focus on the retail outlet it built up during the direct-seller ban, refocus entirely on sales representatives, or pursue a hybrid approach. Focusing on sales representatives plays to Avon’s current core strength, but limits their market range until the sales force has successfully built up. A hybrid approach could allow Avon to maintain contact with consumers who expect a store-buying experience, while limiting sales representative resentment by growing the network in areas currently without retail options.
In other markets, Avon has established sales forces and absolutely no retail exposure. Clearly a retail entrance that angers the sales representative network is inviable, but carefully-limited retail agreements could increase market penetration — for instance, by selling Avon products through existing general stores in small towns without a sales representative.
Other alternatives exist, but these are the main lines to choose along. Any decisions will of course depend on the result of market research: if Avon’s domestic sales have slumped because young buyers have never heard of the company, marketing in conjunction with a retail entrance or sales representative expansion could solve their problems; if there are not enough sales representatives in certain kinds of markets then a retail entrance in appropriate store chains might be the proper solution.
Avon should continue its focus on direct selling overseas while executing a viable retail strategy in the United States. Avon cannot abandon its core competency in direct sales, but this method is clearly failing in the United States. In attempting this, Jung should bring in an outsider with strong retail experience who can help reshape the company’s domestic operations. Depending on the results of market research, this retail expansion should be either a subset of Avon’s products, a new line, or a subsidiary with discreet or removed Avon branding.
In overseas markets, Avon should work to expand its sales representative force and work with them to develop and better serve local competencies. If, for instance, local representatives are serving customers in a bartering capacity then selling new items for their profits, Avon should train similar representatives in this technique and provide tools to make the exchange as productive as possible. For instance, providing simple log sheets so sales representatives can note typical prices for different items might increase their effectiveness, as would providing new representatives with a typical exchange rate for different items. Incorporating these capabilities into their ordering system would allow sales representatives to notate their bartering alongside their product orders, letting them identify and purchase the most profitable items more easily.
In China, Avon should follow a hybrid approach. It should not shut down existing retail operations, but growth should be strongly tilted in favor of sales representatives, who can travel to villages and other insular areas unlikely to be exposed to retail opportunities.
Critique of Existing Recommendations
Avon’s existing recommendations, produced by Andrea Jung, are serviceable but vague. An increase in research & development is unlikely to go wrong, but her commitment to doubling advertising only works if customers are unaware of the company or it has a perception problem. Increased advertising is unlikely to help any perception problems, since the company is already known to have a commitment to women’s health. Customers may be unaware of the product, but cited product research (greater than 90% brand awareness) indicates this is unlikely to be the case.
A renewed and revamped focus on direct selling (“win with Commercial Edge”) is a good choice in overseas markets, but domestically may cause issues —I suspect US consumers are simply uninterested in a direct sales model, and so this investment is misplaced.
Reducing company size is a risky step, but one that Avon may be ready to take. It has significantly automated many processes since 2000, and if typical turnover has not slimmed Avon down enough since that time, a staff reduction is called for.
Leadership Style & Lessons
Andrea Jung is clearly a change agent, as exemplified by her quote: “The risk is not in being wrong, it’s in being late, in not changing fast enough.” As CEO she has led two significant company reorganizations, and she spearheaded significant product change in her role modernizing the company’s image before that.
Her changes at the company were moderately successful. Avon’s stock price rose to over $40 before the recession, and today the company has revenues in excess of $10 billion annually, with an operating income of over $1.3 billion in the last year (Google Finance).
Farkas, Charles & Wetlaufer, Suzy. “The Ways Chief Executive Officers Lead.” Harvard Business Review on Leadership. Harvard Business School Publishing, Boston MA. Copyright 1998.
Google Finance. “Avon Products, Inc.” http://www.google.com/finance?client=ob&q=NYSE:AVP Accessed April 1 2009.
George, Bill; Mayer, Diana; & McLean, Andrew. “Andrea Jung: Empowering Avon Women.” Harvard Business School. Case 9-408-035. Harvard Business School Publishing, Boston MA. Copyright 2008.