Tom Janssens

Soyung Pak

Chung Yun (Grace) Park

Jennifer Pittacora

“I love working with companies of great heritage and

repositioning them for growth.” Andrea Jung, CEO Avon

Introduction and Current Situation:
Avon Products, Inc. is a global manufacturer and marketer of cosmetics, fragrances, and toiletries

(CFTs), gifts, decorative items for the home, and health and nutrition products (Exhibit 1). Utilizing a direct-

selling strategy, Avon distributes and sells its products in the United States through approximately 452,000

independent sales representatives (“Avon lady”) who purchase products directly from Avon and re-sell them to

the customer1. The fifth largest cosmetics company, Avon increased its sales in 2001 and 2000 by 5% year-over-

year, as a result of a 3% increase in active sales representatives and an increase in unit sales in CFTs. 2 In 2000,

Avon launched officially launched beComing (Exhibit 14) - a product line to be sold at JCPenney -, and thereby

entered the retail playing field.

Despite its positive performance, the future success of Avon will depend largely on the firm’s ability to

remain competitive and to acquire new customers in an industry that is becoming increasingly hypercompetitive,

as evidenced by its dependence on intensive advertising and new product innovations. With both an aging

customer base and sales force, as well as softening direct-market segment, a refurbished market position is critical

for Avon going forward as the firm needs to expand and replenish its customer base with younger, professional

consumers, among whom the Avon quality perception ranks poorly (see Exhibit 3). Avon’s task is made more

complex by its commitment to the direct-sales channel, which generates 95% of its revenue. “Without upgrading

its direct sales force with younger reps, Avon's sales base would get increasingly older and the demographic of its

customer would be very similar to that of its rep. Avon still has a long way to go in lowering the average age of a

rep, which is 48. Simply, Avon needs younger reps to help recruitment and beauty sales” 3. In other words, in its

quest for the new customer, Avon must reinvent itself while continuing to offer products that appeal to its

current customer base to make certain that it does not alienate the Avon lady.

Scope

We believe that Avon is unable to compete head-to-head in the broader retail market due to a lack of

financial resources compared to their competitors (see Exhibit 7). Instead, Avon should (1) use a niche-oriented

strategy to increase/establish market share by appealing to the younger segments (teens and working

professionals); (2) leverage its direct sales force to target the growing, less mobile, older segment (Baby

Boomers/55+); and (3) focus its product line on CFTs.

Objectives and Goals

In order to reach teens/working women, Avon should expand/ introduce kiosks that offer value priced

“Avon” branded products to the teen segment and mid-priced “beComing” branded products to middle-class

working women. The firm should also seek to leverage its strength in direct sales to increase sales to the

55+/Baby Boomer segment by introducing new product innovations that specifically target this segment’s needs.

Additionally, growth in the direct sales segment should also be obtained by increasing sales to existing customers

by attracting/retaining sales representatives with creative incentive programs. In addition, we believe that Avon

should seek to reduce the number of non-beauty related products and increase sales in CFTs, its core line, to

concentrate on their core competencies and allocate their resources to establish Avon as a strong cosmetics

company.

Resources

A key element to Avon’s past success is the intimate, unique relationship that Avon ladies are able to

forge with their customers; therefore, the firm should el verage direct sales representatives in targeting the

55+/Baby Boomer. The firm should also leverage Avon’s brand name and its reputation for having value priced

products in targeting the price sensitive teen market.

Competitive advantage

Avon ladies may be the original customer relationship management vehicle, as they are able to customize

each customer’s shopping experience. Therefore, Avon should continue to encourage the personalized customer

service offered by its Representatives (direct selling approach). Avon’s ability to have control over the channel

(sales reps have no bargaining power with Avon) and set reasonable prices for its products (low cost producer)

are also significant factors in establishing and maintaining its competitive position.

Synergy

Avon should strive to take advantage of the brand equity that Avon has with older women, most of

whom grew up with Avon products. The firm should also el verage existing research and development to

develop/introduce higher quality “beComing” products and “Avon” branded teen products.

Analysis

Unfortunately for Avon, the direct sales market for U.S. has been shrinking due to the customer's

changes in lifestyle. Labor force participation by women increased from 49% in 1970 to 72% in 19955. Working
women spend less time in the home and have less free time which is likely to negatively impact the direct selling

model Avon currently uses. Also, the disposable income of these women has increased which is likely to cause a

substantial number of women to move to purchasing more expensive, up-market products with higher perceived

quality tha n are available in the retail channel. Currently, Avon’s products are priced at the low end with low

perceived quality and therefore would not meet the needs of these women. (Exhibit 2 and Exhibit 3 Survey –

VEL). Additionally, only 9% of women purchase their cosmetics in the direct sales channel (Exhibit 4) and from

our survey results majority of women buy cosmetics in department stores (Exhibit 11). Thus, the decision to

enter the retail channel with the beComing brand via a partnership with JCPenney in September 2000 was most

likely based in part on the shifts in demographics that have taken place within Avon’s core customer base—the

housewife. Entering the retail channel may give Avon access to this working-women segment, but this move

also places Avon in an environment plagued with hypercompetition. With the launch of the beComing line,

Avon essentially attempted to push the Value Equivalence Line out by offering a product line that the firm

hoped would carry the higher quality perception that is typical of products available in the department stores, yet

at a price that is equivalent to cosmetics available in the Food, Drug, and Mass (FDM) channels. By pricing their

products to be competitive with higher-end FDM products (L’Oreal, Neutrogena), Avon is benchmarking itself

against products with lower-perceived quality. However, by selling its beComing line through JCPenney, Avon is

also making a clear quality statement about it’s products to the consumer—i.e., that beComing is priced

competitively with FDM products but offers quality that stands up to department store standards. Indeed, Avon

has described its beComing line as a line of "mass-tige" 6cosmetics, with price points that are comparable to

FDM products (ex: L’Oreal) and 10% to 15% below the entry-level department-store lines.

Avon, however, will find it difficult to play in the fiercely competitive retail arena despite that it is the

fifth largest cosmetics company, as it only has a 3% share. Avon faces competitors such as Estee Lauder,

L’Oreal and Revlon who have significantly more resources to defend their position (See Exhibit 7). Competition

in the industry is especially fierce in the FDM channels where brand loyalty is weak, and manufacturers are

burdened with constantly having to update product lines with “quality” enhancing elements touted by premium,

department store brands (see Exhibit 12). As a result cosmetics companies advertise heavily to create a

perception of product differentiation and to announce new product introductions. With its new position in the

retail channel, Avon will be continually threatened by competitors who have deeper pockets for new product
innovations and advertising (Exhibit 7). It is only a matter of time before competitors will introduce products

that directly compete with Avon’s beComing line or increase the quality perceptions through the advertising or

innovating of existing products.

Because of this, Avon must find a lower cost way to serve its customers while still making its product

available to the younger teen/ working women segments. Avon can do this by licensing kiosks to its

independent sales reps and locating these kiosks in malls. Allowing independent sales reps to operate kiosks

increases their access to customers as well as access to potential sales rep recruits. Kiosks also increase the

financial incentives of Avon sales reps by requiring reps to take on longer-term financial commitments when

licensing kiosks, which should help to reduce Avon’s high sales-rep turnover rates, thereby strengthening Avon’s

relationship to individual consumers.

Kiosks offer another advantage over JCPenney and other department stores in that kiosk may benefit

from a halo effect from the increasing popularity of specialty stores within the cosmetics arena. Department

stores have been losing market share to specialty stores since 1996, as the number of specialty stores offering

premium products (Sephoria, Origins, various Internet sales) have increased. In addition, “sales in specialty

stores grew rapidly as…[specialty stores] gained consumer popularity due to competitive pricing structures,

particularly with premium brands.” 8

By moving away from the department store model and towards the kiosk model, Avon will be located

on the same value equivalence line as its competitors and may fly under their radar screen. Avon should also

introduce products in these kiosks that cater to the teen market. By leveraging R&D for existing products, Avon

could slightly reformulate and repackage its existing products thereby creating a new brand of products targeted

towards teens (perhaps “Avon Fresh”). Avon’s products are already priced at the low end, thus the price/value

equation should appeal to the price sensitive teen market (Exhibit 2). This may also help to establish brand

awareness of the Avon name at an early age and may create loyal Avon users.

Avon should also continue to grow their older customer base since there is another demographic

development in the U.S. - the aging of the baby boomers- by continuing to introduce anti-aging creams, lipsticks,

etc. geared towards this segment. While the 10-49 year old market will stay constant until 2010 the 55+ category

will increase by 25 % in the same period9. The anti-aging skincare segment increased by 29 % in the year 2000 10

proving the importance and future potential of this older segment. The competition has already started to
pursue this segment with premium products such as the Estee Lauder’s ‘Crème de La Mer’ at the top end with

NASA developed formula for $179 and Olay at the bottom end with a price setting of $19.95. This is another

example of hypercompetition (timing and know-how) in the cosmetics industry (exhibit 13). Manufacturers are

always experimenting with new products and the players in the market are quick to imitate the successes of other

manufacturers. Pioneers attempt to throw up impediments to imitation (perhaps through advertising) however,

followers overcome impediments and replicate the pioneer’s resource base. With its direct sales representatives,

Avon is positioned well to serve this less mobile, stay-at-home, aging 55+/Baby Boomer segment.

Conclusion

Ultimately, Avon’s challenge is simple to grasp but difficult to tackle—to play in a hypercompetitive

arena without any competitive advantage, and to acquire new customers without a positive (at the very least, a

value-added) brand image. As stated earlier, we do not believe that Avon can successfully directly compete with

the major manufacturers in the department store retail field. Avon has neither the brand equity nor the capability.

Furthermore, given that the rate of innovation in this industry, as well as that so much of the business is spurred

by “image,” it is unlikely that Avon can “leapfrog” its way to success.

We believe that their kiosk model is the most effective, realistic method for obtaining growth and

seeking new customers. Kiosks complements Avon’s direct sales structure as they will be run by Avon reps, who

understand their customers and the Avon line of products. Secondly, the kiosks may serve to strengthen the

direct sales force by giving sales reps an incentive to stay committed to the firm and their customers. Third, as

the kiosks are run by individual sales reps, they can be easily customized to support the demographic/geographic

needs of a sales rep (ex: more teen-niche oriented products in region A, more beComing products for region B.).

Fourth, kiosks expose Avon to non-Avon users without exposing Avon to the hypercompetitive department

store retail arena. Most importantly, kiosks address the issues non-Avon users cite as barriers to trial: 'Avail-

ability' (64%), 'Image' (20%), and 'Quality'(12%) (see Exhibit 9). Because kiosks are located in malls, they will be

accessible to all consumers. Through the availability, Avon will be able to attract more customers by luring them

to the kiosks, induce them to try and test the 'Quality' of the products, thereby improving the poor-quality Image

of the brand. Hence, we propose that the beComing line should be sold via kiosks rather than at JCPenney to

avoid the heavy competition in the department stores while exposing the line to the mass.
 In addition to the kiosks, we feel that Avon should launch targeted products, such as a product line

geared specifically to the more price sensitive teen segment. At the same time, Avon must leverage their sales

representatives' customer-relationship skills as well as develop new products to retain their current (older)

customer base.

Going forward, Avon will continue to be faced with increasing competition from their 'deep pocket'

competitors. In an industry where sales are fueled by image built from marketing and product innovations, Avon

must increase marketing spending and/or find creative ways to stay competitive. However, at the same time, we

feel that Avon’s entry into retail is a necessary strategic move given the larger threat to direct-sales—the Internet,

which has already been a factor in moving the value equivalence line, offering easier access to cosmetics all along

the value line at lower prices (see Exhibit 3). Indeed, Avon’s own Internet site is a direct competitor to the Avon

lady. As technology becomes more commonplace, working women feel more time constrained, and people

become accustomed to making purchases online, we hypothesize that the Internet will allow retail players to

enter into Avon’s direct-sales space. Though kiosks do not represent the final solution, we do feel they serve as

an effective, efficient “bowling alley” from which Avon can position itself for mass acceptance. Our

recommendations to take Avon from the kiosk-based bowling alley to “Main Street” are found in Exhibit 8.

1
Avon 2000 10K.
2
Avon 2000 Annual Report
3
Deutsche Bank Alex Brown, Avon Products, July 30, 2001.
4
Avon 2000 10K
5
Blau, F.D.,’Trends in the Well-Being of American Women, 1970-1995’, Journal of Economic Literature, Vol 36, No
1 (March 1998), pp 112-165
6
In-house Avon terminology. Mass Market + Prestige = Mass-Tige
7
Avon 2000 Annual Report
8
Euromonitor, ‘Color Cosmetics in the USA’
9
Projections of the total Resident population middle series 2001-2010, US Census
10
Grossman, A.M., ‘Anti-aging products top skin care sales’, Drug Store News, 5/22/2000, vol. 22, Issue 7 p88
11
Projections of the total Resident population middle series 2001-2010, US Census
12
Grossman, A.M., ‘Anti-aging products top skin care sales’, Drug Store News, 5/22/2000, vol. 22, Issue 7 p88
13
Snyder, D.A., ‘Trading in Youth: A look at the skin care industry, DCI Jun98, vol162, Issue 6, P32
 Exhibit 1: 2000 Avon Sales by Product Line

18%

1%
8%

5% 62%
6%

Cosmetics, fragrance and toiletries Fashion jewelry

Accessories Apparel
Watches Beyond Beauty and other*

Source: Avon 10K, 2000

Exhibit 2: Cosmetics Prices by Brand

Brand Lipstick Mascara Blush Foundation Basket price Market Channel

Lancome $18.50 $20.00 $24.50 $32.00 $95.00 High Dept. Store
Estee Lauder $15.00 $18.00 $22.00 $29.50 $84.50 High Dept. Store
Prescriptives $17.50 $16.50 $16.50 $32.00 $82.50 High Dept. Store
Bobbi Brown $18.00 $19.00 $19.00 $25.00 $81.00 High Dept. Store
M.A.C. $14.00 $9.00 $16.00 $22.00 $61.00 Mid Dept. Store
Clinique $12.50 $12.00 $16.50 $15.50 $56.50 Mid Dept. Store
Mary Kay $12.00 $8.50 $7.50 $11.00 $39.00 Mid Direct
Revlon $7.79 $6.99 $9.29 $11.29 $35.36 Low Discounter/Drug Store
L'Oreal $6.99 $6.99 $8.99 $10.49 $33.46 Low Discounter/Drug Store
Neutrogena $5.99 $5.89 $8.99 $10.99 $31.86 Low Discounter/Drug Store
Almay $5.69 $5.99 $7.69 $9.96 $29.33 Low Discounter/Drug Store
Avon $6.50 $6.00 $7.50 $8.00 $28.00 Low Direct
Max Factor $5.99 $5.19 $6.30 $8.59 $26.07 Low Discounter/Drug Store
Maybelline $6.29 $4.79 $5.19 $7.99 $24.26 Low Discounter/Drug Store
Cover Girl $4.99 $4.99 $5.09 $4.69 $19.76 Low Discounter/Drug Store

Source:
- high and mid market brands and Avon from company websites
- low end brands from wallgreens.com
 Exhibit 3a: Cosmetics VEL Perceived Prices

Source: Survey of 48 Make-up users March 2-7 2002

Exhibit 3b: Cosmetics VEL Basket Prices

Source: Survey of 48 Make-up users March 2-7 2002

 Exhibit 4: Distribution by Channel 2000

Channels
Department Stores 31.20%
Discounters 24.10%
Pharmacy/ Drug Stores 20.70%
Direct Sales 9.10%
Specialists 7.40%
Grocery 6.60%
Other 0.90%

Source: Euromonitor - Color Cosmetics in the USA

Exhibit 5: US Share of Market 2000 – Color Cosmetics

22% 23%

3%

14% 23%
15%

Estee Lauder L'Oreal

Revlon Inc. The Procter & Gamble Company
Avon Other
Source: Euromonitor - Color Cosmetics in the USA

Exhibit 6: Direct sales competition

Company Worldwide Founded Worldwide Sales Distribution

Sales Reps 2000 [$B]
Avon 3,500,000 1886 3.50 139 countries
Yves Rocher 180,000 1959 1.60 88 countries
Mary Kay 850,000 1963 1.25 37 countries
Amway 3,000,000 1959 1.20 53 countries
Nu Skin 475,000 1984 0.88 30 countries
Herbalife 2,000,000 1970 0.39 53 countries
BeautiControl 50,000 1982 0.11 North America

Source: Women's Wear Daily, December 14, 2001

 Exhibit 7: 2000 Marketing Spend by Company

4,000 3,770
Marketing Budget [$ MM]

3,000

2,000

1,000
1,000
429
62
-
Estee Lauder Revlon Inc. Proctor & Avon
Gamble

Exhibit 8: Strategic Recommendations to Increase Avon Sales

Sell more CFT’s to current Sell more CFT’s by increasing

customers customer base Sell other items

- Improve availability by
increasing the number of
kiosks
- Loyalty cards / Loyalty
program: reward frequent
buyers with gifts and discounts -
- Improved catalogues and data -
base marketing techniques
- Automatic 60 day delivery
- Launch infomercials to support
Avon lady
- Improve availability by - Avon should not bra nch out of
increasing the number of their core competences
kiosks
- Increase customer reach by
targeted sample mailings
Co-branding
Hold promotional events
geared to teens : 'New face'
event hosted by top teen
magazines
- Launch infomercials to support
Avon lady

Exhibit 9: Reason for not trying Avon

% of respondents
Availability/ Access 64
Price 0
Quality 12
Image 20
Poor Selection 2

Source: Survey of 48 Make-up users March 2-7 2002. Question: what is the reason for not purchasing Avon products?
 Exhibit 10: Minutes of meeting with Avon Representative

Date : 3/5/02
Time : 1:00 pm
Interviewer : Grace Park
Interviewee : Mary Smith* (Sales rep of 16 years)

Meeting Objectives
1. Better understand Sales Rep logistics
2. Acquire Avon brochures and sample Avon products

Findings

1. Customer acquisition - mostly through 'word of mouth'

Avon reps have a wide range of customers, ranging from people on welfare to VP
in a bank.
2. Sales - Meet face to face for 1st time buyers. For repeat customers, customers
place orders with the representatives, who purchase and deliver the products to
the customers.
3. Incentives - Avon reps work on commissions
Ø <$1500/2 weeks: get 50% commissions on all cosmetics products sold
For non cosmetic goods, reps only get 20% commission.
Ø <$9800/2 weeks: reps get admitted to 'President's Club' and get 40%
commissions all their future commissions, regardless of their sales.
4. Labor cost for Avon - There's hardly any cost for Avon to have these sales reps,
i.e. they don't give salaries, and there is no training provided. The new comers
actually have to PAY$10 to get the 'sales guide' from Avon to self-study the
product lines and their incentive system
*Name has been changed to protect her anonymity
 Exhibit 11: Survey Results (Additional Information)

The most popular place to purchase cosmetics were in the order of department stores
(81%), drug stores (38%), and specialty stores (28%).

Pl a c e o f c o s m e t i c s p u r c h a s e

Department store
Drug store
Speciality stores
Di s c o u n t C h a i n
Internet
Di r e c t s a l e s
Gr o c e r y S t o r e s

0 20 40 60 80 100
% of r e s p o n d e n t s

73% of our survey respondents had never tried Avon products. The reasons for the low
purchase were mainly due to 'Availability/Access' and 'Image' of the brand. As many as
54% of the respondents answered that they would purchase Avon products if they were
available in the retail channel.

Other factors that would induce the trial of new brands were;

Factors that would cause you to try new products

Packaging Wont' try

7% 2%
Quality
Salesrep advice
28%
8%
Advertising
12%

Price
15% Word of mouth
28%
Exhibit 12: Channel VEL Line
 Exhibit 13 Example of Hyper-competition in the Cosmetics Industry

RE-SURFACE-the first wrinkle corrector with

1999- Lancôme nanocapsules® of retinol concentrate. Lancôme's
(Department store) patented Nanocapsule technology gently releases
Retinol. Your skin receives continuous wrinkle-
smoothing benefits for up to 16 hours. All the power
of Retinol, the purest form of Vitamin A, is stabilized
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1.0 Fl. Oz. $54.00

1.7 Fl. Oz $70.00

RoC® Retinol Actif Pur introduces a new patented

technology: the encapsulation of retinol in
microspheres, allowing the time-release delivery of
pure vitamin A into the cell for 12 hours while
1999-RoC® (J&J) guaranteeing a optimum tolerance.
(Drug/Discount)
The patented microspheres are multi-lamellar carriers
with a lipophilic core (=from liposomes) which is
perfectly compatible with retinol (lipophilic
substance). The retinol therefore remains fully
effective.

1.01 Fl. Oz. $16.99

Neutrogena Healthy Skin® Anti-Wrinkle Cream with

2001-Neutrogena (J&J) SPF 15 is a Retinol facial treatment with Multi-Vitamins
(Drug/Discount) that visibly reduces the signs of sun damage, such as
wrinkles, fine lines, and age spots.
Reduces visible signs of sun damage. Retinol, Vitamin
A in its purest form, works deep within the skin's
surface where wrinkles develop to visibly reduce the
appearance of fine lines, wrinkles and age
spots. Patent pending formula increases skin firmness
and makes pores appear smaller and tighter.

1.4 Fl. Oz. $10.99

Exhibit 14: Avon’s Retail Line—beComing
''The core to what beComing is all about, is celebrating a woman's personal journey through self-discovery,'' Stuart Sklar, group vice president retail marketing

• Target consumer is purposefully vague

o vs. Estee Lauder’s product lines—Clinique for teens, Prescriptives for working women, Estee Lauder for more mature women
• Product line focuses on usage occasion / image vs. value-added innovation (i.e.- Retinol)

Radiant Mom
Discover beComing's palette of colors that Give moms and their new arrivals the
are as individual as you are. Whether treatment they both deserve with
super-natural, polished and pretty or high- beComing's exclusive mom and baby
glam is your style, we've got your color. formulations. Gentle, mild, effective -
just perfect during this special time.

Luminous Active
beComing Luminous is skincare on call, on Whatever way you play, beComing
demand. Formulated with Lumin8™, a Active gets you going and keeps you
multi-functional "women's cocktail" that going.
responds on demand to skin symptoms,
like - dehydration, blotchiness, sensitivity
and aging - caused by stress and bio-cycle
changes. It balances, energizes,
rejuvenates and provides an array of skin-
improving benefits

Centered Sensational
Indulge your body, your mood and all of beComing Eau de Parfum is the
your senses with Aromahue bath and body essence of beComing you. A sparkling
products. 4 colorful collections of Allover floral incense that's modern, classic
Body Mists, Foaming Body Washes, and subtly intriguing. You'll never want
Replenishing Body Balms, Candles and to wear anything else.
Elixirs. Bright hues, smell-good scents and
feel-good textures. All made to layer, mix
and match.

• Avon’s strength is knowing their customers and Avon’s core products reflect this: (ClearSkin for teens, Anew for mature women)
• Recommendation—Avon should nurture its strength, and continue to offer products that target specific needs of specific markets.