GROUP- F3 CASE STUDY I

 Company History  From Charles Perrin to Andrea Jung  Improvement of Avons Image  Current Situation

Company Name2000 Revenues (Overall) 2000 Revenues(CFT) L'Oreal $10.6 $10.3 Proctor & Gamble $40.1 $7.3 Estee Lauder $4.4 Avon$5.7 $3.5 Alberto-Culver $2.3 $2.2 Coty$1.8 LVMH$9.7 $1.7 Johnson & Johnson $29.1 $1.5 Revlon $1.5 Mary Kay $1.2 In billions

Company Sales Revenue Sales Growth from FY2007 Gross Profit Operating Margin Net Profit Margin % of Sales from Outside U.S. Avon Products (AVP) $10,6907.5%$6, %8.2%76.7% L'oreal (LRLCY)$24,6002.8%$1, %11.1%76.2% Estee Lauder Companies (EL) $7, %$5, %6.0%53.1% Bare Escentuals (BARE) $ %$ %17.6%1.2% Revlon (REV)$1, %$ %4.3%42% Elizabeth Arden (RDEN) $1,1411.2%$ %1.7%39.8% FY 2008 AVP vs. Competitors (millions)

Developing a Strategic Vision and MissionSetting ObjectivesCrafting a StrategyImplementing and Executing the Strategy Evaluating Performance and Initiating Corrective Actions

 Vision- to be the company that best understands and satisfies the product, service and self-fulfillment needs of women globally.  Mission- We will build a unique portfolio of beauty and related brands, striving to surpass our competitors in quality, innovation, and value, and elevating our image to become the world’s most trusted beauty company.

 Grow global beauty category sales.  Greater career opportunities.  Reduce inventory levels.  Improve Operating Margin by basis.  Launch new products.  E-commerce opportunities.

1997 – Sales growth9%10%+ Beauty growth10%12%+ Operating margin improvement +3.2 points50+ basis points/year Cash flow from operations $350 million$700 million Capital expenditures$200 million (2000) $225 million average/year Financial Objectives

 Basic EPS for 2009 is 0.47%  Dividend growth rate is 13.75%  Declared a regular quarterly dividend on its common stock of $.21 per share, payable September 1, 2009

 Respond to changes  New market conditions  Grow business  Achieve performance targets

 Market transformations  Supply chain improvement  Sales leadership  International expansion

 Financial problems  Problems for the customers  Poor logistics  Effect of crisis  Failure of non core business

“ our vision is to be the company that best understands and satisfies the product, service and self-fulfillment needs of women globally. Our dedication to supporting women touches not only beauty- but health, fitness, self empowerment and financial independence.”

 Change in customer need and expectation  Aggressively pursuing promising markets  Strategy to outrun competitors  Focus on profitable retail business and e- commerce  Invest in growing product category

Product Category Hair care Fragrance Cosmetics Skin care Bath products and other personal care Total 2005 Dollar value Percent of (in billions) total $ % $39.8

Marketing Transformations Active beauty product SKUs 5,000 4,000 Breakthrough innovation frequency 3 years 2 years Product development (average) 88 weeks 50 weeks Campaign development 52 weeks 26 weeks Supply chain improvement Days of Inventory Forecasting accuracy Baseline +30% Order fill rate 68% 90%

Sales Leadership Leadership down lines per U.S. district Representatives per U.S. district Growth in active representatives 2%-3% 2%-3% Growth in average rep earnings -- 25%-30% E-commerce and Internet E-Representative participation 13% 50% Representative support cost savings $3 million +$20 million Geographic market penetration U.S., Japan, Taiwan 20 markets International Local currency sales growth 50% 20%-30% Representative growth 25% 20%-30% Sales outlets (China) 3,463 6,000

Financial 1997 – – 2004 Sales growth - 9% 10%+ Beauty growth- 10% 12%+ Operating margin improvement points 50+ basis points/year Cash flow from operations - $350 million $700 million Capital expenditures - $200 million (2000) $225 million average/year

 Reduce inventory which is currently at 40% of total current asset.  Reduce the long term debt which had increased 58% in 2000 vis-à-vis  To improve the operative margin by 0.50% every year to achieve higher net profits.

 Advertising, marketing and promotional strategy  Develop new products  Improve its image  Use of technology to aid sales representatives  Development of Avon’s Leadership Opportunity program.

 eRepresentative sales concept  Information technology and use of the Internet  Concept of Sales Leadership  Beauty Advisors program  Store-within-a-store concepts Strategy Under Current CEO: Andrea Jung

GLOBAL INDUSTRYCOMPETITORS STRATEGIES  highly fragmented with distribution channels beyond direct selling  Market was segmented by consumer demographics and by geography.  Country-specific differences in consumer preferences  Sales driven by product innovation  product innovation ;  Acquisition;  Diversification;  Expansion Products were available at  discount stores, supermarkets, and drug stores  department stores, retail stores & Internet

The changing face of Avon’s sales force is shown below: Employees as On Dec 08: AgeNew RepsTotal Reps Under 3552%17% 35+48%83%

 Increase in company’s expenditures for advertising by 50% to $90 million in 2000  The U.S. brand image indexes of Avon and selected competitors in June 1999 and March 2001 are shown below: BrandJune 1999March 2001Change Cover Girl Clinique Revlon Mabelline Avon Mary Kay96 -- L’Oreal Oil of Olay8693+7

 Avon’s new products aided in market share gains of 0.8% in color cosmetics, 2.2% in anti-aging, and 0.3% overall share.  Avon’s sales by product category for the years ended Dec. 31

 Avon held the title of world’s largest direct seller of beauty related products  Avon’s common shares had increased by approximately 90%, while indexes such as the S&P 500 had fallen by nearly 25%.  Avon’s sales growth had increased from 1.5% to 6%  BPR had saved more that $400 million in costs and improved operating margins by more than 350 basis points.  international sales grew at double-digit rates

 In China,  Avon brand awareness improved from 41% to 53%,  annual usage rates increased from 26% to 31%,  sales improved by 47%  In EEMEA markets,  Share makeup subcategory from 8.7% to 11.5%  increased its share of fragrance sales from 6.5% to 9.3%,  market share in the skin care category raises from 7.7% to 10.6%

REVENUE 2009

Misstep:  Avon pursued business diversification to boost its revenues by acquisition of Tiffany & company in 1979, Giorgio Beverly Hills and Parfums Stern in  This diversification left the company with a large amount of debt and in a vulnerable financial position.

Problems:  Any initiative by the company to expand beyond its direct sales model is met with fierce opposition by its sales representatives.  Any effort to sell via the Internet and through retail channels has been rejected by the representatives.  Brand name reputation  Dependence on one sales model  Single line of business  To many manual processes

 Jung’s ‘Pre-CEO’ association with Avon  Jung’s ‘Post-CEO’ performance  Corrective adjustments  New developments  Financial Results

AVP FY Financial Metrics (millions) MetricFY2008% ChangeFY2007% ChangeFY2006 Net Sales Revenue $10, %$9, %$8,764 Gross Profit $6, %$5, %$5,261 Operating Margin 12.5%3.7%8.8%0.1%8.7% Net Income $ %$ %$478

AVP Q2 FY2009 Financial Metrics (millions) Metric 3Mon ended Q2 FY2009 % Change 3Mon ended Q2 FY2008 Total Revenue$2, %$2,736 Gross Profit$1, %$1,718 Operating Margin7.4%-6.3%13.7% Net Income$ %$234

 Working hard and earning her wants and desires  Decisiveness and no nonsense style  Ambitious  Good balance of aggressive and humane approach  Generating innovative options to solve problems  Taking initiative wherever necessary  Focused  Ability to deliver  Never say die spirit

 To sign contracts with premium brand ambassadors  To increasingly employ more male sales representatives for men’s products

 To progressively increase expenditure on R&D  To reduce costs of production  To conservatively increase the dependence on debt  Improve the current ratio of the company  Implement more effective risk management techniques

 In their vision they could along with women also cater to the beauty needs of men

STRATEGYCHALLENGES  To be more focused in its growth  To focus & innovate more in areas of CFT market which show promising growth  To resort to a little more aggressive retailing  To focus more on Mass merchandisers and specialty stores in retailing  To hedge foreign currency and interest rate transactions  Increased costs of retailing  Deal with the huge sales force  Increase in borrowings  Forex fluctuations

CAGR Channel Dollar value (in billions) Percent of total Dollar value (in billions) Percent of total(1996 – 2000) Supermarkets$ %$ %+3.6% Drug stores Mass merchandisers Department Stores Specialty stores

CAGR Product Category Dollar value (in billions) Perce nt of total Dollar value (in billions) Perce nt of total Dollar value (in billions) Perce nt of total (1996 – 2000) Hair care$ %$ %$ %5.3% Fragrance Cosmetics Skin care Bath products and other personal care Total$25.7$32.5$39.8

 Political, legal and regulatory risks in the Global Market  Currency Fluctuation Risks  Interest Rate Risk  Credit Risk of Financial Instruments

Andrea Jung has achieved success through "not by abandoning the seemingly outdated Avon Lady, but by reviving her"