Avon Products Inc SWOT Analysis

SWOT Analysis on Avon Products Inc

 Strategic Evaluation of Avon Products Inc

Swot analysis of Avon Products Inc

Strengths

·         Channel leadership – Avon is the world’s leading direct selling cosmetics and toiletries company.

·         Brand equity –Avon is undoubtedly the best known of all directly sold cosmetics and toiletries brands, and was the leading global cosmetics and toiletries brand in 2006. The company underpinned this by increasing advertising by around 80% in 2006 to US$249 million as part of a turnaround plan launched in late 2005.

·         Strong position in emerging markets – Avon has strong sales and market shares in Latin America and Eastern Europe, enabling it to take advantage of the dynamic growth forecast for these regions.

·         Variety of retail channels – although direct selling is the company’s principal sales model, it also sells via catalogues, shopping mall kiosks, a day spa (Avon Salon and Spa in New York), and online. This multi-tiered approach strengthens Avon’s offer at times when the direct sales channel is encountering difficulty.

·         Product focus – unlike many of its direct selling competitors, Avon is primarily a cosmetics and toiletries seller; although it also sells hair care products, jewellery and apparel, these are an adjunct to its cosmetics and toiletries portfolio and almost all of its sales are cosmetics and toiletries generated. This specialisation gives it strong competitive advantages over competitors such as Amway, whose offer appears muddled in comparison.

·         Portfolio strength – the company’s cosmetics and toiletries portfolio regularly benefits from product developments, which frequently receive favourable coverage in the fashion press, a crucial growth agent.

·         Skin care expertise – Avon’s strong position in skin care, and especially in anti-ageing skin care, which will provide the bulk of the absolute growth of the global cosmetics and toiletries market over the forecast period, provides the company with strong growth opportunities.

Weaknesses

·         Mass-market competition – although the company is keen to readjust its positioning, Avon still remains a mass brand. This part of the cosmetics and toiletries market came under extreme price pressure from mass merchandisers such as Wal-Mart and credible private label offers from chained retailers such as Boots. This has hurt value development over the review period.

·         Dated brand image – despite the substantial leap in adspend, Avon’s brand image still lacks the glamour which increasingly characterises successful brands in the cosmetics and toiletries industry, and consumers still strongly associate the brand with the company’s direct sales business model rather than with its products.

·         Lack of technological authority – many of the company’s core competitors have positioned their products as scientifically and organically based, allowing them to justify higher price positions and make strong claims for their products functionality; these include direct sellers such as Alticor, Nu Skin and Yves Rocher. Avon lacks this, which has hindered price development.

·         Dependence on the US – almost 20% of the company’s value sales in 2006 were in its domestic market, where its sales have been in decline since 2004. The US market is forecast to decline by 26% over 2006-1011 period, suffering in all Avon’s key strategic categories, such as skin care, colour cosmetics and mass fragrances.

·         Weak presence in Asia and Africa – Avon’s presence in Asia-Pacific is weak in comparison with other regions, despite the projected rise in disposable income in the region. The company also remains a small player in Africa and the Middle East, the second fastest growing cosmetics and toiletries market after Eastern Europe.

·         Complex distribution system – Avon’s distribution system becomes more and more complex as the company has to serve the growing number of sales representatives adding new markets every year. This leads to reduced efficiency in its operations, a higher probability of blunders and weaker cost control.

·         Fragile sales model – much of the company’s brand equity resides in its distributors and the relatively low barriers to entry may attract the “wrong” type of distributor. This is especially the case in new markets, where a comparative lack of experience makes brand control far more difficult.

·         Sales channel problems – direct sales has a poor image in the company’s Western markets.

·         Portfolio size – the company has an enormous product line in comparison with other cosmetics and toiletries manufacturers, which heightens the complexity and cost of its operations. The company managed to reduce its line by 25% in 2006, but this continues to be a major focus.

Opportunities

·         Slim-line operation – Avon undertook a substantial restructure in its operations from the end of 2005, purging staff and streamlining global manufacturing. In early 2008 the firm announced another 4,000 job cuts (about 6% of its workforce), on top of a reduction in employee numbers by 10% and management by nearly 30%. Money saved from this rationalisation will be put into research and development and advertising, giving the company the best possible growth opportunity over the forecast period.

·         Restructure and redirection – Avon doubled its adspend between the end of 2005 and 2007 in the US and key emerging markets like Brazil, Russia and China. This will improve brand equity and awareness, and enable Avon to compete better with other leading cosmetics and toiletries manufacturers as well improve prices.

·         Direct channel growth in emerging markets – the already high popularity of direct sales as a profession for women in emerging markets in Latin America, Eastern Europe, Asia-Pacific and Africa and the Middle East is likely to increase in the short term, providing Avon with an opportunity to fuel growth.

·         Growth of the anti-ageing skin care segment – Avon’s has a number of anti-ageing and anti-cellulite skin care products, a category which is anticipated to see high value growth to 2011. Avon is well placed to exploit this, and much of its product development has been in this area, most recently the 2006 launch of its mass-priced Avon Solutions Ageless Results.

·         Emerging markets growth – seeking new customers and developing in fast-growing markets will enable the company to maintain its share in a very competitive industry. Emerging markets in Eastern Europe and Latin America will continue to grow over the forecast period.

·         China – the company had previously dabbled in the Chinese market, stymied by tough market regulations surrounding direct selling. In 2006, Avon gained a direct selling licence and ended the year with over 350,000 licensed Sales Promoters – this represents a strong possible area of growth for the company.

·         Endorsements – Avon could do more to bring its offer into line with branded cosmetics and toiletries manufacturers, given that it lacks the quasi-scientific USPs of many of its direct selling competitors; one aspect of this is develop a “face” for the brand. In 2007, it signed Oscar winning actress Jennifer Hudson to be the spokeswoman of its Imari line’s new scent and Reese Witherspoon to be its Global Ambassador. Avon also undertook a joint venture with couturier Christian Lacroix for the development of two new fragrances, Christian Lacroix Rouge for women and Noir for men.

·         Product development – the company’s solid history of product development will continue to be a strong source of potential growth. Unlike several of its competitors, its product portfolio appears to be as important to the company as the development of distributor bases.

Threats

·         Economic downturn in the emerging markets – Avon derives around 65% of its revenues from markets in emerging regions which are typically faster to enter recession than mature markets. Any severe economic downturn that might occur in the future could have a damaging impact on the company’s sales and profits.

·         Increasing competitive pressure from other distribution channels – Avon faces strong competition from supermarket and specialist retailer chains. As such, consumers now have wider access to a choice of cosmetics and toiletries products, including private label products, which are perceived to offer high quality and value for money.

·         Strong competition for salesforce – intensifying competition for sales representatives among direct sellers over the world has forced all players to increase their incentive programmes, thus denting their profit margins. Avon may also struggle to sustain high recruitment rates in emerging markets in the medium to long term, as economic growth will provide women with increased employment prospects.

·         Market position – Avon remains solidly a mass-market brand; in the long term this makes it vulnerable to private label and mass merchandisers, and inhibits value growth.

·         Pressure from beauty care majors – fierce competition from multinationals such as Procter & Gamble, Unilever, L’Oréal and Beiersdorf will continue to threaten Avon’s shares across all products.

·         Government intervention – in 2006, the US Federal Trade Commission proposed new rules to regulate all sellers of “business opportunities” in the US. These proposals remain in limbo, but this remains a significant threat. Regulatory threat in any of its markets remains a strong possibility.

·         Long-term trade-up – consumer spending power in the company’s emerging markets will inevitably improve in the long term, as will the retail structures which have supported the growth of multinational cosmetics and toiletries brands over the review period. Avon may see sales slacken as consumers trade up to more conventional retail formats – on top of this, rising incomes may also make the recruitment of independent representatives harder, as consumers have less need to add to their finances.

·         Restructuring costs – the restructure of the company, launched in 2005, will ultimately cost an estimated US$700 million a year, although Avon claims that once it is completed, it will save the company US$430 million a year by 2011-2012. However, the restructure is an enormous undertaking, and there is no assurance that any of the initiatives will be successfully met within the planned time periods. This could seriously impact margins for Avon over the forecast period.

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