Avon Faces the Winds of Change
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The only thing constant about life is change. The recent shift of management at beauty products seller Avon Products (NYSE: AVP) bears testimony to that very fact. The company will start a new chapter as the era of the popular Andrea Jung, former CEO, present executive chairman and member of the board in the company steps down on December 31 to stay on as a senior advisor. Although, the decision comes a year earlier than expected, given the recent turmoil that the company has been going through, this decision has come as a breath of fresh air to investors and shareholders alike. Avon Products’ shares rose by 7.2% to $17.39 post announcement of Jung’s departure.
The Past Glory
Jung, 54, joined Avon in January 1994 as president of product marketing for Avon U.S. after holding key positions at companies like luxury retailer Neiman Marcus Group. She moved on to become the company’s chief executive officer from 1999 until April before being succeeded by former Johnson & Johnson executive Sheri McCoy.
Jung known for being a brand ambassador for “women in power” had done her bit in popularizing the brand by infusing the much needed energy in the tired brand and attracting direct sales representatives who looked up to her as a role model. She is also known for pushing Avon into new and potentially lucrative markets overseas, including China and Russia. The company’s sales grew exponentially in the first few years of her tenure.
A crusader for women’s rights, she also helped raise more than $800 million for Avon’s charitable programs, focused on breast cancer research and fighting violence against women.
She has been in the Top 10 of Fortune Magazine's 50 Most Powerful Women in Business list from 2007 through 2010. Her popularity was a key factor in her retention as the chairman of the struggling company for longer than expected.
The Faux Pas
After promising profits in the first few years of her tenure, Jung lost her magic. Sales started dwindling in 2005 after numerous failed attempts by Jung in restructuring and reworking the company’s different policies. The fact that Jung’s background was in marketing, not operations, also started becoming a liability for the company.
The company got entangled in a messy lawsuit when it became the subject of a Securities and Exchange Commission investigation into potential bribery of foreign officials, which is continuing.
More recently, Avon started losing business in Russia, China and Brazil, the fastest-growing markets for beauty products.
Under Jung’s wings, the company gave a miss to a takeover offer from Coty the maker of perfumes by Beyonce Knowles and Heidi Klum, which went on to withdraw their $10.7 billion bid for Avon on May 14, citing delays by Avon and unwillingness to engage in negotiations. Shares of Avon were down nearly 25% since Coty withdrew its $24.75 a share bid in May.
The intense competition
The beauty market is one of the most volatile markets. With Avon treading on unsure grounds, this can be seen as a boon for its direct competitors L’Oreal (NASDAQOTH: LRLCY.PK) and Revlon (NYSE: REV). Currently L’Oreal is leading the pack with a market cap of $74.98 billion followed by Avon with a market cap of $7.51 billion and Revlon with a market cap of $782.09 million.
Revlon maybe going through its own share of problems, but as far as Avon is concerned, it is still a pretty big force to reckon with. The quarterly revenue growth (y-o-y) has been positive for both Revlon and L’Oreal, but Avon’s negative growth is turning out to be a real cause of worry for the investors.
The unique thing that distinguishes Avon from its competitors is its sales strategy of having direct sales representatives instead of selling through retail stores. Whether that will continue to work in its favor or not remains a question. However, the recent alteration of Avon’s management is sure to bring about a change in the market positions. How and in which direction - only time will tell.
The Fresh Faces
Fred Hassan, a well regarded turnaround expert and dealmaker who is lead independent director at Avon, will assume the role of non-executive chairman on January 1. Known for his unconventional way of working and his sense of detailed analysis, a lot is being banked upon his presence in the company.
Hassan, who has been on Avon's board since 1999, is also a managing director and partner at private equity firm Warburg Pincus. He was chairman and CEO of Schering-Plough Corp from 2003 until 2009 and has been part of major sell offs and acquisitions in different companies affecting their overall health positively.
Hopes are also pinned on Sheri McCoy, the present CEO of AVON (since April this year) who has already started in her efforts to stabilize revenue, restructure product pricing and imbibe technology and service (a sector that has been a laggard for AVON) in the most efficient manner.
The market hopes that the duo is able to give the much needed turnaround that the company is in dire need of.
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