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NEW YORK (Reuters) – Avon Products Inc’s next chief executive officer will face a litany of challenges. One of the biggest will be to re-energize the iconic “Avon Ladies,” the company’s diminished and often demoralized army of U.S. sales representatives. The world’s largest direct-selling cosmetics company, famous for the “Ding Dong, Avon Calling” advertisements in the 1950s and 1960s, is more in need of a complete makeover than just a touch-up, according to more than a dozen sales “reps.” In interviews, they called for improved commissions, a break on what they pay for brochures, less pressure on them to recruit new reps, and more exciting products to compete with popular brands like LVMH’s Sephora. Avon is searching for a new CEO to replace Andrea Jung, 53, who is stepping down after years of U.S. sales declines and, more recently, poor performances in key markets such as Brazil and Russia. The company also faces a federal probe into whether it broke U.S. anti-bribery laws overseas. The yet-to-be-named CEO will have the large task of overseeing a major review of Avon’s business planned for this year. He or she will have to start by winning back the confidence of sales reps like Joan Dikowitz, a 63-year-old school bus driver from Tilson, New York. Dikowitz, who sells Avon products for extra cash, says she makes about $300 a month in commissions, barely half of what she used to earn a few years ago. “It’s not as lucrative. Absolutely,” Dikowitz said. She sees little potential in the business and no longer bothers to hunt for new customers.The number of active Avon reps in North America fell 8 per cent in 2011, leaving an estimated 420,000 in the United States.
Many say Avon’s direct sales model is outdated, as more Americans these days buy their makeup and perfumes at drugstores and specialty retailers. The company’s North American sales fell nearly 20 per cent to $2.11 billion last year from 2007.
The decline pushed the North American unit to an operating loss in 2011.
Shares of Avon, which is cutting jobs, have plunged nearly 50 per cent over the last year and a half. The company is worth only about $8 billion today, down from an all-time peak of $21.8 billion in June 2004.
The company has said Jung will stay on as executive chairman, at a salary of $1 million per year, because she motivates sales reps.
Born in Toronto and educated at Princeton University, she became CEO in 1999. She is fond of designer suits and pearls, and hobnobs with celebrities such as Reese Witherspoon and Patrick Dempsey.
Pat Eressy, who has been selling Avon’s lipsticks, mascara and fragrances for 47 years, said Jung had been too focused on her own profile, to the detriment of the company. “That’s a turn-off,” said Eressy, 75, who lives in Worcester, Massachusetts. She remembers how former Avon CEO James Preston years ago visited each table on a company cruise and made the reps feel that they, not the executives, were the key to the company’s success.
In contrast, Jung gave Eressy the impression that she thought reps were lucky to be working for Avon. “They need to show more appreciation, like they used to,” Eressy said.
COMPETITORS DO BETTER
New York-based Avon began in 1886 when door-to-door bookseller David McConnell found that the perfumes he mixed himself were popular with his customers. His company soon began providing women with one of the few ways they could make extra money or run their own businesses.
But in recent years, direct sales of cosmetics have been dropping in the United States. Beauty products and jewelry sales accounted for 19.4 per cent of all U.S. direct sales in 2010, down from 33.6 per cent in 2005, according to the Direct Selling Association.
By contrast, direct sales of other products, such as clothing, dietary supplements and cookware, are all growing, helping companies like Amway and Tupperware Brands Corp. But forays beyond beauty products floundered at Avon. North American sales of its home and fashion lines fell 7 per cent in 2011; the Silpada jewelry brand that it bought in 2010 has been a disappointment. The company gets 73 per cent of its sales from beauty products, but has even lagged behind rivals there. Last year, global sales at Mary Kay rose 15 per cent, compared with Avon’s 4 per cent gain, to $11.3 billion. At Amway, Artistry cosmetic sales rose 40 per cent over the last two years in North America. Jung has had her successes, including rapid overseas growth early in her tenure. But she also oversaw two ineffective corporate revamps, and sales in emerging markets like Brazil and Russia are now slipping.
In 2011, the number of reps fell 1 per cent to about 6.4 million worldwide. Many experts have faulted Avon’s board, saying that keeping Jung on in any role is an impediment to lining up a successor.
“Once you made the decision she was to leave, she needed to leave,” said Charles Elson, director of the John L. Weinberg centre of Corporate Governance at the University of Delaware.
Jung “has made the commitment to maintain and continue to strengthen the company’s key relationships,” a spokeswoman said. “This is critical during a management transition.” Avon declined to comment further for this story.
A BIGGER CUT, PLEASE
Critics blame Avon for many of its problems. The company has confused customers by darting between the higher end and affordable, pulling back on advertising, and failing to generate excitement with new products, some analysts and reps said. Some sales reps also complained about Avon’s commission structure, saying friends working for rivals do better. Mary Kay’s website, for example, promises prospective reps that they will earn 50 per cent of whatever they sell. Avon reps, who include a small percentage of men, have to sell at least $50 worth of products per order to earn any commission, and $1,550 before earning 50 per cent. For an Avon rep, a key to success is recruiting other reps: Bonuses are based on the number of recruits and their sales. Some reps feel penalised if they don’t have a knack for recruiting, although there is no obligation to do it. “I was part of Avon’s 99 per cent — where you’re doing all the work — and there’s that 1 per cent getting the luxury cars and bonuses and fancy vacations,” said Birdie Jaworski, who wrote a book called “Don’t Shoot! I’m Just the Avon Lady!” about her experiences as a rep in Southern California from 2003 to 2008. After costs like buying brochures and samples, Jaworski, who now lives in Albuquerque, New Mexico, was barely making minimum wage. Eressy said too many nonbeauty products, such as Disney watches, have a capped commission of 20 per cent. In its latest annual report, Avon said competition for good sales reps “can be intense.”
To address the problem, the company cut its advertising spending by 22 per cent last year to spend more on developing e-commerce tools, such as e-brochures and software, to help reps run their businesses more efficiently. Avon also may give reps in some markets better discounts and is re-examining what it charges for items like brochures. For all of Avon’s problems, reps still say they have a deep attachment to the company and what it has meant to women.
Jung also has her fans. One of the few women CEOs among the Fortune 500 group of companies, she sits on the boards of Apple Inc and General Electric Co. Letha Bissonnet, 66, of Pasadena, Texas, said she wholeheartedly supported Jung and the company. “I’ve been doing Avon for 25 years,” said Bissonnet, who oversees 500 reps. “I am my own CEO.” She says she makes “a big six-figure income.”
But analysts say few Avon Ladies make that kind of money.
The company contends with fierce competition from drugstores such as CVS, whose makeup sales nearly doubled in the last four years. And customers are going increasingly to specialty chains such as Sephora, Sally Beauty and Ulta Salon, Cosmetics and Fragrance.
Sanford C. Bernstein & Co analyst Ali Dibadj questioned the long-term viability of the U.S. market for Avon. “Direct selling becomes more antiquated the more retail infrastructure there is,” he said, “especially when a brand isn’t coveted.”
(Additional reporting by Lisa Baertlein in Los Angeles and Jessica Wohl in Chicago; Editing by Lisa Von Ahn)
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