Tom Janssens Soyung Pak Chung Yun (Grace) Park Jennifer Pittacora
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 directselling 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-overyear, 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
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 leverage 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.
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
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,
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.
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.
Exhibit 1: 2000 Avon Sales by Product Line
18% 1% 8% 5%
62%
6%
Cosmetics, fragrance and toiletries Accessories
Fashion jewelry Apparel
Watches
Beyond Beauty and other*
Source: Avon 10K, 2000
Exhibit 3a: Cosmetics VEL Perceived Prices
Source: Survey of 48 Make-up users March 2-7 2002
Exhibit 3b: Cosmetics VEL Basket Prices
Exhibit 4: Distribution by Channel 2000 Channels Department Stores Discounters Pharmacy/ Drug Stores Direct Sales Specialists Grocery Other
31.20% 24.10% 20.70% 9.10% 7.40% 6.60% 0.90%
Source: Euromonitor - Color Cosmetics in the USA
Exhibit 5: US Share of Market 2000 – Color Cosmetics
22%
23%
3%
14%
23%
Exhibit 7: 2000 Marketing Spend by Company
3,770
4,000 M M 3,000 $ [ t e g d u B 2,000 g n i t e k 1,000 r a M
1,000 429 62
Estee Lauder
Revlon Inc.
Proctor & Gamble
Avon
Exhibit 8: Strategic Recommendations to Increase Avon Sales Sell more CFT’s to current customers
-
Improve availability by increasing the number of
Sell more CFT’s by increasing customer base
-
Improve availability by increasing the number of
Sell other items
- Avon should not branch out of their core competences
Exhibit 10: Minutes of meeting with Avon Representative
Date Time Interviewer Interviewee
: 3/5/02 : 1:00 pm : Grace Park : 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
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%). Place of cosmetics purchase
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 Groce ry Sto res
0
20
40
60
80
100
% of re sp on de nt 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.
Exhibit 12: Channel VEL Line
Exhibit 13 Example of Hyper-competition in the Cosmetics Industry
1999- Lancôme
(Department store)
1999-RoC® (J&J)
(Drug/Discount)
RE-SURFACE-the first wrinkle corrector with nanocapsules® of retinol concentrate. Lancôme's patented Nanocapsule technology gently releases Retinol. Your skin receives continuous wrinklesmoothing benefits for up to 16 hours. All the power of Retinol, the purest form of Vitamin A, is stabilized and protected for maximum effectiveness and gentleness in a silky-light texture that can be used day or night.
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 guaranteeing a optimum tolerance.
The patented microspheres are multi-lamellar carriers with a lipophilic core (=from liposomes) which is perfectly compatible with retinol (lipophilic
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 vs. Estee Lauder’s product lines—Clinique for teens, Prescriptives for working women, Estee Lauder for more mature women o Product line focuses on usage occasion / image vs. value-added innovation (i.e.- Retinol) Radiant Discover beComing's palette of colors that are as individual as you are. Whether super-natural, polished and pretty or highglam is your style, we've got your color.
Mom Give moms and their new arrivals the treatment they both deserve with beComing's exclusive mom and baby formulations. Gentle, mild, effective just perfect during this special time.
Luminous beComing Luminous is skincare on call, on demand. Formulated with Lumin8™, a multi-functional "women's cocktail" that 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 skinimproving benefits
Active Whatever way you play, beComing Active gets you going and keeps you going.
Centered Indulge your body, your mood and all of your senses with Aromahue bath and body products. 4 colorful collections of Allover Body Mists, Foaming Body Washes, Replenishing Body Balms, Candles and Elixirs. Bright hues, smell-good scents and feel-good textures. All made to layer, mix and match.
Sensational beComing Eau de Parfum is the essence of beComing you. A sparkling floral incense that's modern, classic and subtly intriguing. You'll never want to wear anything else.
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.