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					GLOBAL ANALYSIS- AVON

  MGT 795: Section G1

Professor: Patrick Saparito

    Jennifer Callaghan

       J.R. Longino

     Rasa Navickaite

      Meghan Quinn

        Lia Torre
                        AVON- A GLOBAL COMPANY FOR WOMEN

Executive Summary

                                    History and Background

       In 1886 a visionary entrepreneur named David H. McConnell had the extraordinary idea
to found a business based on the premise of giving women an opportunity to earn money outside
of the home and build financial independence. This was 34 years before women in the U.S. had
even won the right to vote. But there is no stopping a great idea. From one Representative to now
over six million…from one product to thousands…from one country to now over 100 across the
globe, for 124 years the company has grown and prospered. (Annual Report). Currently, Avon is
a leading global beauty company, with over $10 billion in annual revenue. As the world's largest
direct seller, Avon markets to women in more than 100 countries through 6.2 million
independent Avon Sales Representatives. Avon's product line includes beauty products, as well
as fashion and home products, and features such well-recognized brand names as Avon Color,
Anew, Skin-So-Soft, Advance Techniques, Avon Naturals, and Mark. (avon.com) Ticker AVP.

                                       Mission Statement

       The Global Beauty Leader 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 Beauty company most women turn to worldwide. The Women's Choice for Buying
We will become the destination store for women, offering the convenience of multiple brands
and channels, and providing a personal high touch shopping experience that helps create lifelong
customer relationships. The Premier Direct Seller We will expand our presence in direct selling
and lead the reinvention of the channel, offering an entrepreneurial opportunity that delivers
superior earnings, recognition, service and support, making it easy and rewarding to be affiliated
with Avon and elevating the image of our industry. The Best Place to Work We will be known
for our leadership edge, through our passion for high standards, our respect for diversity and our
commitment to create exceptional opportunities for professional growth so that associates can
fulfill their highest potential. The Largest Women's Foundation We will be a committed global
champion for the health and well-being of women through philanthropic efforts that eliminate
breast cancer from the face of the earth, and that empower women to achieve economic
independence. The Most Admired Company We will deliver superior returns to our shareholders
by tirelessly pursuing new growth opportunities while continually improving our profitability, a
socially responsible, ethical company that is watched and emulated as a model of success
(Avon.com).




                                Social/Corporate Responsibility

Avon‘s core values—trust, respect, belief, humility and integrity. Avon has been committed to
advancing women since the company was founded in 1886, and philanthropy has always been a
strong part of their heritage. In 1955 the company formalized philanthropic efforts with the
creation of the Avon Foundation, which advances the mission to improve the lives of women and
their families.

The Avon Foundation‘s first grant, more than half a century ago, was a single scholarship of
$400. The Foundation‘s main efforts are today focused on the critical issues of breast cancer and
domestic violence, and Avon global philanthropy is advancing these causes in more than 50
countries. As committed global citizens, Avon and the Avon Foundation also support emergency
and disaster relief, while a scholarship program for Avon associates and Sales Representatives
maintains the tradition of supporting education.

Avon‘s commitment to the environment has been deeply rooted in Avon‘s principles for more
than a century. At locations worldwide, they remain committed to reducing our global
environmental footprint, including the issue of climate change, by recycling, reducing waste,
conserving energy and water, and monitoring and reducing greenhouse gas emissions. New
Avon facilities are developed using green building standards.

To help drive institutional and individual ―green‖ behavior, Avon launched Hello Green
Tomorrow in 2009 to empower a global environmental movement to nurture nature.

In 2004, they established environmental goals and targets for 2008 and have made progress in
pursuit of these goals.
A Director of Corporate Responsibility is based in the Avon global headquarters in New York
City, and collaborates with management in a wide array of relevant departments that support the
many pillars of corporate responsibility, including human resources, environment, supply chain,
research & development, the Avon Foundation and much more, both in the United States and
around the world.

                                        Business Analysis

Core Competencies


Stronger brand.
Avon‘s iconic brand has 90% awareness across the globe and sells four lipsticks every single
second of the day. To maintain that advantage, Avon has elevated their focus on innovation and
sustained advertising investment at almost triple the rate of 2005, even in the face of
macroeconomic challenges.


Stronger channel
Avon‘s Sales Leadership — through which Representatives earn by both selling and recruiting
— has been rolled out to approximately 50 countries worldwide. They have also launched our
global Internet platform to help Representatives
manage their business online.


Stronger cost management
Due to the restructing plans of 2005 and 2009 and cost transformation programs delivering well
ahead of initial expectations, and a constant turnaround mentality is now fully embedded
in the organization. Avon is expecting and operating margin
improvement in 2010.


Stronger organization
The company has made significant progress in its evolution from a confederation
of local businesses to a fully integrated matrix of global and commercial
business units. Avon has effectively leverage its global strength in marketing, sales
and supply chain, while also remaining flexible and responsive to local
consumers and Representatives.



Management Structure
Avon‘s primary distribution channel is direct selling by more than 6.2 million Avon Sales
Representatives. The recruiting or appointing and training of Representatives are the primary
responsibilities of district sales managers and zone managers. Depending on the market and the
responsibilities of the role, some of these individuals are our employees and some are
independent contractors. Those who are employees are paid a salary and an incentive based
primarily on the achievement of a sales objective in their district. Those who are independent
contractors are rewarded primarily based on total sales achieved in their zones or downlines.

Current Objectives

       In November 2005, Avon launched a comprehensive, multi-year turnaround plan to
restore sustainable growth. The following are the company‘s short term-objectives.

       • Committing to brand competitiveness by focusing research and development resources
on product innovation and by increasing advertising;

       • Winning with commercial edge by more effectively utilizing pricing and promotion,
expanding the Sales Leadership program and improving the attractiveness of Representative
earnings opportunity as needed;

       • Elevating organizational effectiveness by redesigning the structure to eliminate layers of
management in order to take full advantage of their global scale and size; and

       • Transforming the cost structure so that costs are aligned to revenue growth and remain
so.

Current Long Term Objectives
       As more and more Representatives discover the power of the Avon Earning Opportunity,
Avon‘s Long Term Objective goal is to retain them and increase their productivity by continuing
to innovate their business model. Avon also plans to leverage technology and the viral power of
the Internet to build communities that connect Avon to the Representatives and the
Representatives to their Customers. With more and more consumers discovering the smart value
of Avon‘s store, Avon plans to broaden shopping opportunities with new product categories that
reinforce their beauty image and strengthen their customer relationships.




Current Short Term Objectives

       In November 2005, Avon launched a comprehensive, multi-year turnaround plan to
restore sustainable growth. The following are the company‘s short term-objectives.

      Committing to brand competitiveness by focusing research and development resources on
       product innovation and by increasing advertising;

      Winning with commercial edge by more effectively utilizing pricing and promotion,
       expanding the Sales Leadership program and improving the attractiveness of
       Representative earnings opportunity as needed;

      Elevating organizational effectiveness by redesigning the structure to eliminate layers of
       management in order to take full advantage of their global scale and size; and
       transforming the cost structure so that costs are aligned to revenue growth and remain so.




Current Strategy

1) Advertising and Representative Value Proposition (―RVP‖)

Investing in advertising is a key strategy. Advertising investments also included advertising to

recruit Representatives. Avon continued to invest in their direct-selling channel to improve

the reward and effort equation for Representatives.




2) Product Line Simplification

Avon developed the PLS program in order to develop a smaller range of better performing,
more profitable products. The continued goal of PLS is to identify an improved product
assortment to drive higher sales of more profitable products.




3) Strategic Sourcing Initiative

Avon launched the SSI in 2007. This initiative is expected to reduce direct and indirect costs of
materials, goods and services. The goal of this initiative is to shift purchasing strategy from a

local, commodity-oriented approach towards a globally coordinated effort which leverages
Avon‘s volumes, allows suppliers to benefit from economies of scale, utilizes sourcing best
practices and processes, and better matches our suppliers‘ capabilities with our needs. Beyond
lower costs, the goals from SI include improving asset management, service for representatives
and vendor relationships.

4) Enterprise Resource Planning System

Avon is in the middle of rolling out a multi-year global enterprise resource planning (―ERP‖)
system, which is expected to improve the efficiency of their supply chain and financial
transaction processes.




5) Zero-Overhead-Growth

Avon institutionalized a zero-overhead-growth philosophy that aims to offset inflation through
productivity improvements. These improvements in productivity will come primarily from SSI
and our restructuring initiatives. We have defined overhead as fixed expenses such as costs
associated with our sales and marketing infrastructure, and management and administrative
activities.




6) Restructuring Initiatives

2005 Restructuring Program
Avon launched our original restructuring program under our multiyear turnaround plan in late
2005. We have approved and announced all of the initiatives that are part of the 2005
Restructuring Program. The costs to implement restructuring initiatives during 2005

through 2009 are associated with specific actions, including:

• Organization realignment and downsizing in each region and global through a process called
―delayering,‖ taking out layers to bring senior management closer to operations;

• The phased outsourcing of certain services, including certain finance, information technology,
human resource and customer service processes, and the move of certain services from markets
to lower cost shared service centers;

• The restructure of certain international direct-selling operations;

• The realignment of certain distribution and manufacturing operations, including the
realignment of certain of our North America and Latin America distribution operations;

• The automation of certain distribution processes;

• The exit of certain unprofitable operations and product lines

• The reorganization of certain functions, primarily sales-related organizations.




2009 Restructuring Program

In February 2009, Avon announced a new restructuring program under their multi-year
turnaround plan. The restructuring initiatives under the 2009 Restructuring Program focus on
restructuring the global supply chain operations, realigning certain local business support
functions to a more regional basis to drive increased efficiencies, and streamlining transaction-
related services, including selective outsourcing.

SWOT Analysis
Strengths
Diverse geographic presence enhances scale of operations and mitigates local market risks
        Avon is a global player in the cosmetics industry. The company operates in 65 countries
and territories worldwide through direct-sales channel. Additionally, Avon's products are also
distributed in 40 other countries through distributorships. The company derives its revenues from
six geographic segments: Latin America, North America, Central and Eastern Europe, Western
Europe, Middle East and Africa, Asia Pacific, and China. For the fiscal year 2009, Latin
America, Avon's largest geographical market, accounted for 39.5% of the total revenues. While
North America; Central and Eastern Europe; Western Europe, Middle East and Africa; and Asia
Pacific and China accounted for 21.8%, 14.4%, 12.3%, 8.5% and 3.4% respectively of the total
revenues in the fiscal year 2009. The company, hence, does not depend on single market for its
revenues. The geographic diversification helps the company against adverse economic
development unique to one market area. Besides, the diversification has given the company the
capability to shift production base to cheaper and more lucrative locations. Apart from the US
manufacturing and distribution centers, the company runs four manufacturing facilities, and 11
distribution centers in Latin America; and four manufacturing facilities in Europe. It also has
seven distribution centers in Western Europe, Middle East and Africa; four distribution centers in
Central and Eastern Europe; two manufacturing facilities, and four distribution centers, in Asia
Pacific; and two manufacturing facilities and six distribution centers in China. The shift in
production base to cheaper location close to end-markets has resulted in lower cost of production
giving Avon a definitive edge over its competitors. Moreover, it has given the company an
opportunity to penetrate large customer base and cater to an evolving local consumer preference
so as to enhance its sales volume.
Low cost business model of direct selling
        Avon is one of the largest direct-selling companies in the world. The company is
represented by nearly 6.2 million sales force and distributors worldwide, out of which 80% are
from the overseas market. The direct selling business model and a large sales force has been one
of the strengths of Avon over the years. Since direct selling is inherently a low-cost business
model with relatively low start-up costs, it helps the company in expanding to new markets.
Moreover, the additional costs involved with intermediaries and the threats posed by the growing
bargaining power of retailers are also negligible for the company. Besides, it also gives
flexibility to the company to innovate and communicate its brand proposition as per their own
requirements.
Strong brand equity
       Avon is one of the oldest cosmetic companies of the US. The history of the company
dates back to 1886. Over the period, the company has evolved and now is engaged in the
manufacture and distribution of cosmetic products, fragrances, fashion jewelry and apparels
under some well known brands like Avon Color, Anew, Skin-So-Soft, Avon Hair Care, Avon
Wellness, Avon's Prestige Fragrance Counter, M - The Men's Catalog and Mark. The strong
brand image and recognition associated with Avon's products has helped the company in
becoming one of the world's largest beauty brands. The industry reports also substantiate the
brand equity of the company as it has been consistently ranked as one of the top 100 global
consumer brands. Recently, the 24/7 Wall St website ranked Avon as the ninth most successful
brands of 2010 with a brand value of $14,000 million.
       A strong brand recall and recognition enables the company to generate repetitive sales
and hence maintain its leadership position in the skincare products market. Additionally, a strong
brand value allows the company to further establish itself in emerging markets with ease.

Weaknesses
Chinese operations marred with controversy and poor performance
        Avon was one of the first companies to obtain direct-selling license in China in 2006.
Gradually, as the company was facing weakness in its US operations; China, the world's most
populous and attractive cosmetic market, and Latin America became the critical sources of sales
growth for Avon. However, the Chinese operations of the company have been marred with
controversies off-late. The allegations related to bribery involving millions of dollars and
improper accounting of favors in the form of travel, entertainment and expenses has affected the
goodwill of the company. The company suspended its four key officials responsible for Chinese
operations, in the wake of the findings of the investigation. Besides, the bribery controversy
which has diluted Avon's brand value in China, the company is also facing operational problems
in the country. The company was following a hybrid business model in China, involving both
direct selling and beauty boutiques. However, the model failed to create the kind of platform for
Avon, so that it could leverage the lucrative Chinese market. In FY2009, the revenues from the
boutiques declined by nearly 40% as against the revenue growth in the direct selling by 24%.
The company plans to shift to the direct-selling mode in China in the coming fiscals. The
transition, however, is facing difficulties as the company faces lack of confidence from its sales
representatives. The active representative ranks (company's sales representative) in China
reduced by 25% in the first quarter of 2010, as against 32% increase in 2009. The continuing
operational problems in China will adversely impact the company's revenue and sales in one of
its primary market and will negatively impact its overall operations.
Lack of clear-focus and strategy for non-beauty products
       The company offers its products worldwide in three categories: beauty, fashion and
home. Avon's beauty product category is engaged in the manufacture and distribution of beauty
products such as cosmetics, fragrances, skin care and personal care.
The company's fashion product category is involved in the manufacture and distribution of the
company's non-beauty product line such as fashion jewelry, watches, apparel, footwear and
accessories. The company offers gift and decorative products, housewares, entertainment and
leisure products, and children's and nutritional products through its home product category. In
addition to these, the company also produces health and wellness products. However, the
company does not have a clear marketing and operational strategy for its non-core product line.
The lack of strategic focus has affected the company's non-core business; fashion and home
product lines. As a consequence, the non-beauty products business have lagged behind and
reported a poor performance for FY2009. The company's fashion and home product line
registered a decline of 5.1% and 1.2% respectively as compared to the previous year. In the
absence of a definite growth strategy, the non-core business could become a drag on the
company's revenue growth and profits.
Declining operating margins
        Avon's operating margins have gradually declined from 15.9% in 2004 to 8.9% in 2006,
driven by intense competitive pressures in the North America and Asia Pacific regions. The
operating margins for the North American region declined by 1.3% in 2009, as compared to
2008. The decline was mainly due to the incremental costs of restructuring initiatives. Lower
revenues with fixed overhead expense and higher obsolescence expense were also contributing
factors for this decline. The operating margins from other regions also faced declines. The
Central and Easter Europe registered a decline of 3.8%, Western Europe, Middle East and Africa
declined by 2.3% while the Asia-Pacific region reported a decline of 3.1%. The declining profit
margin indicates poor cost management and increase in the company's sales, general and
administrative expenses. It also indicates that the benefits of restructuring initiatives are yet to be
realized fully by the company. A further decline in the margins would decrease the company's
profit generation capability and increases the probability of loss in the future.

Opportunities
Restructuring initiatives for organizational effectiveness
        The company has taken multi-year restructuring initiatives in the recent years. The move
is primarily aimed at increasing revenue growth, profit margins and strengthening overall
performance. The company reorganized its business into six geographic business units towards
the end of 2007 to increase its effectiveness. The company started managing Central and Eastern
Europe and China as separate operating segments since 2006, and increased the number of
reportable segments to six: North America; Western Europe, Middle East and Africa; Central
and Eastern Europe; Latin America; Asia Pacific; and China. Besides, the restructuring involved
realignment and downsizing in each region of operation, which resulted in a leaner management
with about 7 or 8 levels, as compared with the prior 15. The company also closed down its
unprofitable operations including the closure of the Avon Salon & Spa, the closure of operations
in Indonesia, the exit of a product line in China and the exit of the beComing product line in the
US. In addition to this, the company reorganized its certain functions, primarily sales-related
department. In February 2009, the company announced a new restructuring program under its
multi-year turnaround plan (the "2009 Program"). The restructuring initiatives under the 2009
program is expected to focus on restructuring its global supply chain operations, realigning
certain local business support functions to a more regional basis to drive increased efficiencies,
and streamlining transaction-related services, including selective outsourcing. The company
expects to incur restructuring charges and other costs to implement these initiatives in the range
of $300 millions to $400 millions before taxes over the next several years. Avon is targeting
$200 millions as annualized savings under the program, upon full implementation by 2012-13.
The cost savings would give the company flexibility in product pricing. Since Avon operates in
the value cosmetic segment, flexibility in product pricing would give it an edge over its
competitors as the company can reduce prices so as to target greater market share. Besides, the
cost-saving initiatives would help the company in generating more free cash and profit margins
essential for further international expansion.
Re-branding strategy to drive consumer demand
        The company, as a part of strategic initiative, plans to engage in aggressive marketing
and focus on the development of innovative products. The company has increased its advertising
outlay since 2006 with the exception of 2009 when advertising expense was flat due to difficult
economic conditions. Advertising investments were $390.5 millions, $368.4 millions, and $248.9
millions during 2008, 2007, and 2006, respectively while it declined by $38 millions in 2009 as
compared to the previous year. However, the advertising expenditure is expected to rise in 2010.
The huge advertisement outlay has supported the new product launches, such as, Anew
Reversalist Serum/Cream, Anew Dermafull Helix, Spectra Lash mascara, SpectraColor Lip, 24-
K Gold Lipstick, Supercurlacious Mascara and Spotlight fragrance. Besides, the company is also
focusing on enhancing the representative value proposition, the benefits given to sales
representatives. During 2009, the company invested approximately $56 millions incrementally in
the Representatives through Representative Value Proposition program (RVP) by continued
implementation of the Sales Leadership program, enhanced incentives, increased sales campaign
frequency, improved commissions and new e-business tools. The aggressive marketing would
help the company in increasing the brand awareness and boost sales. Besides, direct-selling
companies like Avon depend upon the motivation of its representatives. Measures like RVP
would help to boost their motivation levels and encourage the sales.
        Besides, the company has been innovating and introducing new brands in its portfolio
through celebrity associations. Bond Girl 007 women's fragrance, Spotlight and In Bloom line of
fragrances, among others, were developed in partnerships with some of the big names of the
entertainment industry. Such associations have provided an alternate way of endorsing the
company's value proposition. Further, the company can leverage the status of the celebrity to
effectively communicate the values associated with Avon brand. The company, hence, through
these aggressive advertising and branding strategy can effectually interact with its target
consumer groups and strengthen its position against rivals such as L'Oreal and Revlon.
Use of Social Media Technology to drive online sales
       The popularity of social media continues to gain ground with internet sites such as
Facebook, Twitter and MySpace. Avon already has a presence on the social media giant
Facebook‘s site with their brand ―Mark‖. They have been on the forefront of leveraging this
technology to produce more sales.
        There are currently more than 500 million active users on Facebook, which is about one
person for every fourteen in the world. Half of these users log on in any given day and Facebook
users spend 700 billion minutes per month on Facebook. There are more than 70 translations of
Facebook, and about 70% of the users are outside the US and more than 150 million people
engage with Facebook on external websites every month, and there are more than 200 million
active users currently accessing Facebook through their mobile devices, and these users are twice
as active on Facebook as non-mobile users.
        Late in 2009, Avon revolutionized the direct-selling model for the next generation of
women. ―Mark‖ the beauty and fashion boutique brand of Avon Products, launched new digital
social selling application that connected shoppers with Representatives on Facebook for the first
time. The ―Mark‖ e-commerce boutique allows Facebook users to shop on the ―mark.girl‖ Face-
book Page and connect directly with ―Mark‖ Reps. Reps can also use this new tool to build their
business and build their sales by opening a digital dialogue with new clients. Avon‘s ―Mark‖ is
the only company currently to have a social selling component that connects shoppers on Face-
book with ―Mark‖ representatives. To create this new social selling tool, Avon partnered with
Alvenda, a social shopping platform. The technology, created with Alvenda, is not proprietary to
Avon. They plan to introduce additional iterations of the technology, some of which extend
beyond the virtual borders of Facebook and its more than 350 million members. ―Mark‖ will
allow Facebook members to create wish lists and share them with friends through the site‘s news
feed, and ―mark‖ representatives will be able to create offer lists or product promotions that also
will pop up in friends‘ news feeds, appearing as a small dialog box. Also, Google‘s new
pronouncement that it will be supplementing its search engine results with updates posted each
second to blogs and social networking sites, like Facebook, bode‘s well for ―Mark‘s‖ viral effort.
Emerging markets enhances the scope of growth for the Avon's value cosmetic products
        The increasing popularity of beauty contests and increasing disposable incomes have
spurred the emerging markets such as Brazil, Russia, India and China. These markets are
becoming increasingly important to cosmetics companies like Avon. Avon Products was granted
a direct selling license by China's Ministry of Commerce in 2006. The company has expanded its
operations in China since then. China is the second largest cosmetics market in Asia after Japan.
According to Datamonitor, the Chinese cosmetics market was worth $1,117.8 million in 2009, an
increase of 8.1% over the previous year. The market is estimated to grow to approximately
$1,535.3 million by 2014, an increase of 37.4% since 2009. The rising GDP and disposable
income and a growing middle class are positive trends for the demand of cosmetics and personal
care products. The company, till now, was following a hybrid system in China, utilizing both
boutiques and direct representatives for penetrating the Chinese markets.
        The beauty market in another emerging country, India, has been booming, making it an
attractive market to all global cosmetics' companies. According to Datamonitor, the Indian
market for beauty products was worth $141.6 million in 2009, representing an increase of 9.5%
over the previous year. The market is expected to further go up to $198.7 million by 2014,
representing an increase of 40.3% since 2009. The competitors like Oriflame, Revlon and others
have already established a presence in the Indian cosmetics market. Avon, through, its value
cosmetics product and its brand proposition of being a product of "Housewife" is well suited for
Indian psyche. The company, therefore, stands to benefit from the positive outlook in these
emerging cosmetics market which enhances the chances of improving revenue and sales growth.

Threats
Competitive environment in the global cosmetics industry
        Avon has faced considerable competitive pressures in recent years, both from its direct
selling rivals and established retail brands. The company has been witnessing strong competition
in beauty segment from companies such as Oriflame, Revlon,
L'Oreal, Procter & Gamble, Unilever and Estee Lauder. These companies have increased their
focus to gain market share in beauty and personal care products in the US as well as emerging
markets. Also, in non-beauty segments, global brands such as Amway and PartyLife have
remained a cause of concern for the company. In addition, even drugstore operators such as
CVS, Walgreen's are also increasing their focus on beauty products due to better margins. In
recent years, brand recognition has emerged as key differentiator and companies across the globe
have invested heavily on advertising, promotional campaigns and innovative marketing
strategies to increase market share. Avon has also increased its advertising outlay considerably as
mentioned above. The rise in advertising expenses would further put pressure on already eroding
operating margins. Besides, the competitive pressure on prices would lead to revenue decline and
reduction in cash flow which eventually will affect the debt repayment and further expansion
plans of the company.
Company's revenues are tied to the performance of the sales representatives
         Avon sales, both in the domestic and global markets, are contributed largely from the
company's global sales representatives. The 6.2 million Representatives that Avon employs are
independent contractors that receive a percentage commission for their sales. However, the
allegations like lower commissions and negligible employee benefit creates dissent which then
results in lesser interest by the representatives in enhancing the Avon sales. The company has the
past history of representative's dissatisfaction. Similar allegations related to unhelpful attitude of
local management has been made towards the company. Such allegations and other
dissatisfaction among the representatives could bring down the productivity of the sales force
hampering the growth of Avon in the longer run.
A diversified global operation exposes Avon to currency fluctuation risks
        Avon derives nearly 80% of its revenues from the markets outside the US, making the
company very sensitive to currency fluctuations and the strength of the dollar. In 2009, the
adverse dollar movement against other currencies negatively impacted the company's revenue
and operating figures. The revenues declined by almost 9.0% and operating margin declined by
an estimated 2.5 points. Further, in the first quarter of 2010, Avon had a 64% decrease in net
income compared to first quarter of 2009, due to the devaluation of Venezuelan currency, despite
total revenue increasing 14%. Unfavorable currency fluctuation, if not hedged properly, could
adversely impact the profits and revenue of the company in the future.



Summary of Recommendations




Focusing on International Growth- the BRIC Countries

       Growth opportunities in BRIC (Brazil, Russia, India and China) countries were identified
long ago. For the beauty industry, this meant a shift in focus away from the traditional, maturing
markets (predominantly those in North America and Western Europe) and a chance to reach a
vast and mostly untapped consumer pool. BRIC countries are characterized by rapid
urbanization, large populations with low beauty product usage and emerging middle classes.
These countries have come to the fore as world economic hot spots, and are acting as prime
contributors to dynamism in the global beauty products industry. With the exception of Russia,
BRIC has far outgrown the 4% global growth in beauty 2008–2009, according to market
research from Euromonitor International.1

Brazil and China are the star performers and are set to add around US$8 billion and US$10
billion to the size of their respective beauty industries by 2014.

All of the BRICs are set to be pivotal to future growth. These four countries alone will contribute
over half of the total US$43 billion absolute growth in the global beauty industry over 2009-
2014.

Although there is a general trend towards urban dwelling in the BRICs, rural areas continue to
account for the majority of consumers in nearly all of them. While the number of chained stores
is beginning to grow in the big cities, the distribution infrastructure is often very poor and still
developing in these markets, meaning that it would otherwise be very difficult to reach rural
consumers. Furthermore, there is still a very strong emphasis on community living in the BRICs.
Direct selling is, therefore, the ideal way to reach these rural consumers.2




Brazil

With an 8.6% share of the world market3, Brazil has become the world's third-biggest market for
beauty products after the US and Japan. And it is not only the lower end of the market that is
expanding. In plastic surgery, Brazil is now the world's second-biggest market after the US.4

The market for cosmetics has experienced exponential growth rates and is an important sector in
many countries—particularly Brazil, where the cosmetics sector rose 8.6 percent in 2008 despite


1
    Global Cosmetic Industry; Jun2010, Vol. 178 Issue 6, p18-20, 2p
2
  http://blog.euromonitor.com/2010/10/the-brics-and-beyond-the-lure-of-emerging-economies-for-the-beauty-
industry.html
3
    http://www.premiumbeautynews.com/Creativy-is-Brazil-s-main-asset,826
4
    http://gulfnews.com/business/features/beauty-industry-booms-in-brazil-1.572101
the global financial crisis. Accordingly, Brazil rose in consumer market rankings, becoming the
world's second-largest consumer of beauty products—surpassing the Japanese market, which
shrank during the same period. Until 2007, Brazil lagged behind both the Japanese and American
markets.

Founded in 1969, Natura is the industry leader in the cosmetics, fragrances and personal hygiene
market in Brazil. It is also the industry leader in direct sales, surpassing even the giant American
company Avon. Natura offers a full range of products with solutions for consumers‘ various
needs, regardless of age, including products for the face and body, hair care and treatment
products, make-up, fragrances, bath products, sun protection products, oral hygiene products and
product lines for children.5

Today Brazil has a healthy economy. Its gross-domestic-product growth is estimated at close to 6
percent this year. Further, Brazil's young and ethnically diverse population is growing quickly
(as is its middle class); in two decades, the country's expected to have 20 million more people
than its current 220 million denizens. More than 20 million Brazilians have emerged from
poverty over the past six years. Since last year, for the first time ever, more than half of Brazil‘s
200 million people can be classified as middle income (earning an income between 1800 € and
450 €).

Brazil has the third-largest health and beauty market worldwide, with approximately $20 billion
in sellout (excluding soap and oral care), said Fenart. It's number two in fragrance, color and hair
care, and it ranks first in deodorant. 6 Below is a graph depicting Brazil‘s share of sales:




5
    http://www.brandchannel.com/features_profile.asp?pr_id=429
6
    WWD: Women's Wear Daily; 6/11/2010, Vol. 199 Issue 122, p7-1, 1p
                                                                            7



The resulting boom in Brazil's cosmetics market, along with the recent slump in the US, has
made it the biggest in the world for Avon, since the third quarter of last year. Avon said sales in
Brazil were worth $1.67 billion in 2008, compared with $2.1 billion at the year-end for Natura,
the Brazilian market leader8. However, even with all this past success, Avon has the potential to
grow in this market in the future.

The Brazilian make-up market generated total revenues of $1.3 billion in 2009, representing a
compound annual growth rate (CAGR) of 10.7% for the period spanning 2005-2009.

Lip make-up sales proved the most lucrative for the Brazilian make-up market in 2009,
generating total revenues of $440.2 million, equivalent to 32.7% of the market's overall value.

The performance of the market is forecast to decelerate, with an anticipated CAGR of 7.6% for
the five year period 2009-2014, which is expected to lead the market to a value of $1.9 billion by
the end of 2014.9




7
    http://www.abihpec.org.br/english/dadosdomercado_dados_mercado.php
8
    http://brazil.willpowergroup.net/brazil-avon/
9
    Data Monitor Make-up In Brazil Reference Code: 0076-0700
Institutional Framework
The institutional framework is made up of formal and informal institutions governing individual
and firm behavior. Formal institutions are laws, regulations and rules while informal institutions
are norms cultures and ethics (Peng 93).

FORMAL

Brazil hasn't long been a free market. In the Seventies, it was sealed off under military
dictatorship, and, subsequently, its economy was slammed by financial instability10.

The recent transformation in the lives of ordinary Brazilians owes much to the low inflation and
economic stability brought by orthodox economic policies since the mid-1990s — a floating
exchange rate, inflation targeting by the central bank and steady reductions in public debt — and
to the expansion of income transfer programmes under President Luiz Inacio Lula da Silva since
2003. These programmes pay poor people to keep their children in school and make sure they
have medical check-ups.

But while Brazil's overall economic growth since the mid-1990s has been erratic, the market for
beauty products has been rising steadily, according to Abihpec, the personal hygiene, perfumery
and cosmetics industry association. "Income began to be redistributed with the [inflation-
busting] Real Plan 15 years ago and since then we've seen a fantastic curve of growth," he says.
11
      It's key for executives to continually deal with Brazils fiscal complexity. Import tax can run
up to 150 percent, for instance, and taxes can vary by state, by product and by category12.

INFORMAL

"The role of women in the economy has been growing steadily," says Alessandro Carlucci, chief
executive of Natura. "Women are often the source of a family's income and as they start to have
disposable income they spend some of it on themselves."

10
     WWD: Women's Wear Daily; 6/11/2010, Vol. 199 Issue 122, p7-1, 1p



11
     http://gulfnews.com/business/features/beauty-industry-booms-in-brazil-1.572101
12
     WWD: Women's Wear Daily; 6/11/2010, Vol. 199 Issue 122, p7-1, 1p
He states only 40 per cent of Brazilian women own a lipstick, so the potential for growth remains
enormous. Brazil is correlated with personal hygiene. Women in Brazil will take up to three
showers daily in summertime and use up to four to five products, making hair care the number
one beauty priority for Brazilian women. In contrast to Europe, the Brazilian market is
characterized by a preference for long hair. Consequently, the hair care market is the biggest
segment in Brazil, and the one where Brazilian companies are the most innovative. According to
Euromonitor, Brazil holds on fifth (20.6%) of the world‘s conditioners market.13

The second main beauty priority is body care, followed by skin care. Many Brazilians use body
products on their faces.14

―We have an obsession with having white teeth and clean nails; you don't go out of the house if
you're not impeccable,‖ said Fenart. ―The main preoccupation is hair. It is a weapon of seduction
for the Brazilian woman.‖

Brazilian women wash their hair nearly daily and use up to four to five products. The second
main beauty priority is body care, followed by skin care. He explained many Brazilians use body
products on their faces and continued that there's a ―booming‖ sun care market in the country.15




Industry analysis of Brazil

The Brazilian make-up market is tending towards concentration, with the top three players
holding 63.2% of the total market by value.

The market leaders own a variety of recognized brands and operate in various segments of the
market, such as: eye make-up, face make-up, lip make-up and nail make-up. Fashion is a major
influence on the make-up market, with consumers differentiating themselves quite strongly


13
     http://www.premiumbeautynews.com/Creativy-is-Brazil-s-main-asset,826
14
     WWD: Women's Wear Daily; 6/11/2010, Vol. 199 Issue 122, p7-1, 1p



15
     WWD: Women's Wear Daily; 6/11/2010, Vol. 199 Issue 122, p7-1, 1p
through the styles and brands of make-up products offered. Therefore, buyer power is greater
amongst larger retailers (supermarkets/hypermarkets) as switching costs for buyers are not
particularly high. However, retailers often occupy a strong position in the supply chain, which
allows them to negotiate favorable contracts with manufacturers, thereby enhancing buyer
power. The wide range of brands available, with accompanying variations in quality and price,
means that buyer power is prevented from becoming disproportionately strong in this market.
Supplier power is also moderate, to the extent that the raw materials for the end product are
commonly available. Entry into this market would be highly dependent on the growth prospects
and also on the size of the existing players. Furthermore, make-up products have few substitutes
wherein manufacturers may face indirect competition from traditional cosmetics, such as henna
or kohl. However they are not likely to be a serious threat in the major markets. Rivalry in the
market is assessed as moderate with most of the companies being geographically diversified but
relatively high fixed costs. 16




Supplier Power

Make-up products are typically manufactured using a range of chemical and mineral products,
such as essential oils, which are widely available from a large number of chemical companies.
Packaging is another significant input. The quality of many of the raw materials is important and
chemicals used in these products must be of a suitable standard for manufacturing consumer
products. Supplier switching costs are negligible for make-up manufacturers; inputs are typically
undifferentiated; and products can be made with a range of alternative raw materials, which
reduces supplier power. Suppliers are often small in scale compared to large manufacturers and
consequently their power is reduced, but this is offset by the fact that chemical producers gain
revenues from a wide variety of sources, reducing their dependence on cosmetics manufacturers.
Overall, supplier power with respect to the make-up market is moderate.

Buyer Power




16
     Data Monitor Make-up In Brazil Reference Code: 0076-0700
Major manufacturers tend to advertise to consumers in order to build brand loyalty. Retailers are
positioned at the end of the value chain, which implies that they are obliged to offer buyers what
they want, in a market that is subject to unpredictable changes in fashion. This reduces buyer
power, as most retailers must stock popular brands in order to maintain their own sales volumes.
Moreover, fashion has a major influence on the make-up market. Consumers can differentiate
themselves quite strongly through the styles and brands of make-up products they choose, which
also weakens buyer power. However, retailers often occupy a strong position in the supply chain,
which allows them to negotiate favorable contracts with manufacturers, thereby enhancing buyer
power. Where brand loyalty exists, it is more likely that customer would prefer designer brands
over retailer brands, although some designer labels also have their own retail operations for
which a large market exists. Direct selling is possible: for example, Avon avoids the
conventional retail distribution network, by using a direct sales force. This is made up of third
party independent contractors (not employees), who buy Avon products at a discount and then
sell to end-users. This limits the power of contractors to set the prices, thus weakening the buyer
power. Overall, buyer power in the make-up market is moderate.




Rivalry

The Brazilian make-up market is tending towards concentration, with the top three players
holding 63.2% of the total market by value. Many large players have their own production
facilities, fixed costs are relatively high, which serves to enhance rivalry. Retailers may be
unwilling to switch between market players, as their customers are likely to seek the leading
brands. The diverse product range offered by some major players, including skincare and hair
care products, reduces their reliance on the make-up products, and thus somewhat eases rivalry.
This diversification protects the company‘s business against competitive pressures in any one
particular market. As most companies own large production facilities, the need to divest such
assets on exiting the global market constitutes an exit barrier and therefore a driver of
competition. However, most of these companies are geographically diversified which weakens

rivalry to some extent. Overall, rivalry in the make-up market is moderate.

Threat of New Entrants
The Brazilian make-up market comprises a small number of brands, some widely recognized,
which have strong market position. Large firms benefit from scale economies which allow them
to compete more effectively on price, consequently, new companies entering the market may
find it difficult to compete. Retaliation by existing players, such as the launch of a price war, is a
possibility, especially where a new entrant moves into a more concentrated segment.
Furthermore, the brand strength of major manufacturers is considerable, which may negate much
of the effect of low switching costs. New entrants may be able to start on a small scale, operating
within a particular niche, such as make-up with antiageing components. However, product
testing and research would be both: time-consuming and costly. In addition, new entrants will
need to persuade stores to stock their products, and major retailers aware of their importance in
the distribution chain, may be unwilling to risk displacing existing brands for the sake

of new ones. Substantial funds are also needed to start a business in this market, with capital
required for investment in production, distribution, and also advertising (which is crucial for
success in this market).

However, due to the high sales volumes of make-up products and low product differentiation, it
is

common for the companies to enter the lower end of the make-up market. Due to the high brand
strength of leading make-up manufacturers, it is difficult for new companies to develop their
brands to compete at an international level. Overall, the threat of new entrants with respect to the
make-up market is moderate.

Threat of substitutes

Make-up products have few substitutes as such. The conventional manufacturers may face
indirect competition from mineral make-up products. They are believed to be more natural, light
and allergy free as there are no chemicals, fragrances or preservatives in their contents. Mineral
make-up products are available in the form of foundations and loose powder. These claim to
remove the wrinkles which one gets due to aging process, acne, pimple scars or any other
blemish present on the skin. Overall, the threat of substitutes is assessed as weak.
Recommendation for Brazil

Despite Avon‘s sales growing at a 27% rate last year in Brazil, Avon‘s success in the country has
just begun.17 Avon should continue to focus its efforts and resources in Brazil. . Aligning with
Avon‘s corporate objectives to invest in advertising and increase efforts to recruit new
representatives should be focused in Brazil due several factors. From an institutional standpoint,
with the military dictatorship lifted, the economy booming and the middle class gaining more
income, Brazil is ripe for continued expansion. Additionally, Brazilian women‘s growing
obsession with beauty and perfection and consumers differentiating themselves pointedly
through the styles and brands of make-up products is also a sign that Avon should continue its
strong presence in the country.

In addition, aligning, with their objective to focus on product line simplification, Brazil is a
country where lipsticks and haircare are very profitable and expected to grow in the future.
Currently, Lip make-up is the largest segment of the make-up market in Brazil, accounting for
32.7% of the market's total value18. This would be an excellent location to simplify their lip and
haircare product lines and focus on increasing the profits of those lines.

DataMonitor suggests that rivalry in the make-up market is moderate and tending towards
concentration, with the top three players holding 63.2% of the total market by value. We believe
that rivalry is moving from moderate to high very quickly in Brazil. Other companies such as
L'Oréal have gained almost 40 million new consumers in Brazil in the last eight years. It is the
fourth-largest beauty player there, 50 years after its arrival. In 2009, the company registered 15
percent growth and had 8 percent market share, and in first-quarter 2010 the company posted 32
percent gains in the country.19 Additionally, Brazil has a wealth of natural resources due to the
Amazon rainforest so demand for natural products and exotic plants (Brazil is home to 250,000
native botanical species of which only 300 have been tested for properties that may be useful to
the cosmetic industry) have led most of the world‘s largest cosmetics companies to Brazil for
ingredients like maracujá (passion fruit), açaí, acerola, mango and castanha do pará (Brazil

17
     http://brazil.willpowergroup.net/brazil-avon/
18
     Datamonitor
19
     WWD: Women's Wear Daily; 6/11/2010, Vol. 199 Issue 122, p7-1, 1p
Nut)20. We feel that there will only be more companies to join and capatalize on the growing
market and readily available resources. Hopefully at this point, Avon has an early mover
advantage and has already built up significant brand loyalty among Brazilian consumers.



Russia

           Cultural and demographic factors in Russia have created a prime market for cosmetics
and perfume in this country. Women outnumber men, and therefore looking good is considered
a key competitive factor in finding a husband (Kolchik 1). It‘s also considered an important
factor in finding a job. The industry, ―which grew at a rate of around 25 percent year on year
during the economic boom of the mid-2000s‖, remained one of the most recession-proof in
Russia in late 2008. (Kolchik, 1)
           Despite out-growing other industries in Russia, the beauty industry did not keep up with
the growth rate of other countries, registering just 5% value growth 2008–2009, versus the 12%
seen from 2007–2008 globally (Eurominitor). The main reasons for the reduced growth in
Russia were consumer trade down to less-expensive brands, and cutbacks on non-essentials.
Unlike Brazil and India, where mass products make up the bulk of the sales, premium cosmetics
rule the Russian market. Growth in these premium beauty products slid down from 20% during
2006–2007 to 0% 2008–2009. (Lennard 1)

           While the Russian economy suffered greatly during the economic crisis, it is expected to
recover in 2010 and 2011. Euromonitor International forecasts consumer expenditure to rise by
3.6% and 4.8% respectively in real terms. Consumer credit is likely to see healthy development
in the short term as a growing number of Russian consumers gain access to banking services.
Russia‘s primary challenge in the long term is its demographic crisis. The population has been
declining since 1995 and will continue declining through to 2020, dropping from 142 million in
2009 to 139 million by 2020(Business Environment: Russia; Euromonitor). Russia‘s
challenge will be its shrinking labor force and therefore it will have difficultly to developing the
labor skills needed to sustain economic growth.



20
     http://www.premiumbeautynews.com/Creativy-is-Brazil-s-main-asset,826
The Russian Beauty Consumer
       Russian women are very particular about their appearance, and in fact, don‘t believe in
―natural beauty‖. They believe that beauty should be made and that all aspects of a women‘s
appearance can be enhanced through usage of cosmetics. The Dove Beauty campaign with the
tagline ―you are beautiful the way you are‖ was a complete failure (Russia- cosmetics 1).
       Beauty products have become an integral part of a Russian women‘s identity in uncertain
times and ―usage is equivalent to liberation‖ (Russia-cosmetics 1). Russian women expect
miracles from their products and are highly engaged in the science behind them. A Russian
consumer will commonly spend up to thirty minutes at a cosmetics counter, to truly understand
the feature and benefits of the products. Russian women do not skimp on cosmetics, but rather
consider them as a sign of status, which is very important to them.
       A growing affluent population, as well as the culture of ―glamour and status‖ has also
shaped the beauty industry in Russia, and led to a growth in the premium and luxury goods
market.. Russians are now believed to be the world's fourth largest spenders on high-end goods,
behind the USA, Japan and China. (New Global Report)
       There appears to be three main segments of beauty consumers in Russia, those ages 18-
30, those ages 30-39, and those 40+. As mentioned before, they share a preoccupation with their
appearance and are willing to spend on premium products. Up to 80% of Russian women use
cosmetics every day, which is the highest usage rate in Europe. While Russian women have not
embraced ―the western feminine ideology‖, they have embraced the idea of designer fashions
and cosmetics indicating status (Russia-cosmetics 1).
       The 18-30 year olds are motivated by money and career opportunities. Given the aging
population, the labor market demand for graduates is expected to increase, in turn raising the
income of the younger generation. This segment is also becoming increasingly educated, with
most universities offering a master‘s program as the norm after undergraduate. These more
material-oriented consumers seek out high status and fashion products.
       The younger generation is also the most active in usage of cosmetics and is willing to try
out new products. They consider cosmetics as an attainable indulgence. Similar to the rest of the
population, they are preoccupied with status and often display high end fragrances in their
homes. French beauty brands are particularly coveted.
       The Russian beauty consumer in her 30‘s uses both premium and mass market products.
She uses a wide variety of cosmetics and is also using anti-aging products preventatively. She is
very concerned with premium brands and the status that they carry. She is well-educated and has
a higher income than her younger counterparts (Russia-cosmetics1).
        The beauty consumer that is 40+ is also using premium products. She is also engaging in
beauty procedures, such as Botox. This segment will see the largest growth over the next decade
with the aging of the population.


        _____________________________________________________________________
        It is also worth noting that the men‘s market is also growing in Russia. It is estimated to
generate around 10% of Russia‘s beauty market. This can partially be attributed to the fact that
appearance is important in the workplace, which stimulates self-purchasing.
The term ―metro-sexual‖ is not offensive to men and prestige beauty products are selling at a
greater pace than mass products.
Market Summary 2009- DataMonitor

Market value

The Russian make-up market grew by 8.7% in 2009 to reach a value of $1,576 million.

Market value forecast
In 2014, the Russian make-up market is forecast to have a value of $2,293.5 million, an increase
of
45.5% since 2009.
Market volume
The Russian make-up market grew by 5.2% in 2009 to reach a volume of 205.9 million units.
Market volume forecast
In 2014, the Russian make-up market is forecast to have a volume of 255 million units, an
increase of
23.8% since 2009.
Market segmentation I
Eye make-up is the largest segment of the make-up market in Russia, accounting for 33% of the
market's
total value.
Market segmentation II
Russia accounts for 14.9% of the European make-up market value.
Market share
L'Oreal S.A. is the leading player in the Russian make-up market, generating a 25.7% share of
the
market's value.
Market rivalry
The Russian make-up market is tending towards concentration, with the top three players holding
50.4%
of the total market by value.

                  Porter’s Five Forces: Russian Beauty Industry (Datamonitor)

Overview                       Russian make-up market is tending towards concentration (top
                                three players holding 50.4% of market)
                               Market leaders own a variety of recognized brands and operate in
                                various segments of the market, such as: eye make-up, face make-
                                up, lip make-up and nail make-up.
                               Fashion is a major influence on the make-up market
Buyer Power            Moderate;
                               Wide range of brands available
                               Accompanying variations in quality and price
                               Buyer power is prevented from becoming disproportionately strong
                                in this market.
Supplier Power         Moderate;

                               Raw materials for the end product are commonly available.

New Entrants           Moderate:

                               Entry into this market would be highly dependent on the growth
                                prospects and also on the size of the existing players.
Substitutes           Weak;

                             Make-up products have few substitutes

                             May face indirect competition from traditional cosmetics, such as
                              henna or kohl. Unlikely to be a serious threat in the major markets.

Rivalry               Moderate;

                             Most of the companies are geographically diversified but relatively
                              high fixed costs.




Institutional-based considerations (BRIC)

•Formal institutions - laws, regulations, rules

Despite the economic recession of 2009, a recovery is expected in 2010. The business
environment remains challenging due to over-regulation, lack of reform, insufficient public
investment and corruption. The delay in WTO accession is the biggest challenge for foreign
trade. The tax system remains complicated and tax evasion is widespread. Skills shortages are
felt in many sectors and the labour force is shrinking. Consumer markets offer many
opportunities as competitiveness is still low. The World Economic Forum's global
competitiveness index ranked Russia 63rd out of 133 countries for 2009-2010, which represented
a significant decline compared to the country's ranking of 51st in the 2008-2009 report, largely
due to the tougher economic conditions both domestically and internationally.

Recession ends but long-term problems persist
The stability of the Russian economy has been seriously challenged as a result of factors such as
the global economic crisis 2008-2009, international oil price volatility, corruption and lack of
economic reform. Following the turbulent transition of the 1990s, the economy grew at a healthy
pace in the 2004-2008 period, at an average rate of 7.0% per year in real terms. In 2009, a major
contraction of 9.0% in real terms took place, however a recovery is expected in
2010, thanks largely to Russia's energy and raw materials exports.
–supported by a regulatory pillar (the coercive power of governments)

In 2009, Russia was ranked 146th out of 180 countries in Transparency International's corruption
perception index,as problems with corrupt officials at all levels of government persist and no
significant measures to tackle corruption have been implemented.




•Informal institutions - norms, cultures and ethics

–supported by the normative and cognitive pillars

High-income earners have a growing appetite for luxury goods
Over the course of the last 15 years, an elite of top earners has evolved in Russia, with their
consumption preferences and lifestyles very different from those of the rest of the population. In
2008 there were 110 billionaires and 130,000 millionaires in Russia.
Outlook
The affluence of the country‘s business, political and entertainment elite will continue growing
faster than the wealth of the rest of the population over the forecast period, increasing the already
vast inequalities among different income levels. This will have a significant influence on the
market for luxury goods, as advertisers will increasingly have to differentiate their products from
those targeted at middle-income consumers, as well as from the counterfeit goods widely
available in Russia.
Impact
Russia‘s top-earning consumers increasingly see themselves as belonging to the international
elite of richest men and women. Demand for luxury vehicles, private yachts and designer houses
is very high among this segment, as the rich try to keep up with
each-other in terms of conspicuous consumption. Over the forecast period, producers of luxury
goods will have to continue innovating in order to offer this specific consumer segment new
products with which to demonstrate their exclusivity and social status.



Industry-based considerations (BRIC)

Porter’s Five Forces

The Russian make-up market is tending towards concentration, with the top three players holding
50.4% of the total market by value.
The market leaders own a variety of recognized brands and operate in various segments of the
market, such as: eye make-up, face make-up, lip make-up and nail make-up. Fashion is a major
influence on the make-up market, with consumers differentiating themselves quite strongly
through the styles and brands of make-up products offered. Therefore, buyer power is greater
amongst larger retailers (supermarkets/hypermarkets) as switching costs for buyers are not
particularly high. However, retailers often occupy a strong position in the supply chain, which
allows them to negotiate favorable contracts with manufacturers, thereby enhancing buyer
power. The wide range of brands available, with accompanying variations in quality and price,
means that buyer power is prevented from becoming disproportionately
strong in this market. Supplier power is also moderate, to the extent that the raw materials for the
end product are commonly available. Entry into this market would be highly dependent on the
growth prospects and also on the size of the existing players. Furthermore, make-up products
have few substitutes wherein manufacturers may face indirect competition from traditional
cosmetics, such as henna or kohl. However they are not likely to be a serious threat in the major
markets. Rivalry in the market is assessed as moderate with most of the companies being
geographically diversified but relatively high fixed costs.
Buyer Power

Major manufacturers tend to advertise to consumers in order to build brand loyalty. Retailers are
positioned at the end of the value chain, which implies that they are obliged to offer buyers what
they want, in a market that is subject to unpredictable changes in fashion. This reduces buyer
power, as most retailers must stock popular brands in order to maintain their own sales volumes.
Moreover, fashion has a major influence on the make-up market. Consumers can differentiate
themselves quite strongly through the styles and brands of make-up products they choose, which
also weakens buyer power. However, retailers often occupy a strong position in the supply chain,
which allows them to negotiate favorable contracts with manufacturers, thereby enhancing buyer
power. Where brand loyalty exists, it is more likely
that customer would prefer designer brands over retailer brands, although some designer labels
also have their own retail operations for which a large market exists. Direct selling is possible:
for example, Avon avoids the conventional retail distribution network, by using a direct sales
force. This is made up of third party independent contractors (not employees), who buy Avon
products at a discount and then sell to end-users. This limits the power of contractors to set the
prices, thus weakening the buyer power. Overall, buyer power in the make-up market is
moderate.
Supplier Power

Make-up products are typically manufactured using a range of chemical and mineral products,
such as essential oils, which are widely available from a large number of chemical companies.
Packaging is another significant input. The quality of many of the raw materials is important and
chemicals used in these products must be of a suitable standard for manufacturing consumer
products. Supplier switching costs are negligible for make-up manufacturers; inputs are typically
undifferentiated; and products can be made with a range of alternative raw materials, which
reduces supplier power. Suppliers are often small in scale compared to large manufacturers and
consequently their power is reduced, but this is offset by the fact that chemical producers gain
revenues from a wide variety of sources, reducing their dependence on cosmetics manufacturers.
Overall, supplier power with respect to the make-up market is moderate.



New entrants

The Russian make-up market comprises a small number of brands, some widely recognized,
which have strong market position. Large firms benefit from scale economies which allow them
to compete more effectively on price, consequently, new companies entering the market may
find it difficult to compete. Retaliation by existing players, such as the launch of a price war, is a
possibility, especially where a new entrant moves into a more concentrated segment.
Furthermore, the brand strength of major manufacturers is considerable, which may negate much
of the effect of low switching costs. New entrants may be able to start on a small scale, operating
within a particular niche, such as make-up with antiageing components. However, product
testing and research would be both: time-consuming and costly. In addition, new entrants will
need to persuade stores to stock their products, and major retailers aware of
their importance in the distribution chain, may be unwilling to risk displacing existing brands for
the sake of new ones. Substantial funds are also needed to start a business in this market, with
capital required for investment in production, distribution, and also advertising (which is crucial
for success in this market). However, due to the high sales volumes of make-up products and low
product differentiation, it is common for the companies to enter the lower end of the make-up
market. Due to the high brand strengthof leading make-up manufacturers, it is difficult for new
companies to develop their brands to compete at an international level. Overall, the threat of new
entrants with respect to the make-up market is moderate.


Substitutes
Make-up products have few substitutes as such. The conventional manufacturers may face
indirect competition from mineral make-up products. They are believed to be more natural, light
and allergy free as there are no chemicals, fragrances or preservatives in their contents. Mineral
make-up products are available in the form of foundations and loose powder. These claim to
remove the wrinkles which one gets due to aging process, acne, pimple scars or any other
blemish present on the skin. Overall, the threat of substitutes is assessed as weak.



Rivlary

The Russian make-up market is tending towards concentration, with the top three players holding
50.4%of the total market by value. As many large players have their own production facilities,
fixed costs are relatively high, which serves to enhance rivalry. Retailers may be unwilling to
switch between market players, as their customers are likely to seek the leading brands. The
diverse product range offered by some major players, including skincare and hair care products,
reduces their reliance on the make-up products, and thus somewhat eases rivalry. This
diversification protects the company‘s business against competitive pressures in any one
particular market. As most companies own large production facilities,
the need to divest such assets on exiting the global market constitutes an exit barrier and
therefore a driver of competition. However, most of these companies are geographically
diversified which weakens rivalry to some extent. Overall, rivalry in the make-up market is
moderate.



SWOT Analysis

Strengths


   -      Consumer behavior and attitudes
   -   Cosmetics Industry rebound from recession


Weaknesses


   -   Ease of doing business


   -   Slower recovery than other BRIC countries


Opportunities


   -   Aging population


   -   Room for ―masstige brand‖ during economic recovery


Threats


   -   Strong competition


   -   Technological advances taking over direct selling market




Resource-based considerations




Summary of Recommendations

   -   Mark for younger generation

   -   Anew for aging POP

       -Loreal as a 30s+ play

_____________________________________________________________________
                                              India
Overview
        The market for make-up in India has shown substantial growth in the past few years and
is projected to continue growing.      Between 2005 and 2009 the Indian make up market
experienced a compound annual growth rate (CAGR) of 12.9%. In 2009, the market generated
total revenues of $141.6 million. Over the next five year they expect there will be CAGR of 7%
which will produce a market value of $198.7 million by the end of 2014. This will represent an
overall growth of 40.3% from 2009. The majority of revenue from make-up sales came from lip
make-up which produced sales of $72.5 million which is equal to 51.2% of the market's overall
value. Nail make-up sales were a distant second making up 17.6% of the market‘s value.
        The Indian economy experienced an average GDP growth rate of 8.4% from 2003 to
2008 which was driven by the services sector and supported by industrial activity. Growth
declined the following year because of global economic downturn but still showed growth of
7.2% from 2008 to 2009. Growth fell again in from 2009 to 2010 to 6.5%. However, the Indian
economy is expected to grow at a rate of 7.9% during 2010–11 and is expected to continue to
grow at a rate of 7% or more a year from 2010 to 2013. This is credited to the fact that India has
a large working age population, with approximately 64% of the population is between the ages of
15 and 65 and a median age of 25.3.
        Companies are beginning to recognize that the rural market has the potential to occupy a
major share of the market but few companies have made their products available in these areas.
Avon‘s direct selling model would benefit in this type of environment because their sales
consultants could reach consumers in these untapped rural areas.
        Unilever, a global manufacturer and marketer of consumer goods in the food, personal
and homecare segments, is the leader in the make-up market in India and generates 34.7% of the
market‘s value. Coming in second is Revlon holding 25.5% of the market.
        Companies like Avon who use a direct selling model with a sales force made up of third
party independent contractors further weaken buyer power because they limit the power of
contractors to set the prices.
Indian consumers
       The growth in the Indian cosmetics market has and will continue to be driven by the
growing desire of Indian consumers to look young and beautiful. This trend will help the make-
up market in India to continue to experience the upward growth that has been predicted. The
growing need for Indian consumers to purchase make-up products was brought about by the
introduction of satellite television and the vast number of television channels they bring. Further
driving this need is the Internet, which has allowed Indian consumers to receive constant updates
about new cosmetic products. The newly flourishing Indian film industry has also added to this
desire because it has made Indian consumers believe in the importance of having good looks and
appearances. It should be noted that despite the dramatic increase in sales of make-up products,
the average consumer in spends considerably less on make-up products than consumers in any
other part of the world. The high volume of sales at low prices implies that the Indian cosmetic
industry has an even greater potential for growth in future than present. New entrants in the
make-up industry must be careful not to drastically increase prices immediately because the
Indian domestic market is price sensitive. They will need to take their time and develop
innovative strategies to gain market share.
       We have already established that the make-up industry in India is in the midst of
experiencing rapid growth. Therefore, it has a great deal of opportunity for new-to-market
companies to enter and become successful. In particular, U.S companies have increased chance
of success because products from the U.S. are perceived to be very high quality in India. This
puts them in high demand. This growth is driven by the emergence of a young urban elite
population in India. This growing segment of the population brings also has an increasing
amount of disposable income. More specifically, there is a growing number of working women
and their desire for lifestyle oriented and luxury products is the main driver of demand for
imported cosmetics products. Indian consumers tend to look towards international brands,
instead of brands from their own country, as lifestyle enhancement products. The wealthier
Indian consumers become, the more discerning and aware of they become of high-quality
personal care products, including make-up products.
       Herbal and mineral make-up products have been regarded as being in indirect
competition with traditional make-up products. However, the Indian consumer has recently been
found to be highly receptive towards these new segments as they have emerged as new trends in
the Indian cosmetic market. This seems to be happening because consumers are becoming more
aware of what is in the products they are using. They are also learning more about the benefits
of plant products and the harmful effects of chemical ingredients.
Institutional Framework
Formal
         As a way to work towards a favorable business environment, India has laws in effect that
protect both consumers and corporations. The Competition Act of 2002 ensured free and fair
competition in the market. The Consumer Protection Act of 1986 protects consumers from
unscrupulous traders or manufacturers. Further protection is offered by the comprehensive legal
framework for business entities. Some of the important laws regulating business in the country
include the Companies Act, Patents Act, Copyrights Act, Trademarks Act, Special Economic
Zones (SEZ) Act, Labor Laws, Right to Information Act, Information Technology Act,
Environment Protection Act and Foreign Exchange Management Act.
         In the past India was subject to strict trade barriers. Beginning in 1991, India has
gradually opened up its markets through economic reforms and reduced government controls on
foreign trade. Trade in India is regulated by the Foreign Trade Act of 1992 which lets the central
government make provisions for the development and regulation of foreign trade. They do so by
making it easier to bring in imports and imports into India and expanding the exports that are
sent out of India.
         India‘s currency could potentially work against revenue generated in India‘s make-up
market.    The rupee is subject to inflationary and fiscal risks. Fortunately, in 2010 the rupee is
expected to     appreciate about 7.6% compared with its value in 2009. The trend is expected to
continue in 2011 and beyond.
Informal
         In recent years, India has improved their relationships with regions outside of Asia
including Western Europe, the U.S., and Canada. As a result, India has formed new R&D
agreements with these nations.       Further, the government is expected to further build their
relationship with the U.S. in the future making doing business in India very promising for a U.S.
based company like Avon.
         With the introduction of satellite television and a number of television channels as well as
the Internet, the Indian consumers are constantly being updated about new cosmetic products,
translating into the desire to purchase them. Additionally, the flourishing Indian film industry is
fuelling growth in the industry by making Indians to realize the importance of having good looks
and appearances.
        Aside from understanding Indian consumer, it is important to realize how vast a
population the country of India has. India is the second most populous nation in the world, with
1.1 billion people, many of whom are young. Additionally, the number of females relative to
males is steadily increasing.
Industry Analysis of Brazil

                 Porter’s Five Forces: Indian Beauty Industry (Datamonitor)

Overview           
                   India‘s make-up market is fairly concentrated (top three players holding
                   68.1% of market)
                 Market leaders own a variety of recognized brands and operate in various
                   segments of the market, such as: eye make-up, face make-up, lip make-up
                   and nail make-up.
                 Fashion is a major influence on the make-up market
                 Consumers differentiating themselves through the styles and brands of
                   make-up products offered
Buyer         Moderate
Power                 Key buyers in this industry are retailers selling make-up products.
                      Major manufacturers work to create brand loyalty
                      Retailers are dependent on popular brands to maintain sales volumes
Supplier      Moderate
Power
                      Chemicals and mineral products used to produce make-up are widely
                       available
                      Suppliers have little dependence on cosmetic companies
New           Moderate
Entrants
                      Opportunity for new entrants to start on a small scale by operating within a
                       particular niche in the Indian make up market.
                      Entry requires substantial funds for production, distribution, and
                       advertising giving established companies the best chance of entry
                      More opportunity to enter the lower end of the market as a result of high
                       sales volume and low product differentiation
Substitutes   Weak

                      Few substitutes for make-up products
                    Indirect competition from mineral make-up and herbal make-up products.
                     They are believed to be more natural, light and allergy free as there are no
                     chemicals, fragrances or preservatives in their contents. Fortunately for
                     make-up companies, these substitute make-up products are only available
                     in the form of foundations and loose powder.
Rivalry         Moderate

                      Each company has their own production facilities with relatively high fixed
                       costs

                      Companies offer a diverse range of products, their reliance on make-up
                       products is reduced and are geographically diverse


SWOT Analysis
Strengths
-There is inherent strength in the economy
-India has the largest working-age population pool in the world
-India is a highly favored foreign domestic investment (FDI) destination
-The number of females relative to males is increasing
-India has a growing proportion of young people with disposable income
-India is rapidly becoming more urbanized
Weaknesses
-The unemployment rate has remained high even though the number of working individuals has
increased.
-GDP has fluctuated in recent years.
Opportunities
-India has a strong infrastructure spending and foreign direct investment (FDI) is expected to
drive industrial growth
-India‘s expanding domestic market is driven by rising disposable income and improving market
penetration.
-Each sector has its own specific opportunities.
Threats
-India has imbalanced regional development and widening economic disparities
Recommendations
-Since Lipstick sales make up the majority of make-up sales in India, it may make sense for
Avon to compete in other areas of the make-up industry. Avon is a U.S. company which Indian
consumers associate with high quality products. This could potentially convince them to use less
popular make-up products if they are introduced by a U.S company.
-Avon is always working with dermatologists to deliver new formulas. They could work on
developing cosmetics made of herbal products to appeal to Indian consumers.
-Once market share has been gained and consumers find they value a brand, higher end products
can be introduced.



CHINA
Just 40 years ago women in China were forbidden to reveal any kind of femininity, and were
required to wear masculine, military-style clothes, as in 1966 ―China's Communist Party
chairman Mao Zedong launched his Cultural Revolution and banned the pursuit of beauty‖,
which lasted for 10 years (―China‘s Beauty Boom‖). However, times are changing and beauty
industry is booming in China (―China‘s Beauty Boom‖). Women emphasize the importance of
beauty and sometimes taking to the extreme by undergoing various surgeries as leg lengthening,
as they believe that being taller and being beautiful to some extent would guarantee the success
at work and in life overall. Therefore, it is apparent that the importance of the beauty is on the
rise in China, and thus AVON could take advantage of this market by targeting the specific
needs and wants of the local consumers.

Institutional-Based Considerations
FORMAL

As business opportunities have grown in China, many business leaders realized that China is a
very unique country to operate business in. However, not only businesses‘ operations are
impacted by the formal institutional aspects, but also informal institutional ones.

The business culture has been influenced a lot by the historical events in China, as well as
communism, which still reflects in current practices. That is, Chinese government still controls
many businesses, still influences the everyday business of the privately owned firms, and the
bureaucracy level is still high. Some business may find it challenging to deal in China, and Avon
is no exception. Surely, Avon has a first mover‘s advantage, as it entered the Chinese market in
1990s. However, this alone did not assure the smooth business in China and the company had
experienced some challenges.
First of all, Avon is famous for their ―core competence‖ direct selling. By offering their products
to end consumers via direct selling, Avon managed to grow to be world‘s largest direct-selling
company. However, Chinese government has challenged direct-selling and put a ban in 1998,
accusing direct selling companies ―for ‗evil cults, secret societies and lawless and superstitious
activities.‘‖ (Barboza). In 2006, Chinese government lifted the ban ―after heavy lobbying from
American companies‖ (Barboza). Since then, direct selling has grown into an $8 billion industry
marketing a diverse array of product in this manner (Barboza). However, direct selling
companies in China have to comply with many regulations that are unique to China, and in some
way challenge the direct selling business model overall. Among some them are ―The investor
should have sound business credit with no record of illegal operations during the past 5 years. If
the investor is a foreign company, it must have experience in conducting direct selling business
for at least 3 years outside China; (ii) The DSE must have a registered capital of not less than
RMB 80 million; (iii) A guarantee deposit, in the sum of RMB 20 million, should be paid into a
designated bank account at the time of establishment of the DSE; (iv) The DSE should establish
and maintain an information reporting and disclosure system‖(Lo).

INFORMAL

In China, the importance of beauty goes back to the ancient times, and ―the modern Chinese
standards of beauty often mimic those from thousands of years ago‖ (―Chinese Philosophy of
Beauty‖). However, the Chinese women focus more on dealing with aging by changing their
lifestyles, rather than treating the aging symptoms with various products. For example,
―Traditional Chinese Medicine (TCM) targets the entire body and the factors that cause
wrinkles‖ (Young). ―TCM strengthens…internal organs, freeing blood to move smoothly
to…face and distributing energy and fluid evenly through [the] body, [which]
nourishes…complexion‖ (Young). Thus, as China‘s population is aging, there will be more
aging women as well, and hence companies that will be able to target and satisfy the needs of
these women most likely would experience growth in this industry. Additionally, the life
expectancy of Chinese population is increasing, which may suggest an opportunity for Avon in
terms of offering various anti-aging products.

Carrie Lennard in her article ―BRIC Key for Future Growth‖ points out that ―By 2013, China‘s
urban population is forecast to swell by 200 million people from the level it was at in 2003. This
results in very high absolute growth in beauty of more than $10 billion 2009–2014‖(20). That is,
as numbers of people, especially women, are migrating from the countryside to urban areas
beauty becomes more important.

Additionally, the same article points out some other important facts about the Chinese population
and the effects on the beauty industry. For example, ―although China‘s disposable income levels
are set to roughly double 2009–2014, the per capita spend on beauty and personal care will still
be just $22 per person per annum in 2014, far lower than the predicted $175 per person in Brazil.
This is due to China‘s culture of children financially supporting parents in old age, and means
that even with a forecast value of $31 billion by 2014, there is much room for China to become
the largest beauty market in the world‖ (Lennard 20).

What is more, ―the Chinese government is facing another serious problem, especially in the
context of the global economic downturn. Around seven million students graduated in 2009 from
the Chinese universities and it is estimated that the number would reach nearly 7.6 million in
2011. With ever-increasing numbers of students graduating from Chinese universities, the
government is expected to be extremely anxious about campus stability. Students spearheaded
the demonstrations in the pro-democracy unrest of the 1980s, including the protests in
Tiananmen Square. Decreasing employment opportunities in the current depressed market
conditions could spark widespread protests and fan political volatility in the country‖ (―China‖).
This could be seen as an opportunity for Avon, as many of these educated students are looking
for employment, and being an Avon representative may serve as a start for their careers.

David Barboza, the author of the article ―Direct Sales Flourish in China‖, indicated that Avon
recruits about 50,000 representatives a month, and at the end of 2009 had approximately a
million ―agents‖. So what makes Avon and their way of business so attractive to the Chinese
women? Barboza also points out that usually these direct selling companies provide jobs ―often
for disadvantaged or poorly educated young women.‖ Women in China have very few
opportunities to open their own businesses in China, thus direct selling model of business to
some extent allows entrepreneurship.

Furthermore, China is a collectivist culture, which means that social and family ties are very
important in forming relationships. Hence, representatives of direct selling companies have
better chances to approach and sell to those people that are ―within their circle‖.



                Porter’s Five Forces: Chinese Beauty Industry (Datamonitor)

Overview                  Chinese make-up market is tending towards concentration (top
                           three players holding about 53% of the market)
                         Market leaders own a variety of recognized brands and operate in
                           various segments of the market, such as: eye make-up, face make-
                           up, lip make-up and nail make-up.
                         Fashion is a major influence on the make-up market
Buyer Power           Moderate;
                         greater amongst larger retailers (supermarkets/hypermarkets) as
                           switching costs for buyers are not particularly high
                         Wide range of brands available
                         Accompanying variations in quality and price
                         Buyer power is prevented from becoming disproportionately strong
                      in this market.
                    retailers must stock popular brands in order to maintain their own
                      sales volumes
                    Consumers differentiate themselves through styles and brands of
                      make-up products they choose (weakens buyer power)
                    Customers prefer designer brands over retailer brands
Supplier Power   Moderate;

                        Raw materials for the end product are commonly available.

                        Supplier switching costs are negligible for make-up manufacturers

                        products can be made with a range of alternative raw materials

                        Suppliers are often small in scale compared to large manufacturers

New Entrants     Moderate:

                        Entry into this market would be highly dependent on the growth
                         prospects and also on the size of the existing players.

                        a small number of brands, some widely recognized, which have
                         strong market position

                        Large firms benefit from scale economies which allow them to
                         compete more effectively on price

                        Retaliation by existing players, such as the launch of a price war, is
                         a possibility

                        The brand strength of major manufacturers is considerable

                        New entrants may be able to start on a small scale, operating
                         within a particular niche

                        New entrants will need to persuade stores to stock their products

                        Substantial funds are also needed to start a business in this market

                        High sales volumes of make-up products and low product
                         differentiation

Substitutes      Weak;

                        Make-up products have few substitutes

                        May face indirect competition from traditional cosmetics, such as
                         henna or kohl. Unlikely to be a serious threat in the major markets.

                        Conventional manufacturers may face indirect competition from
                              mineral make-up products




Rivalry                Moderate;

                             Most of the companies are geographically diversified but relatively
                              high fixed costs.

                             Many large players have their own production facilities, fixed costs
                              are relatively high

                             Retailers may be unwilling to switch between market players



SWOT Analysis

Strengths

-

Weaknesses

-

Opportunities

-

Threats

-




Recommendations:

    -   Focus on anti-aging, skin brightening products

    -   Foundation-specific to the Asian skin-color or even lighter (as skin brightening is very
        popular)
-   -attract representatives by emphasizing the opportunity for entrepreneurship
                                                Works Cited

Kolchik, Svetlana. "Beauty is in the Eye of the Consumer." Russia Beyond the Headlines. 10 March

     2010: Web.

Lennard, Carrie. "The BRICs and beyond; The lure of emerging economies for the beauty industry.‖

     Euromonitor Global Research Blog. 1 October 2010: Web.

―Russia: An overview of Russian history, cultural idiosyncrasies, and the cosmetic market‖. Global

     Cosmetics and Fragrance Marketing. 26 March 2009. Web.

				
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