POLYTECHNIC UNIVERSITY OF THE PHILIPPINES College of Accountancy and Finance Sta.

Mesa, Manila

AVON PRODUCTS INC. 2009

Submitted by: Group #6

BSAH 3- 2
BECERIL, Crystal Dawn CASTAEDA, Chiara Jolene ECHALAS, Lejanie FLORES, Charmaine GECHA, Mark Paul NUAS, Vangie SARATE, Charisse

Submitted to: Dr. Celso Jovy D. Torreon Professor, Business Policy and Strategy

TABLE OF CONTENTS

TIME CONTEXT VIEWPOINT

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CENTRAL PROBLEM . OBJECTIVES Must Objectives Want Objectives SWOT ANALYSIS Strengths Weaknesses Opportunities Threats

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8 9 10 13 15 19 21

ALTERNATIVE COURSES OF ACTION . RECOMMENDATION . . .

DETAILED PLAN OF ACTION .

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TIME CONTEXT
We, Group 6 of BSAH 3-2 assumes the year of 2009 as this case time context.

VIEWPOINT
We put ourselves as the consultants hired by the company to give recommendations that will help managers make efficient and effective decisions.

CENTRAL PROBLEM
The sudden decrease in the market price per share of the Avon Products Inc. which fell from P39.75 to P24.07.

Theoretically, shareholders wealth maximization appears to be the most important objective for any business to pursue. It is a long-term objective as opposed to the profit maximization objective usually followed in the short-run. Shareholders wealth is the value of the company generally expressed in the value of stock. So they must maintain the high price of a stock. The value of stock of Avon Products Inc. increased by 18.51% from the year 2006 to 2007. Then it dropped by 39.17% in the year 2008. These changes may affect the firms operation in the future. Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. The question is what makes people dislike the stocks of Avon. Three different categories of factors affect stock price movements. The first category includes factors relating to the company itself, such as its balance sheet, profitability, sales forecasts

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and position within the industry. The next category includes factors relating to the larger economy, such as legislative changes, economic climate and global issues. The general cause of the decrease in the stock price is the decline in earnings of a firm and lower or suspended dividends. But in the case of Avon Products Inc., their earnings increase by a significant amount as well as the dividends declared in the year 2008. Its facie evidence that Avon operated well this year. We see lowered payout ratio as one of the problem of lower stock price. Even though the dividends declared by the board of directors increased, still, the percentage declared out of the earnings decreased. The payout ratio in 2007 and 2008 are 61.2% and 39.2% respectively. The large difference in the payout ratio is significant in the view point of the shareholders. Since the Avon Products Inc. is a large and well-established company, they must return a larger percentage of earnings to their stockholders. Nevertheless, dividend payout ratio is not the only thing we consider in the decline of stock price. The Avons high level of liabilities is threatening to the company. Having a debt ratio of 88.89% means that 88.89% of companys asset is financed by debts which may result in higher leverage thereby increasing risk. It is also critical to pay attention to the debt/equity ratio of the company because if it is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Substantial increases in the debt-to-equity ratio can indicate a company is borrowing heavily. The high debt ratio and high debt/equity ratio negatively affect the firms share market price. Many shareholders view company with high financial leverage negatively. As a result, many of them will sell their stocks because they are nervous. High debt means high interest. This high interest may decrease EPS in future then lower share price. If a company, in the worst case, goes bankrupt, the stockholders are the last to be paid retribution, if at all. Leverage has also negative effect on future investments.

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In order for a company to be attractive to the investors, the companys image must be good. The price movement of a stock indicates what investors feel a company is worth. The problem with Avon is that their brand image is weak. The name Avon is not associated with most of the products. And Avon lagged behind seven of their cosmetics companies in their customer loyalty, probably because their marketing strategy is direct selling. A company using direct selling has limited customers. Avons customer will purchase only if Avons representative will sell directly to them. Avons major competitor like Revlon sells in many prestige department stores that generally catches many customers. When compared to product quality, Avons competitors lik e Revlon and Mary Kay are leading. Its because of their high pricing strategy that usually link to quality of product and brand image. The stock price is a measure of companys financial health. For this reason, a company's stock price is a matter of concern. If performance of their stock is ignored, the life of the company and its management may be threatened with adverse consequences, such as the unhappiness of individual investors and future difficulties in raising capital.

OBJECTIVES
A business objective acts as guidance for a company's growth or development in a specific area. It serves as a framework for delegating personnel resources, determining what kinds of policy changes need to be made to accommodate the objective, and understanding how the objective will allow the company to be more competitive in the marketplace. Creating defined objectives allows your business to stay focused on the core principles that the company was founded on. Your objectives define what your companys goals are.

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Thus, in our endeavor in seeking out the best alternative among the alternative courses of action provided, we formulated objectives that Avon should employ in order to progress and eventually, attain success. The objectives are sorted according to their time frames, whether short- term or long term. The former for the Must objectives and the latter for the Want objectives. These objectives were founded on the SMART principle. (Specific, Measureable, Attainable, Realistic and Time-bound)

A. MUST OBJECTIVES 1. Employ the decision that will best benefit the companys owner through increase in sales. Increasing the sales of the company, eventually ascends profit. Thus, increasing the earnings per share of the company and investors would then be compensated with higher dividends. Delivering less risk and increasing investor confidence.

2. Implement the alternative that will increase the companys market value and profitability. To achieve the ultimate goal of maximizing owners wealth, it is important also that we first meet its prerequisite- that is ensuring the profitability of the company. Increase of profitability, in reference to the market trend will increase the market price per share. And as market price per share increases, investors confidence will ascend.

3. Implement decisions that will be able to minimize performance gap and increase performance by 60% to 100%. By being able to minimize performance gap and increase performance by 60% to 100%, companies often experience a cultural "multiplier effect." Over time, as strategies are

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successfully turned into performance, leaders in these organizations become much more confident in their own capabilities and much more willing to make the kinds of stretching commitments needed to inspire and transform large companies. In turn, individual managers who keep their commitments are rewarded with faster progression and fatter pay checks, reinforcing the behaviours needed to drive any company forward.

B. WANT OBJECTIVES 1. To provide beneficial advantage for the society by providing more products that is health-friendly. Businesses are not always about profit and money. Businesses also respond to the needs of the society as a whole. Providing health-friendly products, such as organic cosmetics for Avon, is a way of showing their appreciation as well participation to the society. A win-win situation will then be established, where both the society and the company itself will benefit. The society for being ensured that the products they use are of less health hazards and the company being given due recognition for it.

2. To protect the interest of the stakeholders. Every business should be able to protect the interest of the people who participates on their day to day activities to be able to ensure the continuity of its operation. They need to give protection to the best interest of their Employees, Creditors, Customers, suppliers, owners, the Government, And the General Public. Through this, the company will be able to magnify and eventually reinforce the behaviours vital to drive the companys progress.

3. To foster a norm of over performance within the organization.

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Through this, investors will start giving management the benefit of the doubt when it comes to bold moves and uncertain news. The result is a performance premium on the companys stock one that further rewards stretching commitments and performance delivery. Before long, the companys reputation with potential recruits rises and a virtuous circle is created, where talent begets performance, performance begets rewards, rewards beget even more talent. Thus, companys success is ensured.

SWOT ANALYSIS
STRENGTHS 1. High liquid assets that can cover current obligations. A higher current and quick ratio indicates greater degree of liquidity. The operation of the company, its revenues and earnings brought a high liquidity ratio, which is a great indication that Avons operation is doing well with regards to meeting its obligations. This may give the company a high credit rating. Although the liquidity ratio has declined from 2006 to 2008, the ratio from 1.31 to 1.22, it is still acceptable because the company was also affected by the global crisis and recession.

2. Efficient Utilization of Assets The assets in Avon Product, Inc. are efficiently utilized. The company has been doing a good job in managing their assets to garner the most benefit it can obtain. In fact, the company pursues resource-based strategies that attempts to exploit company resources in a manner that offers value to customers in ways rivals are unable to match. Avon is pursuing a cost-based advantage that invests in super-efficient distribution centers that gives it the capability to distribute its products at a lower cost than rivals. The return on

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assets of 14.85% also showed the overall effectiveness of management in generating profits with its available assets, the ratio is also acceptable within the industry as well.

3. Increasing operation effectiveness Since the company is highly leveraged, which means that most of its financing comes from debt, Avon is very conscious that they will be able to cover its contractual interest payments to the creditors. The operating profit of Avon showed a large margin of safety that secures their interest payments and other current obligations like taxes. This may also probably contribute to the companys credit rating. Their operation resulted to have a very good standing in the market. Focusing on direct selling as the channel of distribution, sales revenue and net income largely increased.

WEAKNESSES 1. Inventory is sold slower and company is having too much stock. The companys inventory is taking quite some time before they are actually sold in the market. The ratio from 2006 to 2008, which is 3.81% to 3.92%, showed that inventory is sold even slower than the preceding years. The longer the products are stocked, the higher is the cost to keep them, thus increasing Avons expenses.

2. Collection and credit policy implementation Avon is known for its one (1) month to pay policy from the date of purchase, but the ratio in 2008 showed that the company has been collecting its credits more than a month, specifically 40 days, which means the credit and collection policy is not strictly implemented, resulting to a high average receivable turnover. If this situation continues, the

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company may have problems in generating cash for its operations, like meeting its current obligations and the like.

3. Declining operating margins Avons 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 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 1. 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

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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 million to $400 million before taxes over the next several years. Avon is targeting $200 million 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.

2. 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 million, $368.4 million, and $248.9 million 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

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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 million 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.

3. Use of Social Media and 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 Facebooks site with their brand Mark. They have been on the forefront of leveraging this technology to produce more sales.

4. 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. In China, Avon Products was granted a direct selling license by China's Ministry of Commerce in 2006. The

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company has expanded its operations in China since then becoming the second largest cosmetics market in Asia after Japan.

THREATS 1. Competitive environment in the global cosmetics industry Like all companies in the cosmetics industry Avon has faced considerable competitive pressures in recent years, both from its direct selling rivals as well as 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.

2. 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. Negative sentiments like lower commissions and negligible employee benefit create dissent

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which could result in lesser interest by the representatives in enhancing the Avon sales. 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.

3. 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. Total revenues declined by almost 9.0% and operating margin declined by an estimated 2.5 points (Avon, 2010). 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% (Avon Products Q1, 2010). Unfavorable currency fluctuation, if not hedged properly, could adversely impact the profits and revenue of the company in the future.

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ALTERNATIVE COURSES OF ACTION

ACA 1: Decrease debt ratio through increasing internal financing by issuance of new shares Advantages: 1. Capital is immediately available Disadvantages: 1. Expensive because internal financing is not tax-deductible

2. No interest payments

2. No increase of capital

3.

No

control

procedures

regarding 3. Not as flexible as external financing

creditworthiness

4. Spares credit line

4. Losses (shrinking of capital) are not taxdeductible

5. No influence of third parties

5. Limited in volume (volume of external financing as well is limited but there is more capital available outside - in the markets - than inside of a company)

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ACA 2: Strengthening direct selling strategies and Reaching markets globally through online advertising Advantages: 1. Increase in sales Disadvantages: 1. Additional costs

2. Increase in customers

2. Risky

3. Improve employee skills

3. Can be annoying and be ignored by web users

4. Fast improvement on product and service

4. Transaction issues/internet fraud

5. Easy update on products

6. Less costly way of advertising

7. Provides wider market reach

8. Faster relay of information

9. Global access to the company

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ACA 3: Investing on Research and Development of green products Advantages: 1. Reduced Utility Costs Disadvantages: 1. Increased Capital Outlays

2. Decreased Environmental Impact

2. Decreased Productivity

3. Improved Public Image 4. Rebates and Tax Benefits 5. Increased Business Opportunities

3. Products are more expensive 4. Customer Backlash

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ACA 4: Factoring of receivables Advantages: 1. Maintenance of the receivables account Disadvantages: 1. The cash price of the invoices is discounted by the factor company

2. Collection of receivables

2. Possible harm to customer relation

3. Protection against the default in payment by 3. May be viewed as a sign of financial crisis or debtors weakness by customers and other creditors

4. Helps in enhancing the liquidity of the firm 4. and efficient capital management

Maintenance

of

credit

and

collection

department is expensive

5. Does not infringe upon the rights of the customers.

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RECOMMENDATION
Among the alternatives presented above, the second alternative is the best possible solution. Strengthening direct selling strategies will help the company to increase its market price per share. Direct selling is one of the core competencies that the Avon Products Inc. has. The company is the worlds largest direct seller with 5.4 million Avon representatives in over 100 countries. Avons business model provides for the company to sell its products to its representatives on credit, so that for most part, the representatives do not pay the company until they get paid by their customers. For promoting direct-sales through consumer and the business; one is to offer incentives to its customers and second is to motivate the business to promoting its products by advertisements, establishing sales competition for employees, participating in conventions, personal and entrepreneurial skills development trainings. Promoting Avons products and high chance of increasing direct-sales is to offer incentives to its consumers. Incentives provide a positive motivational influence to encourage and excite buyers to buy the products. Such incentives, appropriate for this situation, are coupons, rebates, product samples and awards. Coupons can be attached in mail, beauty magazines, newspapers, and advertisements on mail or on the internet companys official website. Rebates can be offered also to attract more buyers to buy the products. Rebates can be advertised also on coupons through mail or the internet. Another successful way of attracting consumers is by offering samples of Avons cosmetic products, which can be done door-to-door or attached on an advertisement through mail. Finally, awards through prizes and contests can offer consumers the chance to win something small or big like cash or free-trips. Also, prizes can be offering a free gift whenever a consumers purchase one of Avons products.

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Motivate the Avon business to reach its goals of promoting its products and gaining sales through advertisements, sales competition and participating in conventions. Advertising is the key to attracting consumers and the outcome is high sales. Such advertisement is done through media (television), mail, or the internet. The more awareness from the public of the company likely to attract more buyers and the outcome is high sales. The next strategy is to encourage Avons sales representatives with awards/prizes that reached their sales goals within a period of time. Another is participating in conventions and this is more likely to increase sales through direct contact with customers. Another is to provide regular training to representatives that will help to further develop their communication skills and entrepreneurial abilities which could contribute in increasing the companys sales. These programs should include proper product usage, policies to be implemented like credit and collection policies as well as recruitment benefits they may get in conducting the business. Through these strategies, sales can be increased thereby increasing profits as well. As profit increases, the companys earnings per share will increase thus enabling them to declare higher dividends. Higher dividends normally, give confidence to potential investors attracting them to purchase more shares. Having new investors will help increase the market price per share that will have a big impact on the maximization of shareholders wealth which is the ultimate goal of the company. New investors give the company enough funds that they can utilize for future use.

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DETAILED PLAN OF ACTION

OBJECTIVE STRATEGY PERSON RESPONSIBLE Identify the problems with the current direct selling strategies Make Avons website more customer friendly Develop a clearly defined plan consisting of actions to be taken to improve direct selling Redesigning the website Avon Management 3-4 months Thru this, the company will have a guideline to use their resources effectively It would cost the company to redesign the website but later on the benefits of a good website will be seen. The company can use the appropriated fund it earns. This will benefit the company in terms of increase in sales growth Use the fund set aside for advertising purposes. Thru this people will be encourage to buy and try the product In this way, the representative will be encourage to put more effort in selling to get the reward TIME RESOURCE

IT Department

1-2 months

Use innovation

Launching new products in convention or fairs, which are not only low in cost but also high in quality Advertise through media, mail, or the internet

Research and development department, Production Department

6 months

To encourage the public to patronize the product

Marketing Department

Every 4-5 months

To ensure that the representatives contribute to the company

Provide awards, rewards or commission changes to representatives if they meet the quota

Human Resource Department

12 months

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To ensure effective performance of sales representatives To know if the plan has been effective in its implementation

Proper selection and training of sales representatives

Human Resource Department

1-6 months

Follow-up Evaluation

Accounting and Finance Department as well as the Top management

6 months to 1 year

The company will incur training cost but then trained representative can be an asset to the company The company can take an adjustment in its plans once it has figured out the difference between the planned and actual result

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