How Avon Plans to Rectify Its Discounting Problem

Avon Products Inc. is still struggling to regain momentum.
The direct-selling business faced further sales declines, representative declines and losses in its second quarter, but management chose to focus discussions with Wall Street Thursday on the positives — improvements in how much sales reps are selling, and a decrease in discounting, from 98 percent of all products to 93 percent.
"Over the past years, we have allowed discounting to become the norm," said Jan Zijderveld, Avon's chief executive officer. "We drove purchase frequency through a heavy reliance on promotions as the main lever. This dependence is something we know we must slowly wean our consumers and representatives off as we modernize the brand and strengthen our business."
In order to do that, Avon has cut 23 percent of all stockkeeping units and is focusing on higher-priced innovation, management told Wall Street analysts on a Thursday earnings call.
Zijderveld noted that Avon has 20 percent more sales from new innovations, with a 30 percent higher price point. Future innovations include Distillery, a nine stockkeeping unit line of skin and makeup products that have high concentrations of active ingredients and "less unnecessary fillers," Zijderveld said. Avon is also launching two antipollution products, slated for the fourth quarter.
"In 2018, we began to reset this business, restore our competitiveness and modernized the core business model," Zijderveld said. "We are making steady progress as we improve productivity, strengthen brand relevance and value, become simpler and much more cost competitive."
For the quarter ended June 30, Avon posted $1.17 billion in net sales, down 13 percent from the prior-year period. Net losses narrowed year-over-year to $19.1 million, from $37 million. Active sales reps declined 10 percent.
Avon also struggled across geographies, posting regional declines across the board in the quarter. Europe, the Middle East and Africa posted a 15 percent decline in net sales, to $425.1 million; South Latin America posted a 14 percent decline, to $443 million; North Latin America had a 7 percent dip in sales, to $193.8 million, and Asia-Pacific dipped 4 percent year-over-year, to $108.4 million.
Miguel Angel Fernandez Calero, Avon's global president, noted that trends are improving in Brazil and Russia, two of the company's largest markets. Sales in Russia were still down 12 percent in constant currency, Calero said, and the region is "in full reset mode." He added that Russia is seeing signs of recovery. Sales improved 0.2 percent in Brazil, due in part to lower bad debt. But in Mexico, sales declined 4.9 in the quarter, due to "tougher market conditions" and "a lower number of sales leaders," Calero said.
Executives noted that their focus has been on improving margins — which were up 190 basis points from the prior-year period — and that sales declines may continue for the next two quarters.
In early 2020, Avon is expecting the merger with Natura Cosméticos SA to close. The deal still requires regulatory approval, but would make the combined businesses the fourth largest pure-play beauty business in the world.
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