Multi-Level Marketing Avon

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Avon’s Marketing Strategy

Avon Products Inc. sells its products through direct sales by sales people whom Avon refers to as ‘Avon Representatives’. Avon, in their website, refer to themselves as “the world’s largest direct seller”. This direct selling takes the form of a model known as Multi-Level Marketing. This is a method of direct selling where the sales people operate as independent dealers who may purchase and resell a company’s products at a discounted price may and recruit other independent dealers who may in turn recruit more independent dealers to form a ‘pyramid’. They receive compensation based on their sales or purchases of company products and well as the sales or purchases of independent dealers in their direct line of recruitment up to the extent defined by the company.

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The method has its benefits compared to other selling methods. Scholars draw a comparison between the corporate pyramid structure and the mute-level marketing. They point out that multi-level marketing confers more benefits to a sales person by allowing them to leverage on the time of those people they train as opposed to the company pyramid structure where sales people cannot hire other sales people and increase their earnings by leveraging their time. This is likely to motivate a sales person thus increasing sales (Jones 55). Multi-level marketing also allows the sales people to ‘own’ their franchise and have the people they recruit as their ‘employees’ even when they start their own agencies. This is something that is not available in the typical corporate pyramid where a sales manager can hire a sales person and the when the person quits, they become competition.

To the company, multi-level marketing allows them to have a sales force, which they do not employ directly, thus being a relief on their payroll. Direct selling in general is also beneficial to the company in initiating sales of products. The company is also able to maintain control over the distribution channel, which is something not available with other methods of sale such as use of retail outlets. The personal touch involved is also necessary in products that may require demonstrations (Horngren et al. 115). It also increases chances of sale by taking advantage of the salesperson’s acquaintances. It is also a good method of building customer relationships through familiarity to the salesperson. Direct selling is also beneficial to the salesperson as it offers a business opportunity with low start-up cost, independence and training opportunities.

Multi-level Marketing’s main disadvantage is the perception people have about it. Most people feel that it is exploitative since it ensures that people at the top of the pyramid earn from the people recruited directly below them. Some people also feel that sales people take advantage of friendships to make profits. The method used to recruit sales people may also be a source of problems for the company. Sales people recruit people known to them, without considering their ability or experience in selling, who also at most times are just after a method of making quick money with minimal effort. This leads to a workforce of sales people who are frustrated. Marketing researchers have observed that around 9 out of 10 of those people who try network marketing fail owing to this assumption of quick returns with minimal effort. MLMs that focus more on selling the business opportunity as opposed to recruiting a sales force are also likely to fail because they will not achieve the main objective of selling the product.

Form 8-K

Key Announcements made by Avon

Avon Products Inc. released their fourth quarter and full year results for 2011 on 14th of February 2012. They did this in a filing made to the Securities Exchange Commission. The company made several announcements among them a rise in revenue for 2011 by 4% to $11.3 billion. This rise could be due to the improved economic conditions from the prior year. The company also announced that they were not planning for margin recovery in 2012 with their focus being on improving its top-line performance. Management also intended to improve cost management. The final strategy for performance improvement was increased cash generation. The company also announced plans to maintain its annual dividend of $0.92 in 2012. It also emerged that the company was seeking a new CEO. Avon also announced that it would conduct a conference call on that day to discuss the quarter results, which would be webcast live. The company also announced that the related slides were accessible for download.

Performance of Avon in the Fourth Quarter of 2011

The performance of the fourth quarter for 2011 was poorer than that of the same period in 2010. There was a 4% decrease in total revenue from the value posted in the same period the previous year. The decrease can be attributed to several factors. First, there was a decrease in total units by 2%. There was also a 3 per cent decrease in the number of active representatives (sales people). Increases in costs also resulted in the poor performance.

The inventory charge in Brazil and an increasing cost of commodities caused a reduction in gross margin (Garrison, Noreen and Brewer 85). Selling, general and administrative expense in the quarter also increased due to higher distribution costs, bad debt expense, and investments in sales training and incentives to representatives. Costs that decreased include restructuring costs. The greatest influence on performance was a non-cash impairment charge of $263 million on goodwill and an intangible asset related to the acquisition of Silpada Designs, necessitated by a rise in silver prices since the acquisition and reduced revenues and margins.

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This caused a reduction in operating profit of 31% compared to the fourth quarter of 2010. The regional performance classification showed that generally Latin America was the only region with an increase in revenue for the fourth-quarter of 2011 which increased by 2%.The other regions including North America, Central & Eastern Europe, Western Europe, Middle East & Africa and Asia Pacific all recorded reduction in revenue. This painted a poor picture of management’s performance.

Performance of Avon in the full year of 2011

The year 2011 saw an increase in total revenue of 4% above the value posted in the previous period (2010). This increase in revenue can be attributed to several factors among them contribution from acquisitions during the period resulting in a 1% growth in revenue and increase in total beauty sales by 5%. There was a however a reduction in active representatives by 1% and a 2% decrease in units. Operating profit on the other hand decreased by 20%, owing majorly to the Silpada impairment charge and restructuring costs incurred during the period. However, with the exclusion of the impact of these activities, operating profit had decreased by 6%, which still indicated a poor performance based on profits. With an increase in revenue but a reduction in profits, even with the exclusion of extraordinary activities, Avon’s poor performance can be attributed to a rise in costs, therefore a failure on the management’s side to control costs. Avon saw an increase in net debt at year-end 2011 by $107 million from the prior period. Avon’s cash flows from operations decreased by $33 Million owing to pension contributions, a long-term incentive compensation plan and higher restructuring payments.

Far-flung Operations

The supplemental schedules that are presented just after the consolidated statement of cash flows give detailed information about the various operations that Avon has worldwide. The supplemental schedule on regional results breaks down the financial statements into regional information while the non-GAAP financial measures schedule reconciles the non-GAAP adjustments with GAAP compliant reporting. The incoming CEO to determine the threats they are exposed to can use information from these schedules. Based on the schedules, the North American and Western Europe Middle East and Africa regions present a challenge since they reported losses in the 2011 financial year. Avon’s worldwide operations are divided into five (5) regions namely Latin America, North America, Central and Eastern Europe, Western Europe Middle East and Africa and Asia Pacific. The regions’ proportion of business of Avon can be determined using revenue as follows:

Region Total Revenue in $ Millions Proportion (Revenue/Total)
Latin America 5,116.0 0.4531 = 45.31%
North America 2,110.4 0.1869 = 18.69%
Central & Eastern Europe 1,580.6 0.1399 = 13.99%
Western Europe, Middle East & Africa 1,542.2 0.1366 = 13.66%
Asia Pacific 942.4 0.0835 = 8.35%
Total 11,291.6 1.0000

Latin America has the largest proportion of Avon business with Asia Pacific being the smallest market for Avon products based on revenue. Central& Eastern Europe and Western Europe, Middle East & Africa have almost equal proportions of revenue.

Significance of the goodwill and other intangible assets write-down on Silpada, Inc

The write-down on impaired goodwill is a substantial but not a significant amount. This is based on the proportion of the write-down to other expenses in the consolidated income statement for the 2011 financial period. The impairment constitutes 2.52% of the total expenses before interest and tax as per calculation from the 2011 full-period consolidated statement of income. Avon claims that the write-down played a major role in the losses it incurred. This is only true if you look at the fourth and final quarter results only. However, on further analysis it is clear that Avon saw a reduction on operating profit of 6% in the final quarter of 2011 even with exclusion of the impairment, which makes the impairment of little significance due to the little effect it would have on the financial statements. The poor performance the financial period of 2011 can be attributed more to the increase in selling, general and administrative expenses which increased by 4.82% and the increase in cost of sales by 2.66% as per calculations based on the consolidated income statement of the 2011 financial period.

References

Garrison, Ray, Eric Noreen and Peter Brewer. Managerial Accounting, Chicago: McGraw-Hill, 2011.Print.

Horngren, Charles T, Gary L Sundem and Jeff Schatzberg. Introduction to Management Accounting, London: Person Education, 2010.Print.

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Jones, Michael. Management Accounting: An Introduction, Chicago: John Wiley and Sons, 2008. Print.

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