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Ding-Dong Avon Stalling?

Ringing doorbells across the nation with her sample case in tow, the intrepid Avon Lady was once the Queen of Suburbia-and an American icon. Today the $5.2 billion company she represents is struggling to reinvent itself in a beauty market teeming with splashy e-commerce sites and nouveau retail boutiques. Andrea Jung, Avon’s third CEO in as many years, intends to rejuvenate the domestically challenged global enterprise with a brand makeover.

Ding-Dong. It’s 1886 and door-to-door book salesman David H. McConnell is changing the face of the cosmetics industry with a simple concept. At a time when women don’t even have the right to vote, he sets them up in business-employing housewives in rural and small town America to peddle perfume to their peers door-to-door. In 1939, an expanding product line and rapidly multiplying sales force prompts the renaming of his California Perfume Co., and the world famous lipstick-wielding Avon Lady is born.

Ding-Dong. It’s 2000 and both women and retail have come a long way, baby. Most of Avon’s target customers-and, for that matter, potential Avon Ladies-are full-time members of the workforce. In short, they’re no longer home waiting for the doorbell to ring, nor overly interested in becoming commission-only, part-time help.

Meanwhile, deep-pocketed multinational cosmetics firms have extended their fight for market share first to Small Town USA via Wal-Mart stores’ shelves and then to the Web storefronts of fashion and beauty sites like iVillage.com, ibeauty.com, and eve.com, bringing value-priced cosmetics within reach of women virtually everywhere. If that isn’t enough competition for today’s army of Avon Ladies-now 3 million strong-younger, hipper beauty shop chains like Sephora, Aveda, and Body Shop are giving more than lip service to the personal assistance concept, doling out product samples and consulting with shoppers on the respective virtues of skin-care cream options.

Faced with dramatically shifting distribution channels, an outmoded image, an aging customer base, and the legacy of a deeply entrenched direct sales force, how does a 114-year-old global cosmetics firm cope? Enter Andrea Jung, the chief executive officer charged with bringing what’s been viewed as a “Graying Goliath” of a cosmetics company from frumpy to fashionable. In many ways, the 42-year-old Jung epitomizes the contemporary consumer Avon is striving to reach      and the image it’s looking to project. Svelte and fashionable, she’s Avon’s first female CEO, and one of only three women heading Fortune 500 firms. She juggles a high-powered job, a high-profile marriage (to equally driven Bloomingdale’s CEO Michael Gould), and motherhood (to a 10-year-old daughter and a two-year-old son), and manages to fit in seats on the boards of both GE and Donna Karan.

The Canadian-born Jung, who’s been CEO of Avon for a scant seven months, didn’t spearhead the makeover goal that Avon’s chairman, James Preston, characterized as “becoming the Coca-Cola of the beauty industry,” but she has been instrumental in implementing it. After joining the firm as a marketing executive in 1994, Jung rapidly rotated through the company’s top marketing posts, drawing on experience garnered while at Neiman Marcus and I. Magnin to slash a third of the company’s product line, unveil new products and updated packaging, introduce Avon retail kiosks in shopping malls, and develop a global ad campaign.

Despite these feats, Jung was among four insiders-two of whom have since left the company-passed over for the top seat when Charles Perrin, former

CEO of Duracell, was brought in to steer Avon in 1997. But she got her turn a mere 18 months later. After disappointing financial results for fourth quarter 1999 sent share prices spiraling down to a 52-week low of $23.31, the company announced Perrin’s retirement and named Jung-then president and COO-to the CEO chair. While some viewed the move as a belated correction, Jung is more philosophical. “The experience I had between ’97 and ’99 definitely readied me for the job in a different way,” she says. “I was marketing-based and U.S.-based. I hadn’t run our international business; I hadn’t run the operating line. Because of the board’s insistence that I go on the road and get that experience, I’m sure I’m a better CEO than I would have been.”

It’s experience she’ll need to face the growth hurdles, both international and domestic, that loom ahead. While Avon’s international sales volumes are on the rise, currency exchange rates took a toll on 1999 figures, knocking Europe’s sales increase of 13 percent down to a 2 percent increase over 1998 and taking Latin America from a 16 percent climb to a 3 percent decline. But raising flat U.S. sales, which still account for nearly 40 percent of the company’s overall revenue, remains Jung’s most formidable task.

“Probably the biggest challenge Jung or anybody will ever face in operating Avon will be developing alternative sales channels without alienating Avon’s sales reps,” says Robert Izmirlian, an investment officer at S&P Equity Group. After all, Avon’s 500,000-plus U.S. reps could well be put off by the prospect of losing their exclusive claim on Avon products. “I’m happy to see Jung making initiatives in the U.S. where the direct-sell methodology doesn’t necessarily fit our demographic environment as it may have 40 years ago,” says Izmir-Han. “Yet it’s something that has to be done carefully-you can’t turn on the faucet and implement it overnight.”

Sensitive to the issue, Jung’s game plan for moving into retail and e-commerce walks a tightrope between updating Avon’s reach and remaining loyal to its sales force. “We tested Avon Beauty Center mall kiosks with the desire to understand how we could enter retail in a complementary way and not conflict with our representatives,” she asserts. “Over the past six months, our research has found that 95 percent of the mall kiosk customers had never bought Avon before. So this is a new customer.”

The company’s Internet strategy is even more clearly Avon Lady-compatible. Rather than cannibalizing existing sales, a relaunch of Avon’s Internet site will enable its representatives to serve their customers through their own customized Web pages. The firm recently announced a partnership with Gateway to help reps interested in delving into e-commerce finance hardware and software.

First quarter 2000 reports suggest Jung is on the right track, exceeding expectations with a 9 percent sales hike and a 2.5 percent climb in profits. Yet Avon’s share price remains stalled at $38, considerably lower than its 52-week peak of $59.12. Investors, it seems, are taking a wait-and-see approach, looking at Jung’s efforts to rejuvenate U.S. sales as a test of her abilities to tailor the global company’s strategy to the needs of multiple markets.

“We’ll have to see how these initiatives pan out,” says Izmirlian, who points out that the U.S. market is a microcosm for challenges Avon may eventually face in all the 135 countries in which it currently operates. “It may take years for some, but ultimately every country they are in will go through the same problems they face here. As a country’s economy becomes more mature, direct sales may not be the best way to sell product. And you don’t want to have to always go into the next emerging market to find your growth.”

Jung is confident that she—-and Avon-have what it takes. “Avon invented the concept of direct marketing and direct selling beauty,” says Jung, who recently added Roche vitamins and nutritional supplements to Avon’s core line. ‘And that’s still very valid to us. What we really needed to make sure of is, does the brand and this model make sense 10 years out? And our answer is that with modernization and the incremental expansion of opportunity that we’re going to gain from other channels we haven’t dealt with before, we’ll have a firm that will be around for another 114 years as strongly as it was the first 114.”

Avon Mailing

Avon is obviously a recognized brand, but it’s one with an outdated image. How do you plan to overcome that?

Our makeover had to focus on the products first, then internal communications, right to our core customers, and finally to new customers who haven’t seen us. We started by revitalizing our products. We eliminated a third of the product line, repackaged the rest, and then focused on innovation. We boosted R&D 50 percent in the last three years, focusing on breakthroughs in skin care and color cosmetics technology. The line and the brand are different today than they were even in the mid-’90s.

Then we moved into the next phase sampling. We’re spending 100 percent more this year than last to get our products out there. And we’re spending approximately $25 million annually in an incremental investment to upgrade our core brochure, which is our store. It’s higher quality paper and a larger size, with larger product pictures, and younger models.

Last, there’s “Let’s Talk,” a $90 million ad campaign-50 percent more than we spent last year-that we launched in 23 countries this year. There’s lots of supermodels and glamour out there in TV and in magazine ads. And all our customers tell us, “We don’t look like that; we’re real.” Our “Let’s Talk” campaign features accessible women. It’s “Let’s talk about why you should use Avon, about why Avon is for you when you didn’t think it was.” And it’s obviously a major statement that this is not your grandmother’s Avon.

The Web and retail penetration make a person-to-person approach look antiquated-particularly in the U.S. market. What role will the Avon Lady play in the new economy?

We still believe there’s tremendous opportunity in the core direct-selling business. It needed and needs certain strategic changes. For example, there’s a way to revolutionize direct selling with B2B solutions. We can Web-enable representatives in our core channel to do business easier with us and with their customers through technology and to move away from a paper-, telephone- and knock-knock-based mode.

But even without technology, this person-to-person selling in cosmetics is very important. Women like to use products that other women say work. The Internet will be a big opportunity, but you can’t smell a fragrance there yet.

On a great day, I don’t believe that the amount of cosmetics sold over the Internet will be more than 25 percent. It’s a huge opportunity, so that’s not to pooh-pooh that space, but there will always be room for other channels. I don’t believe the Internet will eclipse direct and/or retail selling of cosmetics. A representative is free delivery; she’s a personal beauty consultant. Some people want that high touch.

Direct selling makes perfect sense in places like Brazil and Russia, where retail infrastructures are close to non-existent. It’s far less appropriate in areas like North America and Europe. How are you tailoring Avon’s approach to fit the varying cultures and economic environments of 135 countries? And how will you adapt them as those conditions evolve?

When you spend time in Brazil or in Malaysia, you realize that internationally there are what we call five Avons rather than one, unified template. There are different stages of development, brand acceptance, and the channel. And we have different operating models, although the foundation, obviously, is still the same. Understanding the nuances culturally and business-wise are critical to running this business.

In China, the government banned direct selling in 1998. That was [an example] of the art of being flexible, doing business as a company one way and then having to, not over time but immediately, wake up the next morning and be in a different business. But our people were able to respond to that.

In Latin America and in some emerging markets in Southeast Asia, direct selling penetration and our market share are unbelievably strong. Ten years from now, there will probably be a more developed retail infrastructure and more competition.

In more developed markets like the U.S., the U.K., and Australia, we are moving to expand into retailing and Internet opportunities. But I don’t think that they will replace our direct sales business, [which is] close to $2 billion in the U.S. and an 18-plus percent operating margin. We are certainly not walking away from that business. I don’t believe it’s a there in no-growth scenario domestically in our core direct-sale business, it’s medium-growth. To get a high-growth model in the U.S., we have to look at expanding access through retail and e-commerce.

How do your representatives react to the prospect of Avon going retail?

Our research shows that our mall customer is a new customer who is otherwise buying from other retail competitors or other department stores. She likes to buy and touch the products.

We also never undercut representatives’ prices. A representative will always be able to sell the discounts in our core business, which are not offered at retail. So it’s never more advantageous to buy there. It’s just convenience.

We invite our representatives to every mall kiosk opening. We try to encourage the fact that this is sort of flagship Avon. They can get tips from the beauty consultants and send customers there to sample products.

How do you plan to expand your U.S. retail presence?

Having proven with very competitive sales per square foot that we have a viable retail model, we’re pursuing two different but not mutually exclusive avenues. One is to open more mall locations, but to franchise, which has been a successful strategy for us internationally in countries like Venezuela and Malaysia. While you probably won’t see 1,000 kiosks owned by Avon, you might see 1,000 owned by entrepreneurial women.

The other strategy at retail that we are contemplating is an in-store concept with a major retailer. We’re talking with potential partners about a concept that’s beauty-related, but broader than just beauty, encompassing stress, health, and wellness. It’s too early to talk about yet, but it won’t be a department store.

Observers feel Avon is late in pursuing an aggressive e-commerce strategy. How do you plan to catch up to established entities like ibeauty.com?

We’re trying to marry high touch with high tech. Our challenge is to find the right combination financially and strategically of living in both worlds. Compared to the competition today, our Internet strategy is broader in scope.

We are going to Web-enable the core channel. A representative today may submit a 48-page paper purchase order; tomorrow she can save time by hitting one button to do that. Today she calls the call center or her district manager to find the status of her order. All of this can be Web-enabled. And that’s a cost-cutting opportunity, because a paper order is $ I and a Web order is 20 cents. And as she tries to get more customers, there’s only so many she can handle in a paper-based, telephone-based way. So we’re going to allow her to have her own Web site, of which 90 percent will be common, and 10 percent customizable. That’s a big opportunity that dramatically changes direct selling.

Avon also has an advantage in that we’ve always shipped small orders to individuals. So we don’t have the back-of-the-house complexities and barriers faced by other traditional companies who try to get up and running.

How comfortable are your reps with that prospect?

They’re standing-ovation comfortable, meaning that many have been wanting to have Web sites; and 42 percent have Internet access. But we didn’t want 500,000 different sites, which is why we have a common template.

Beauty on Board

Have you brought anything you absorbed on GE’s board to Avon?

Jack’s “destroy your business.com” concept helped us. Having every business unit look at how you would try and destroy the old economy business with the Internet if you were on the outside, and then develop a strategy to defend that is a brilliant, simple way to develop an Internet strategy.

Do you see being a woman as making you a “better” marketer to women?

It has advantages. When I used our nail enamel and it chipped faster than I thought it should, I could go back and say, “We haven’t got this formula right yet, let’s get it right.” I’ve known some great male marketers for cosmetics, but being a user brings an advantage as long as all the rest of the skills are there.

In 1997, when you and other colleagues were passed over for the CEO post, were you tempted to leave?

I believed then, as I do now, in what the company could be. I had to believe that my turn would come and I didn’t want to give that opportunity up, even for another firm with more revenues and an easier strategic challenge. Once you fall in love with what Avon can be-not only what it is, but what it can be-you see it as one of the biggest strategic and corporate opportunities for, not a turnaround, but a makeover, in the history of companies. That’s a professional turn-on to me.

Each new CEO faces something he or she wasn’t completely prepared for, or that came as something of a surprise. What was yours?

I became CEO at the beginning of the hit on old economy stocks. When something like that occurs in your first six months as a CEO of a more traditional branded firm, it makes for a fast learning curve. Spending time with investors—-always a part of the role-was probably enhanced and necessarily so. Because the attitude has been, “that sounds good, but show us the money.” New things have also happened in the beauty industry, whether it’s the Sephora’s or the dot-com firms, that have shaken the business model. So it’s the most exciting and challenging time to be a CEO that I could imagine. If you’re not a great businessperson and you’re not a great CEO who can lead a company, whether you’re in the new economy or the old economy, you’re not going to make it.

How do you balance your responsibilities as a high-profile executive and those of your role as a parent?

Just like any other working mom, it’s hard. Avon is a unique place to work; we’ve got family-friendly policies. We have more senior women in high-level management than any other company; 46 percent of our officers are women.

Beyond Avon, I do see being a role model for working women and working mothers as a requisite part of my job, in addition to everything else. I feel that certainly, there are a lot of eyes on women at the top these days. I actually take it as a real privilege to be a role model. But a lot of responsibility comes with that. Women like myself, CEOs, can pave the way for more women to get to the top.

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.