Avon Products (
) sells products ranging from color cosmetics and fragrances to
jewelry, house wares and even nutritional supplements. Avon is the
largest direct selling organization in the world with over 6.2
million active sales representatives that buy products from Avon at
a discount and earn a commission on every sale. This is what
differentiates Avon from the likes of
), Estee Lauder (
), Procter & Gamble (
), that traditionally sell through third-party retail outlets
including department stores and mass-volume retailers like Wal-Mart
(WMT) or Costco (COST).
Our price estimate for Avon Products' stock stands
, roughly 25% ahead of its current market price. Beauty products
make up almost three-fourth of our estimated stock value, while
fashion and home products constitute 15% and 10% respectively.
Rise in Online and Mobile Sales
Online sales in the U.S. reportedly grew 12% year-over-year
(YOY) in December 2010. Health and beauty retailers reported
an even steeper rise beyond 23%. What makes these trends
particularly interesting is the portion of sales generated through
mobile devices. These gadgets reportedly contributed 5.5% of online
retail sales, a sharp increase over November 2010.
While part of this rise is no doubt a function of growth off a
small mobile sales base, the report does nevertheless highlight the
rising trend of online and mobile retail as a crucial medium for
sales. Here we explore the impact this trend might have on Avon
Products, which utilizes another alternate sales medium, direct
selling via sales representatives.
Avon's Direct Selling Model
Eliminating the conventional retail channel (drugstores,
department stores, perfumeries, pharmacies etc) helps Avon avoid
the relatively higher retailer margins (in excess of 40%) in favor
of the commission charged by sales representatives (which we
estimate to be close to 25%). This not only lets Avon offer
products at more competitive prices but also helps the company to
earn higher profits from the sale.
Direct selling also enables Avon to be in closer contact with
the final consumers, which creates better understanding of its
customer base and, ultimately, leads to more efficient advertising
and research & development spending. Also, since products are
shipped from Avon's warehouse or centralized outlets once the order
is placed, it favors better inventory management.
The downside of direct selling is that it leads to dependence on
sales representatives. Avon has to incur expenses to advertise and
attract talent, train the sales representative and retain these
employees by ensuring that they make sufficient margins on sales.
We believe this partly explains the breadth of Avon's products
range. On any given household visit, a sales representative stands
a better chance to make a sale with a broader products
How Does the Growth in Online and Mobile Shopping Affect
Competitors selling online stand to make higher margins than
those selling through retail outlets. However, they cannot sell at
explicitly discounted prices for fear of cannibalizing third-party
retail sales and spoiling trade relations with retailers. Hence,
more promotions (such as Buy Two, Get One Free etc) can be expected
on companies' e-commerce websites. This would increase
competition for Avon since competitors' promotional offers erode
Avon's price advantage.
Further, online and mobile shopping adds an implicit level of
competition for Avon, as it offers consumers the same convenience
of shopping from home. While Avon does sell online, it hasn't
developed a mobile-specific interface yet. With rising e-commerce
facilitated by sophisticated user-friendly applications on the
iPhone, Blackberry, Android and Symbian, we expect mobile shopping
to draw sales sales volume away from Avon until the company can
expand its online and mobile presence.
Beauty care products will likely be more affected than fashion
items, as consumers still feel the need to physically touch or try
fashion products before reaching a final decision on purchasing.
Beauty care products, particularly items that the customer has
previously purchased, will be more easily transferrable to online
We estimate that annual beauty care product sales per
representative will rise from nearly $1,300 in 2010 to beyond
$1,900 by the end of our forecast period. However, if online and
mobile shopping continue to gain momentum and Avon does not expand
its presence in this realm, there could be downside to our base
Drag the trend line in the chart above to see how various
trends in beauty care sales per Avon representative could affect
the company's stock value.
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You can see our detailed analysis of
$36.63 Trefis price estimate of Avon Products' stock