Avon 2006 Annual Report Download - page 10

PART I
Dollars in Millions
ITEM 1. BUSINESS
General
We commenced operations in 1886 and were incorporated in
the State of New York on January 27, 1916. We are a global
manufacturer and marketer of beauty and related products. Our
products fall into three product categories: Beauty, which con-
sists of cosmetics, fragrances, skin care and toiletries (“CFT”);
Beauty Plus, which consists of fashion jewelry, watches, apparel
and accessories; and Beyond Beauty, which consists of home
products and gift and decorative products. Sales from Health
and Wellness products and mark., a global cosmetics brand that
focuses on the market for young women, are included among
these three categories based on product type.
Our business is conducted worldwide primarily in one channel,
direct selling. Our reportable segments are based on geographic
operations in six regions: North America; Latin America; Western
Europe, Middle East & Africa; Central & Eastern Europe; Asia
Pacific; and China. We also centrally manage Brand Marketing
and Supply Chain organizations. Financial information relating to
our reportable segments is included in the “Segment Review”
section within Management’s Discussion and Analysis of Finan-
cial Condition and Results of Operations on pages 18 through
33 of this 2006 Annual Report on Form 10-K, and in Note 11,
Segment Information, on pages F-24 through F-26 of this 2006
Annual Report on Form 10-K. Information about geographic
areas is included in Note 11, Segment Information, on pages
F-24 through F-26 of this 2006 Annual Report on Form 10-K.
Strategic Initiatives
In November 2005, we launched a comprehensive, multi-year
turnaround plan to restore sustainable growth. Our four-point
turnaround plan includes:
• Committing to brand competitiveness by focusing research
and development resources on product innovation and by
increasing our advertising;
• Winning with commercial edge by more effectively utilizing
pricing and promotion, expanding our Sales Leadership pro-
gram and improving the attractiveness of our Representative
earnings opportunity as needed;
• Elevating organizational effectiveness by redesigning our struc-
ture to eliminate layers of management in order to take full
advantage of our global scale and size; and
• Transforming the cost structure so that our costs are aligned
to our revenue growth and remain so.
We attacked our cost structure, primarily through delayering,
and we have reinvested ahead of savings from this and other
cost savings initiatives. Our initial investments have focused sig-
nificantly on advertising and our direct selling channel, where we
have increased investments in 2006.
We are also committed to increasing our spending on product
and brand innovation. In 2006, we launched several new
innovative products, including Anew Clinical THERMAFIRM Face
Lifting Cream,Anew Clinical EYE LIFT,superFULL mascara, Avon
Solutions Ageless Results, Ultra Moisture Rich Metallic Lipstick,
Avon Crystal Aura fragrance, Avon Blue Rush fragrance and
Derek Jeter DRIVEN fragrance. In 2007, we expect to implement
a comprehensive strategy to reposition and rebrand our color
line, including product innovation, upgrading packaging, a sig-
nificant increase in advertising, improved merchandising and
new brochure executions. We are forging alliances for our color
line including alliances with a color make-up artist and an inter-
national fashion designer. In 2007, we also plan to launch a
global integrated marketing campaign, called Hello Tomorrow,
supporting both the brand and the direct selling channel. Addi-
tionally, we expect to continue to reallocate the time our
research and development department spends toward
innovation and away from promotional items.
We are also investing in our direct selling channel to improve the
reward and effort equation for our Representatives
(Representative Value Proposition). We have accelerated the roll
out of our Sales Leadership program, which is described below,
and have undertaken extensive analysis to better understand the
drivers of value for our Representatives. In 2007, we will con-
tinue to look for ways to improve the earnings opportunity for
Representatives through various means, including the following:
• Evaluating optimum commissions in select markets;
• Continuing to roll-out our Sales Leadership Program, which
offers Representatives an enhanced career opportunity;
• Strategically examining fee structure and brochure costs to
enhance Representative economics; and
• Recalibrating the frequency of campaigns to maximize Repre-
sentative selling opportunities.
While the earnings and effort equation will be different within
our global portfolio of businesses, we expect that web enable-
ment will be a key element to reduce Representative effort
worldwide. We will focus on improving Internet-based tools for
our Representatives.
We have launched a product line simplification program (“PLS”),
which includes an analysis of our product line to develop a
smaller range of better performing, more profitable products.
This program is designed to improve the shopping experience,
our brand image and Representative experiences by reducing the
number of SKU’s overall, which is expected to have significant
savings implications. Over time we expect this initiative will: