Avon 2007 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 manu-
facturer and marketer of beauty and related products. We con-
duct our business in the highly competitive beauty industry and
compete against other consumer packaged goods (“CPG”)
companies to create, manufacture and market beauty and
beauty-related products. Our products fall into three product
categories: Beauty, which consists 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 prod-
ucts. 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.
Unlike most of our CPG competitors, which sell their products
through third-party retail establishments (e.g., drug stores,
department stores), our business is conducted worldwide primar-
ily 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 man-
age 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 Financial Condition and Results of Operations
(“MD&A”) on pages 26 through 33 of this 2007 Annual Report
on Form 10-K, and in Note 11, Segment Information, on pages
F-26 through F-28 of this 2007 Annual Report on Form 10-K.
Information about geographic areas is included in Note 11,
Segment Information, on pages F-26 through F-28 of this 2007
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. As part of this effort, we have invested in
our direct-selling channel to improve the reward and effort
equation for our Representatives. In addition, in our ongoing
effort to improve brand competitiveness, we have significantly
increased our investment in advertising.
We also increased our spending on product and brand
innovation. In 2007, we launched several new products, includ-
ing Anew Ultimate Age Repair Night Cream and Elixir, Christian
Lacroix fragrances and Imari Seduction. In 2007, we also
implemented a comprehensive strategy to reposition and
rebrand our color line, including product innovation (such as
Uplifting Mascara and Ultra Color Rich Lipstick), upgraded pack-
aging, a significant increase in advertising, improved merchandis-
ing, and new brochure executions. We have also forged alliances
for our color and fragrance lines including alliances with Jillian
Dempsey, Jennifer Hudson, Derek Jeter, Christian Lacroix and
Cynthia Rowley. In 2007, we also launched a global integrated
marketing campaign, called “Hello Tomorrow,” supporting both
the brand and the direct-selling channel. As part of “Hello
Tomorrow,” we signed actress Reese Witherspoon to a multi-
year contract as Avon’s Global Ambassador. Additionally, we
expect to continue to reallocate the time our research and
development department spends towards innovation and away
from promotional items.
As stated above, we are also investing in our direct-selling chan-
nel to improve the reward and effort equation for our Repre-
sentatives (Representative Value Proposition or “RVP”). We have
committed significant investment for extensive research to
determine the payback on advertising and field tools and
actions, and the optimal balance of these tools and actions in
our key markets. We have undertaken these investments in
proprietary direct-selling analytics to better understand the driv-
ers of value for our Representatives. During 2007, we enhanced
RVP through continued implementation of our Sales Leadership
program, which is described below, increased incentives spend-
ing, web enablement and the launch of more frequent selling
opportunities in Central and Eastern Europe. In 2008, we will
continue to look for ways to improve the earnings opportunity
for Representatives through various means, including the
following:
• Evaluating optimum discount structures in select markets;