Avon 2007 Annual Report Download - page 12

PART I
generally have no arrangements with end users of our products
beyond the Representative, except as described below. No single
Representative accounts for more than 10% of our net sales.
A Representative contacts customers directly, selling primarily
through the Avon brochure, which highlights new products and
special promotions for each sales campaign. In this sense, the
Representative, together with the brochure, are the “store”
through which Avon products are sold. A brochure introducing a
new sales campaign is usually generated every two weeks in the
U.S. and every two to four weeks for most markets outside the
U.S. Generally, the Representative forwards an order for a cam-
paign to us using the mail, the Internet, telephone, or fax. This
order is processed and the products are assembled at a dis-
tribution center and delivered to the Representative usually
through a combination of local and national delivery companies.
Generally, the Representative then delivers the merchandise and
collects payment from the customer for his or her own account.
A Representative generally receives a refund of the full price the
Representative paid for a product if the Representative chooses
to return it.
We employ certain electronic order systems to increase Repre-
sentative support, which allow a Representative to run her or his
business more efficiently, and also allow us to improve our
order-processing accuracy. For example, in many countries,
Representatives can utilize the Internet to manage their business
electronically, including order submission, order tracking, pay-
ment and two-way communications with Avon. In addition, in
the U.S., Representatives can further build their own Avon busi-
ness through personalized web pages developed in association
with us, enabling them to sell a complete line of our products
online. Self-paced online training also is available in certain
markets, as well as up-to-the-minute news about Avon.
In the U.S. and selected other markets, we also market our
products through consumer websites (www.avon.com in the
U.S.).These sites provide a purchasing opportunity to consumers
who choose not to purchase through a Representative.
In some markets, we use decentralized branches, satellite stores
and independent retail operations to serve Representatives and
other customers. Representatives come to a branch to place and
pick up product orders for their customers. The branches also
create visibility for Avon with consumers and help reinforce our
beauty image. In certain markets, we provide opportunities to
license Avon beauty centers and other retail-oriented oppor-
tunities to bring Avon to new customers in complementary ways
to direct selling.
The recruiting or appointing and training of Representatives are
the primary responsibilities of District Sales or Zone Managers
and Sales Leadership Representatives. In most markets, District
Sales or Zone Managers are employees of Avon and are paid a
salary and a sales incentive based primarily on the increase over
the prior year’s sales by Representatives in their district, while in
other markets, those responsibilities are handled by independent
contractors. Personal contacts, including recommendations from
current Representatives (including the Sales Leadership program),
and local market advertising constitute the primary means of
obtaining new Representatives. The Sales Leadership program is
a multi-level compensation program which gives Representatives,
known as Sales Leadership Representatives, the opportunity to
obtain earnings from commissions based on sales made by
Representatives they have recruited and trained, as well as from
their own sales of Avon products. This program limits the num-
ber of levels on which commissions can be earned to three and
continues to focus on individual product sales by Sales Leader-
ship Representatives. Development of the Sales Leadership pro-
gram throughout the world is one part of our long-term growth
strategy. As described above, the Representative is the “store”
through which we primarily sell our products and given the high
rate of turnover among Representatives (a common character-
istic of direct selling), it is critical that we recruit and retain
Representatives on a continuing basis in order to maintain and
grow our business. As part of our four-point turnaround plan,
we have initiatives underway to standardize global processes for
prospecting, appointing, training and developing Representa-
tives, as well as training and developing our direct-selling
executives.
As part of our effort to recruit and retain Representatives on a
continuing basis, we have also allocated significant incremental
investment to grow our Representative base, to increase the
frequency with which the Representatives order and the size of
the order and have undertaken extensive research to determine
the pay back on specific advertising and field tools and actions
and the optimal balance of these tools and actions in key mar-
kets, as described above. In addition to a research and marketing
intelligence staff, we have employed both internal and external
statisticians to develop proprietary fact-based regression analyses
using Avon’s vast product and sales history.
From time to time, local governments and others question the
legal status of Representatives or impose burdens inconsistent
with their status as independent contractors, often in regard to
possible coverage under social benefit laws that would require us
(and in most instances, the Representatives) to make regular
contributions to government social benefit funds. Although we
have generally been able to address these questions in a sat-
isfactory manner, these questions can be raised again following
regulatory changes in a jurisdiction or can be raised in additional
jurisdictions. If there should be a final determination adverse to
us in a country, the cost for future, and possibly past,