Avon 2007 Annual Report Download - page 25

ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the results of operations and finan-
cial condition of Avon Products, Inc. and its majority and wholly
owned subsidiaries (“Avon” or the “Company”) should be read
in conjunction with the information contained in the Con-
solidated Financial Statements and related Notes. When used in
this discussion, the terms “Avon,” “Company,” “we” or “us”
mean, unless the context otherwise indicates, Avon Products,
Inc. and its majority and wholly owned subsidiaries.
OVERVIEW
We are a global manufacturer and marketer of beauty and
related products. Our business is conducted worldwide, primarily
in the direct-selling channel. We presently have sales operations
in approximately 66 countries and territories, including the U.S.,
and distribute products in approximately 48 more. 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
centrally manage global Brand Marketing and Supply Chain
organizations. Product categories consist of: Beauty, which con-
sists of cosmetics, fragrances, skin care and toiletries; Beauty Plus,
which consists of fashion jewelry, watches, apparel and accesso-
ries; 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 categories
based on product type. Sales are made to the ultimate consumer
principally through approximately 5.4 million independent Repre-
sentatives, who are independent contractors and not employees
of Avon. The success of our business is highly dependent on
recruiting, motivating and retaining Representatives.
We view the geographic diversity of our businesses as a strategic
advantage. In developed markets, such as the U.S., we seek to
achieve growth in line with that of the overall beauty market,
while in developing and emerging markets we seek to achieve
higher growth targets.
Revenue grew in every segment during 2007. We continued to
experience strong growth in emerging and developing markets,
including Brazil, China, Colombia, Russia, Turkey and Venezuela.
We have also experienced growth in developed markets, such as
the U.S. and the U.K. Revenue in China increased significantly
due to the continued roll-out of direct selling. See the “Segment
Review” section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations for additional
information related to changes in revenue by segment.
In 2005, we launched a comprehensive multi-year turnaround
plan, described below, which seeks to take costs out of our
business and reinvest those savings in initiatives that we expect
to generate revenues as well as increase profitability over the
long run. As part of this turnaround plan, we invested ahead of
savings and incurred incremental costs, including investments in
advertising and the Representative Value Proposition (“RVP”), as
well as costs to implement restructuring and costs related to our
product line simplification (“PLS”) program. Operating margins
for the years 2007 and 2006 were negatively impacted by these
costs associated with our turnaround plan.
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.
Our turnaround plan has continued to gain traction and deliver
results. During 2007, revenues increased 13%, Active Repre-
sentatives increased 9%, with increases in all segments, and
sales from each of our product categories increased, with prod-
ucts in the Beauty category increasing 15%, fueled by higher
investments in advertising and RVP and benefiting from a shift in
research and development investment to innovation. Beauty
sales have also benefited from a modest improvement in both
the frequency and depth of discounting. The advertising and RVP
investments were substantially funded by savings from
restructuring initiatives and other cost savings initiatives.
In our ongoing effort to improve brand competitiveness, we
increased our investment in advertising by 83% in 2006 and
48% in 2007. Advertising investments were $368.4, $248.9 and
$135.9 during 2007, 2006 and 2005, respectively. Approx-
imately 60% of the incremental spending was allocated to Chi-
na, Brazil, Russia and the U.S. The advertising investments
supported new product launches, such as Anew Ultimate Age
Repair Night Cream and Elixir, Christian Lacroix fragrances, Imari
Seduction and Avon Color cosmetics, including Uplifting Mas-
cara, and Ultra Color Rich Lipstick, as well as support for “Hello
A V O N 2007 19