Avon 2008 Annual Report Download - page 12

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. We
conduct our business in the highly competitive beauty industry
and compete against other consumer packaged goods (“CPG”)
and direct-selling companies to create, manufacture and market
beauty and beauty-related products. Beginning in the fourth
quarter of 2008, we changed our product categories from Beau-
ty, Beauty Plus and Beyond Beauty to Beauty, Fashion and Home.
Beauty consists of cosmetics, fragrances, skin care and toiletries
(“CFT”). Fashion consists of fashion jewelry, watches, apparel,
footwear and accessories. Home consists of gift and decorative
products, housewares, entertainment and leisure, children’s and
nutritional 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.
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: Latin America;
North America; Central & Eastern Europe; Western Europe,
Middle East & Africa; Asia Pacific; and China. We also centrally
manage Brand Marketing, Supply Chain and Sales 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 20 through 36 of this 2008
Annual Report on Form 10-K, and in Note 12, Segment Infor-
mation, on pages F-26 through F-27 of this 2008 Annual Report
on Form 10-K. Information about geographic areas is included in
Note 12, Segment Information, on pages F-26 through F-27 of
this 2008 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
program and improving the attractiveness of our Representa-
tive earnings opportunity as needed;
• Elevating organizational effectiveness by redesigning our
structure 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.
Over the past three years we have been implementing our turn-
around plan through various strategic initiatives, including our
multi-year restructuring plan, product line simplification program
(“PLS”), strategic sourcing initiative (“SSI”) and investments in
advertising and our Representatives. Additional information regard-
ing our strategic initiatives is included in the “Overview” and
“Strategic Initiatives” sections within MD&A on pages 20 through
23 and additional information regarding our inventory is included in
the “Provisions for Inventory Obsolescence” and “Liquidity and
Capital Resources” sections within MD&A on pages 24 and 33
through 36 of this 2008 Annual Report on Form 10-K.
Distribution
We presently have sales operations in 66 countries and terri-
tories, including the U.S., and distribute our products in 44
more. Unlike most of our competitors, which sell their products
through third party retail establishments (i.e. drug stores, depart-
ment stores), Avon primarily sells its products to the ultimate
consumer through the direct-selling channel. In Avon’s case,
sales of our products are made to the ultimate consumer princi-
pally through the direct selling by 5.8 million active independent
Avon Representatives, approximately 457,000 of whom are in
the U.S. Representatives are independent contractors, not em-
ployees of Avon. Representatives earn a profit by purchasing
products directly from us at a discount from a published bro-
chure price and selling them to their customers, the ultimate
consumer of Avon’s products. We generally have no arrange-
ments with end users of our products beyond the Represen-
tative, 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