Avon Misdirects Ad Spending

Avon Products (AVP) announced increased sales Friday. But when you wipe the face cream off, they actually had a Q3 operating profit decrease of 32%. The profit margin dropped from 13.1% to 8.1%.

The culprit has been fingered as a $40 million dollar write down of inventories. Avon also claims to be doubling advertising from last year's levels. Now lets think. Avon is sold by sales reps so as to avoid the need for big advertising. Also where can you spend big advertising dollars? Usually this involves western markets and Japan; both areas are experiencing downward 3Q sales. But where is the growth? Latin America and China do not have a comparable big media spend capability.

Are they really placing their advertising bets in the correct market? Do they remember or recognize their core competency in using representatives?

Look for rocky results until more reality checks reach the boardroom.

AVP 1-yr chart:

Avon Q3 2006 Earnings Call Transcript

Comments

[Paul Meisel]

I consulted my local experts on cosmetics for insight. (A little Lynch-like habit.)

They indicated that Avon, while still selling through reps, seems to have more kiosks springing up in malls (whether these are superambitious reps or Avon is sponsoring this in a different way I do not know). Also they indicated that the number of women going to the mall to switch from Avon to upscale brands in the department stores seems to them to be very large.

Sounds to me like there may be some more fire behind this smoke (inventory write downs, huh...)....

[George gutowski]

Since this post I have had a flurry of emails from retired AVON types many of whom claim to have been pushed aside and or forced out. While the sour grapes were a factor it remains clear that AVON is channel conflicted. Since going public senior management have lost their understanding of direct marketing and want to act like a more traditional consumer products company.

If consumers are switching from Avon to supposed better products in the mall large Advertising campaigns will not stop them. Other cosmetics companies have huge ad budgets and vast experience in managing ad campaigns.