Avon CEO Discusses China Direct Sales Strategy

From Avon's (AVP) Q3 2006 earnings call late last week:

Andrea Jung - Chairman and Chief Executive Officer

Finally, turning to China, direct selling is clearly taking hold. If you exclude the impact of the exit of company-run store counters, we are very encouraged by the strong growth of nearly [70%] that we saw in this market. We ended the quarter with 236,000 licensed sales promoters. As we bring these new sales promoters on board, our focus now is converting them to active representatives through comprehensive training on how to sell and service their customers.

I'm pleased that the percentage of active representatives is in the mid-40s, a very respectable number, particularly in light that we've been in this business just a few months and the number of as [SP]. This percentage has improved sequentially every month. At the same time, the ordering activity of our beauty boutiques continues to be over 90%.

To our knowledge, we remain the only company in China with a national direct-selling license. This is a unique window, a once in a lifetime opportunity. We are moving to capitalize on this opportunity as aggressively as possible. China continues to have the potential to become one of the largest markets in Avon.

Nick Moody – Analyst, UBS

On China, Andrea, what kind of plans do you have in place to improve the productivity of the reps in that market over time?

Andrea Jung - Chairman and Chief Executive Officer

Let me address China first. And the focus, as I mentioned in my earlier remarks, is on training and development. Obviously, we are more than pleased with the number of sales promoters that are coming into the business. But the focus is on converting them to active representatives. That is with a huge focus of the organization to cascade training and direct-selling skills throughout via a very, very intensive training/seeding program.

Training the field sales force, a large group of district sales managers that we’ve put into place in that market in order to ready ourselves for the opening of direct selling in the early part of this year. We are training all of our key beauty boutiques, on site, for more than three days as they now have a major role in the model, as well as servicing our representatives.

We also are training the sales promoters themselves, and that is a combination of a large training force as well as, again, material so that they can understand and learn the Avon opportunity of selling and servicing customers. So this is a major investment and focus in the organization, and obviously for us the KPI that we would be measuring is improved activity, as well as improved order size.

Justin Hott – Analyst, Bear Stearns

Okay, thanks. And maybe I missed this, but can you give us some idea, more clarity on China on the number of beauty counters?

Andrea Jung - Chairman and Chief Executive Officer

The number of beauty boutiques is still around 5,500. We are still seeing over 90% activity in our beauty boutiques over time. I don't see that number staying at 5,500 as the ramp up of licensed sales promoters turning into active representatives continues to grow in that business model. But I still think we are going to have a very sizeable infrastructure of not only revenues from beauty boutiques, but very importantly, the required service centers that meet the government regulations and have really helped to give us the advantage all across the country.

Linda Bolton Weiser – Analyst, Oppenheimer & Co.

I was wondering if you could give a little more color on China. You said the percentage of active reps was 40% of the total. Can you give us some idea of the productivity per active rep and just qualitatively how that compares to the productivity in other regions of the world? Is it really at the very low end globally? Are you pleased with what you're seeing so far and what might be the outlook for productivity?

Andrea Jung - Chairman and Chief Executive Officer

I think the productivity is good. It's not at all what we might have got in early days. It's nearer to $70 and $80. It's getting closer to being $100 than not. That would not be that dissimilar. So again, we're focused on productivity, certainly in that market. I don't think we're seeing average order sizes that are hardly alarming; we think there's an opportunity and we’re continuing to focus on it. Activity is the important thing here, at the mid-40s, that does continue to grow each month. That's the important thing.

When I look at other Avon markets in the world, getting to a mid-40s and then hopefully 50% activity rate is a very respectable activity rate, particularly in light of the number of SPs being recruited. So we’ve got a lot of work to do. We have a lot of focus on the training and development, as was mentioned earlier on the call. We love the numbers, certainly, in terms of 236,000 and that number continues to grow. I think the team is just feeling great over there. They are very realistic, though, which is terrific about the focus on productivity, the focus on activity, understanding that it is not about a numbers game, but it is obviously about building a sustainable, productive business.

No question though, that this is going to be one of the biggest markets and the largest markets in Avon.

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