An attempt to score points through indirection. As women in growing numbers around the world enter the middle class, their interest in cosmetics and value as a growth market has increased significantly. But building your own sales and distribution network in countries with often fragmentary and inefficient transportation networks can be slow and costly. How much simpler to acquire someone who has already established such a sales machine - and who's stock is undervalued.
Avon, they of the 'Avon Calling!' direct sales strategy, has built such networks in emerging economies. Coty, a venerable French enterprise much smaller than Avon wants in to those markets. But its bid is not delusional. Avon has been plagued by discord and its stock price has suffered accordingly. A CEO who stayed too long, rumors of bribery in key foreign markets and other travails have depressed its stock price. Which makes it an alluring target - especially if your strategic objective is global distribution.
Whether Coty will be able to get Avon to sell - and whether, if successful - it can effectively shove its more upscale products down Avon's sales pipeline remains to be seen. The broader implication is that women's commercial power in emerging markets may outweigh that of men. JL
Christina Passariello and Emily Glazer report in the Wall Street Journal:
As Coty Inc. fights to win over Avon Products Inc., the prize it has in mind is Brazil.
The Latin American country is the world's third-largest beauty market behind the U.S. and Japan, according to Euromonitor International, and has become a key battleground for the world's cosmetics giants. Avon's door-to-door sales force in Brazil has given it a leading role in the country. Rivals who sell through traditional stores—such as L'Oréal SA, Estée Lauder Cos. and Procter & Gamble Co. —have struggled for as much traction.
Coty Chairman Bart Becht said Thursday in an interview he would like to use Avon's direct-sales channel to push his company's lower-end, mass-market brands such as Adidas and Playboy colognes. The company's main business is designer and celebrity fragrances.
"A key win for Coty is to get into Brazil," Mr. Becht said. "Door-to-door is a key way of getting into the market."
Coty this week unveiled a proposal to buy Avon for $10 billion. Avon immediately rejected the offer, saying it undervalues the company and lacked certainty because it was informal.
Coty is working on formalizing its financing, and details will likely be revealed after the Easter and Passover holidays, people familiar with the matter said. Coty also plans to begin lobbying Avon shareholders at that time, the people said.
Avon declined to comment.
Two years ago, Brazil became the single biggest market for Avon's door-to-door sales of lipstick, face cream and perfume. Its main competitor is market leader Natura Cosméticos SA, NATU3.BR 0.00%a local company that also sells door-to-door.
The geographical reach of door-to-door operators and their ability to tap into women's strong social networks have given them an edge over brands that rely on Brazil's underdeveloped store networks.
Yet the retail brands are elbowing their way in, altering the long-term outlook for door-to-door selling. L'Oréal is pushing its skin-care and makeup brands—such as Maybelline, Vichy and L'Oréal Paris—onto store shelves, bringing competition to two categories that have long been the turf of direct sales. Next up is fragrances.
The stakes are high. Brazilian women have long been heavy users of beauty products, ranging from hair conditioners to nail polish to perfume. That has propelled the country's cosmetics sales far ahead of other emerging consumer markets such as China and India, which often see strong consumer adoption in only a single product category, such as skin care or hair care.
Door-to-door sales are intricately tied to a country's economic development, economists say. As unskilled women enter the work force, they often earn their first income by selling products to their family and friends. This model has worked particularly well in Latin America because of the large social circles, experts say.
Brazil's 2.4 million door-to-door salespeople sold $8 billion of goods in 2009, the latest year available, according to the World Federation of Direct Selling Associations. Direct selling accounts for 28.6% of Brazil's beauty and personal-care market, which includes soap and deodorant, compared with 13.9% in China and just 7.7% in the U.S. in 2011.
But door-to-door sales could decline as the economy matures. In the U.S., the stereotypical Avon Lady prospered in the postwar suburbs—not in a market with cutting-edge chains such as Sephora. In Brazil, store-based sales of beauty and personal care products are expected to grow faster than direct sales this year for the first time in several years, according to Euromonitor.
Estée Lauder's sales rose nearly 50% in Brazil last year, driven largely by its contemporary, high-end MAC Cosmetics line, sold mainly in free-standing stores. Chief Executive Fabrizio Freda is betting increased affluence will generate more interest in high-end cosmetics, he said in an interview earlier this year.
L'Oréal, the world's biggest cosmetics company by sales, is counting on the development of more and better stores to sell its products. The French group also thinks the convenience of stores, for the flexibility of their hours and the ability to see and touch the products, plays in its favor.
"If you give good service, people will buy [in stores]," says Didier Tisserand, L'Oréal Brazil's country manager. "Consumers want advice."
Brazilian sales of L'Oréal's Maybelline brand have jumped 50% in each of the last two years, Mr. Tisserand said. He expects the brand to add 40% more shelf space this year, especially after recently signing a distribution agreement with a major pharmacy chain.
L'Oréal is manufacturing more of the beauty line in the country this year to whittle down its price and will soon air its first television commercial in Brazil.
Mr. Tisserand declined to say whether L'Oréal has any interest in Avon or direct sales.
Avon's products are seen as lower end, more for mass consumers, beauty executives say.
Avon Chief Executive Andrea Jung acknowledged on an October earnings call that Avon did see increased competition in the third quarter, particularly from fragrance franchises and skin-care retailers.
Avon's sales in Brazil faltered in the second half of last year after the implementation of a new computer system led to botched orders. In October, Avon admitted the new system caused it to undercount demand, lose track of product components and experience delivery delays.
For the first time in 10 quarters, Avon's sales growth in Brazil fell below 10%.
While the computer problems stabilized coming into the new year, sales remained pressured in the fourth quarter and could remain spotty early in 2012, the company said on an earnings call in February. Getting Brazil right is the top priority this year, Avon said on the call.
"We still view Brazil to be a really good beauty market going forward," Ms. Jung said at the time.
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