Class of 2019 | sadhviv@wharton.upenn.edu
Deciding between Olay and Dove for that new cleanser you’ve been dying to try? Or do you keep seeing those Neutrogena and L’Oréal advertisements? But, how about Avon, do you even remember that one?
Avon Products, a publicly traded company, is a makeup and beauty brand. It is a brand that typically specializes in selling direct to consumer via retailers or other options. Avon has not been doing well lately, for it has been losing sales over the last five years, with 2011 being the most recent year in which it made a profit. Therefore, Avon had brought in a new CEO the next year to see if the downhill slide could be reversed. However, this change did not really help Avon, as it saw sales continue to decline by 25 percent since and its stock price by about 81 percent; in only the last year, it had its stock price fall about 60 percent. In fact, a few years ago, it had an offer for a buyout by Coty, another cosmetic company, but it decided not to take it.
Recently, however, Avon had begun to consider selling a stake for various reasons, specifically with firms such as Cerberus Capital Management LP and Platinum Equity LLC that focus in private investment in public equity (PIPE) and any type of distressed investing as a whole. These are used when selling an entire company looks to be too difficult – this is understandable for Avon as its worth has been decreasing over time.
Recently, Avon finally made a deal to sell stake in itself. On December 17th, 2015, the private equity firm Cerberus Capital Management agreed to invest $435 million for 16.6% and another $170 million for 80.1% of its newly separated North American branch. Avon had decided to split the company so that it would have Avon in North America and Avon internationally. As Sheri McCoy, the CEO of Avon, stated, this would allow the company to concentrate on mainly the international business, which consists of 85 percent of Avon’s total worldwide revenue.
As for Avon North America, it will be a private business, operating across the United States, Canada, and Puerto Rico. Cerberus will run this business, and it plans to begin spending money on marketing and recruitment of representatives right away. In order to strengthen the representative program, they plan to expand the ways in which representatives are rewarded. Cerberus also would like to expand the range of products Avon offers while making the overall operations of the business much more efficient and simple.
As a result of this deal, other restructuring will occur at Avon. That is, five on the board of directors along with the chairman will be switched with a Cerberus representative. Overall, much of the Avon’s weight will be diluted, placing the CEO in a possibly difficult situation. In addition, Pablo Munoz, the prior president of Avon North America, was recently released from his position in January. Avon also decided to stop giving out its quarterly dividends temporarily, as it plans to use the benefits from this to counter its debt and the costs of reorganizing.
In this day and age, consumer retail is shifting to an atmosphere centered on efficiency, convenience, and accessibility. This involves internet sales, for they are a significant part of most companies today. Here, Avon has been unable to follow this shift and knows it must revamp in order to make online purchasing an attractive option for consumers. Another issue involves how employees today prefer a permanent job instead of the contract-based ones that Avon provides. Debt management is also growing into an issue as sales are continually dropping at Avon.
Avon, a company that has been slow to change and adjust to the desires of the consumer, seems to be taking a step in right direction with this deal. Cerberus, which invests in businesses where it can improve operations and create long-term worth, may help to redesign the cost structure of Avon and provide it with increased financial leeway. In the end, this uniquely structured deal between Cerberus Capital Management and Avon Products could help revive Avon and bring its brand back to relevancy in the global market today, giving it a complete makeover.