Tuesday, September 9, 2014

Avon Lady, the fallen star - A case in forecasting gone bad?

Avon Products ranks as the fifth-largest beauty company worldwide, and the second biggest 'direct-selling' enterprise globally, only behind Amway. For this beauty giant founded in 1886, direct selling became the go-to business model.
Some women looked after their homes, and their husbands didn't want them to go out shopping. 'Ding Dong, Avon (came) Calling', with its ever growing troop of sales reps armed with vanity cases full of makeup, and skin creams. This model, while providing employment to scores of housewives, also provided consumers quality products at lesser prices by bypassing the costs usually associated with retail brands, like marketing, retail space, and the likes. And for a very long time, the brand was very profitable, topping up a market value of $21 billion in the early 2000s. Ten years on, things were looking downward for Avon. After a series of management lapses and complacent directors, the company registered losses. Bold projections were made about the future of the business without the strategies or expertise to deliver results.
Some things that went wrong for Avon, and in my opinion, how they were contrary to the basic concepts in forecasting:
• Past demand: Avon was always the 'direct seller'. Years of sales and profits indicated how this model was a success. But, this was in the management's opinion, making Avon a "pedestrian brand". Quashing the existing customer base, the brand was refreshed to make it upscale. Entering into Sears and JC Penny was a part of this move. They were shifting to the retail model, opening stores and kiosks in malls.
• Understand and identify customer segments: New sales outlets and product lines that catered to the younger clientele was proof that Avon was trying to be perceived as 'high-end'. Sears and J.C. Penney already attended to a similar demographic to Avon.
• Weighing the competition: They tried to compete with retail brands like P&G and L'Oreal in the new arena of retail. They also faced stiff competition from drugstore brands!
• Planned advertising or marketing efforts and costs: Every fortnight, Avon publishes a 150-page-plus brochure for the US! High marketing costs at a time when the company position was already tight.
• Policy changes in target market: In 2010, Brazil was the largest market in sales for Avon, ahead of the US. The Brazilian government mandated electronic invoices for tax purposes. Avon's computer systems were stretched to the limit, further causing problems in order services, forecasting, and product shortages at triple the normal levels! A few years later when new systems were in place, the transition caused missed late orders, derailing the demand forecasting off its tracks. Late product arrivals meant shipments to representatives were delayed. The sales had dipped by 8% that quarter.

Getting down into retail proved to be a very bad move. All in all, Avon has been operating in losses, registering a net income of approximately $-52 million in 2013.
Perhaps it was a case of forecasting gone wrong, or too many competitors in the market? In this age of one-click shopping, may be Avon is stuck with an outdated business model. But then again, Tupperware, following the same model, continues to climb the markets through innovative products. Should Avon stick around and learn a thing or two from them? May be.


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