Emerging markets boost Avon's sales
excellent sales growth in the second quarter, boosted by the
surprisingly fast-growing emerging markets. Focusing on China and
Russia, the company says it will reinvest its profits oversees in
order to benefit from market growth and reduce its effective tax
rate, writes Iordan Mateev
Avon's net sales in the second quarter increased by 13 per cent to $1.6 billion, driven by a 17 per cent increase in sales of cosmetics, which account for about two thirds of the sales, with all major categories delivering double-digit gains.
Operating profit rose 16 per cent to $325.5 million, prompting the company to predict a further increase in earnings for the full year, to $1.72 per share, $.02 per share ahead of earlier guidance.
Avon's international operations exceeded expectations. The American company saw sales growth of 28 per cent in Europe, where it makes more that a quarter of its sales, and 20 per cent in Asia Pacific. Growth in the US, Avon's biggest market was just 3 per cent.
"Our international regions performed above expectations, with Europe, Latin America and Asia Pacific all generating double-digit gains in sales, operating profit, units and active representatives," said Andrea Jung, Avon's chairman and chief executive officer.
The company said that the markets of central and eastern Europe again posted outstanding results, with sales and operating profit advancing significantly, including Russia, Avon's fastest growing market, where sales grew more than 80 per cent. Avon's sales in Russia in 2003 were $241 million.
Another driving force was China, where sales rose more than 60 per cent in the quarter. Avon considers China as its largest long-term growth opportunity: last year Avon's sales in China were $157 million, but the company said it expected to reach $400 million by 2007.
Much of this growth will come following a new agreement with the Chinese government allowing Avon to begin its trademark direct-to-consumer selling there. Avon recently received verbal permission for door-to-door selling, and is now awaiting final, written acceptance. Such sales techniques have been banned in China since1998, but restrictions are soon to be lifted in accordance with World Trade Organisation requirements.
Avon Products is the world's largest direct seller of beauty products, marketing its products to women in over 100 countries through 4.4 million independent sales representatives. The number of active reps increased 11 per cent in the second quarter compared to the same period. In Europe and Asia Pacific, sales representative numbers rose 13 per cent.
But pushing into emerging markets - such as Vietnam, another new market entered in the first half - was not the only reason for Avon's good performance.
Avon's strategy includes launching new high technology cosmetic products, new packaging, new advertising, all combined with cost cutting measure and tax optimisation.
A business transformation programme, which began in 1999, has already resulted in substantial cost savings in all geographic regions, while as a result of tax optimisation, Avon expects to reduce the effective tax rate to about 31 per cent for 2004, compared to around 35 per cent in previous years. This is expected to happen mainly as a result of reinvesting profits overseas.The company also benefited from weak currencies: net sales growth in local currencies in Europe and Asia Pacific was 20 per cent and 16 per cent respectively. Avon said it expected third quarter local currency sales growth to be in line with that of the second quarter, with continuing strength in international regions.
The company also said that growth in sales of cosmetics should again outpace overall sales gains, and units are expected to grow at a rate similar to that in the second quarter. A new global advertising campaign featuring Mexican actress Salma Hayek is also expected to have a substantial beneficial effect on lifting sales in the second half.
"We're pleased with the continuing strength of our business fundamentals, and we're confident that 2004 will be our fifth consecutive year of exceptional operating performance," Jung said. "It will also be the second year in a row in which Avon's earnings have increased over 20 per cent as we accelerate the transformation of the company."