Avon plans job cuts to reduce long-term costs

Avon has detailed the final steps of its restructuring program which began three years ago when executives diagnosed the company as bloated and misdirected. The company now expects to make annual savings of $430m once the performance boosting initiatives have been fully implemented in 2011-2012. This compares positively to Avon's previous estimate of $300m although it does expect to incur $30m more in costs in exchange for the long-term savings. Banc of America analyst Theo Brito welcomed the cost reducing initiatives although he said the savings would be realized quite late on and would have to be considered alongside the increased short-term charges. Avon warned investors that $120m of the total $530m restructuring budget will be incurred in the fourth quarter of 2007 by which time the company will have accounted for all but $70m from the total envisaged restructuring costs. The company will also incur a charge of $110m in the fourth quarter from inventory write-offs related to the realignment of the business away from saturated Western European markets. A total of 4,000 jobs will be axed and 1,600 more created as the company shifts its focus from Western Europe to Latin America. Jobs will be lost at its Neufahrn site in Germany where Avon intends to close its distribution branch by early 2009. In Continental Europe the company intends to reduce its sales zones, close distribution centers and outsource call centers in order to reduce administrative and overhead costs. The cost cutting initiatives will free up resources for increased advertising expenditure and investment in growing markets in Latin America. Avon plans to phase out production at its facilities in Brazil and build an improved distribution center in the country, which it expects to open in 2010 and employ 1,300 people. The company also intends to close its manufacturing facility in Guatemala and transfer production to its existing plant in Mexico. Costs related to these capital investments will be paid for over the next three to four years and are expected to total $160m. With regards to Avon's current financial performance, the company's third quarter sales reported in October were $2.3bn, up 14 percent (8 percent in local currency) on last year's figure. Theo Brito told CosmeticsDesign.com: "Avon​ is having a pretty good year this year and has benefited from the weak dollar and strong growth in international markets. ​​"We expect its growth rates to moderate a little in the long-run but still remain strong at between 4 - 6 percent." ​