Exclusive: As CEO of Avon, Andrea Jung made bad bets and missed opportunities. Now she’s been replaced – and the 126-year-old company has a second bidder lining up.
It was a painful hour for Andrea Jung.
The CEO and chairman of Avon Products was fielding questions during the company’s third-quarter earnings call from a pack of frustrated analysts — and they weren’t holding back. The company had surprised the Street, missing analysts’ estimates, and reporting that it would no longer hit its revenue-growth and operating-margin targets for 2011. A day before the October 2011 call, the Securities and Exchange Commission had subpoenaed Avon for information related to whether the company had improperly shared information with analysts — on top of an SEC inquiry into allegations of bribery by employees in China and elsewhere. On the call Citigroup’s Wendy Nicholson said, “It strikes me that you guys are so totally screwed up in so many ways, the change has to be radical.”
Avon (AVP) is indeed undergoing a radical makeover: In early April the company announced it was replacing Jung as CEO with Sherilyn McCoy, a Johnson & Johnson (JNJ) vice chairman. McCoy, 53, inherits a 126-year-old company in disarray. Years of management missteps (compounded by a complacent board of directors) have left the beauty brand bruised — and vulnerable. Privately held Coty, majority-owned by German holding company Joh. A. Benckiser GmbH, made an unsolicited $10 billion offer for Avon at the end of March. Fortune has learned that Richmont Holdings, another holding concern, is also putting together a bid for Avon. Remarkably, Richmont founder and chairman John Rochon, former CEO of Avon rival Mary Kay, led an attempted takeover of Avon that began in the late 1980s and ended in the early 1990s. At one point his group was Avon’s largest shareholder; it ultimately sold its shares.
The sale of the venerable company would have been unthinkable eight years ago, when its market value topped $21 billion. But today a buyout could be the final act of a wrenching corporate drama starring Jung, a glamorous, ambitious executive, who wanted desperately to remake pedestrian Avon in her own image. Even as Jung racked up accolades and sat on high-profile boards (GE! Apple!) the company plunged deeper into crisis: Execution problems bedeviled Jung’s far-reaching growth plans; management made bold projections about the future of the business without the strategies or expertise to deliver results. Under pressure from shareholders, Avon’s board finally announced in December 2011 that Jung would step down as CEO — with a two-year contract to stay on as executive chairman.
It is a stunning reversal of fortune for one of corporate America’s stars. Named CEO at 41 in 1999, Jung had been dubbed a marketing wunderkind and was widely credited with reinvigorating the direct seller. Despite her company’s relatively small size, $11.3 billion in revenue in 2011, she exerted her influence in broader circles. Last year Fortune named her the 6th most powerful woman in business. (McCoy was No. 10.)
Beneath the polished façade — she favors Chanel suits, not what you’d find on a typical Avon Lady — Jung was struggling. Despite her scant operations experience, she had gone without a chief operating officer since 2006 and failed to groom a successor. Jim Preston, who served as CEO of Avon from 1989 to 1998 and hired Jung, tells Fortune, “How could you go through five or six years of the performance that they’ve had and not begin to ask serious questions, and say our hires are not right, and our operating systems are not right?”
Avon’s execution problems were exacerbated by its unwillingness to fully embrace its door-to-door roots. The company straddles the worlds of direct selling — how it sells — and beauty — what it sells — and must balance the two. Under Jung, Avon leaned too far toward being a beauty company that wanted to compete with blue-chip consumer packaged-goods companies like Procter & Gamble (PG) and L’Oréal. It strayed from its core without realizing the limitations that came with its direct-selling channel and customers. Ashok Pahwa, former vice president of new businesses for Avon, said some people in direct selling suffer from “the cocktail party disease” — a sense of embarrassment and inferiority around the business, which, he says, creates a feeling that “they need to make Avon something it isn’t.”
Avon declined to make Jung or members of its board available for this story, but former employees and industry analysts paint a picture of a company unsure of what it wanted to be, and therefore uncertain of how to move forward. A onetime executive suggested that Avon is operating as though it were two companies: “There’s the public company, the one Andrea represents,” she told me. But “the company that actually sort of fuels the business and is at the heart of what Avon is, is not a consumer packaged-goods company at all. If you go to Mexico City or Moscow or to the heartland, that’s the real Avon Lady.”
To understand what’s gone wrong at Avon, you first have to understand what it means to be a direct seller. While Avon is the fifth-largest beauty company in the world, it’s by far the biggest direct-selling enterprise globally, with 6.4 million active representatives marketing its products. What Avon is actually selling is an earnings opportunity to its sales representatives, who then turn around and sell Avon’s lipsticks and lotions to the end user. Alan Kennedy, a longtime executive in the industry who worked at Avon in the 1970s and 1980s, puts it this way: “The fundamental challenge in direct selling is getting people to sell your stuff, not so much getting people to buy your stuff.”
Effective direct-selling companies are 25% about the brand and 75% about the sales channel, says Rick Goings, CEO of direct-seller Tupperware Brands (TUP), who worked for Avon from 1985 to 1992. Traditional retailers pay rent and use advertising to pull customers into the store, but direct selling is a push business. “You redeploy what you would spend on rent and advertising into payment for a direct sales force,” Goings explains. Direct selling may feel outdated in the U.S., but the channel remains hot in emerging markets like Brazil. Direct selling grew about 30% between 2006 and 2011 into a $136 billion global market, according to Euromonitor International. Avon gained only 1.1 percentage points of share in the direct-selling industry during the same time frame, with 11.4% of the market in 2011.
This quirky sales channel was unfamiliar turf for Jung when she arrived at the company in 1993. Until then she had spent her career in high-end retail, working for Neiman Marcus, I. Magnin, and Bloomingdale’s.
Jung took a job at Avon as a consultant, assigned by Preston, then CEO, to look into the feasibility of retail outlets. Preston thought the project would take months, but within weeks Jung reported back that the move would be a mistake. Avon didn’t have the right packaging or positioning to compete with store brands. Jung, articulate and smart, wowed Preston. She spoke fluent Mandarin (her parents emigrated from China) and she had a Princeton degree. She joined the company full-time in 1994 as president of the product marketing group for Avon U.S., a newly created position.
When Preston retired in 1998, Avon board member Charles Perrin, former head of Duracell, was tapped as CEO. Jung was elevated to president and chief operating officer, setting her up as heir apparent. Perrin had planned on staying for about five years but remained for less than two. Jung took over in November 1999 just after Avon said it would miss earnings targets, becoming the first woman to ever lead the company.
With her marketing background and experience working at prestige brands, Jung brought a new kind of sophistication to Avon. “How many other chief executives embody their companies the way Andrea Jung does?” asked Institutional Investor early in her tenure.
In reality, Jung embodied what she wanted the company to become. Avon typically attracts representatives earning below $50,000. It costs $10 to sign up, and most reps sell Avon part-time and make on average less than minimum wage doing it.
Avon certainly needed some rejuvenating, but Jung moved to give the company a dramatic face-lift. While still president, she opened the Avon Centre with its store, spa, and salon in Trump Tower on Fifth Avenue. In 2000 Jung launched Avon’s “Let’s Talk” campaign, the company’s first global advertising initiative, and signed Venus and Serena Williams as spokespeople. Advertising spend climbed from $63.4 million in 1999 to its peak of $400 million in 2010. Jung tried to refresh existing brands, and launched new ones. “Mark,” a hipper, trendier line aimed at college-age women, attempted to both raise the company’s image and attract a younger demographic.
The year Jung became CEO, Avon adopted the slogan “the company for women,” moving away from its long-time ad campaign “Ding Dong, Avon Calling.” The change was meant to modernize Avon, but it also paralleled a shift in focus within the company. The old tagline emphasized the direct-selling side of the business. Now Jung was taking Avon into a new arena: retail.
Avon started with mall kiosks, and followed with a plan to go into Sears (SHLD) and J.C. Penney (JCP) with a new line called beComing. It was a flawed venture from the start. The new sales outlets and product line had the dual objectives of going higher-end and of introducing Avon to women who may never have encountered its products before. But associating with Sears and J.C. Penney wasn’t exactly going to class up the brand, and the retailers already served a similar demographic to Avon. Sears backed out not long before the launch, and Avon’s foray into J.C. Penney ended two years later in 2003.
Although the undertaking failed, it cemented among some Avon executives a feeling that Jung just didn’t embrace direct selling — or Avon’s existing customer base. Says one former manager: “All the things she tried — Mark, retail — you’d have to ask, ‘In her heart of hearts, does she really believe in the model?’ ”
Still, for a time all seemed golden under Jung’s leadership. From her start as CEO to June 2004, Avon’s stock tripled, topping $46 a share. Profits grew at nearly the same rate and reached $846 million in 2004, up from $287 million in 1999. Avon went into international markets early, and non-U.S. business made up about 70% of sales. (That figure was nearly 85% in 2011.)
But soon other beauty brands started aggressively pursuing Avon’s customers; multinationals such as P&G made inroads in the developing world, and drugstores and big-box retailers expanded their selection of affordable cosmetics. By 2005, profits were flat after three years of double-digit growth. “When things started to slow, there was an admission that the company had been resting on its laurels,” says BMO Capital Markets analyst Connie Maneaty.
Avon, once set up for growth, had gotten too fat. Jung implemented a half-billion-dollar restructuring, cutting 30% of managers and chopping its 15 layers down to eight. Consultants came onboard, and Jung started looking at acquisitions as a way to restart expansion. She also brought on new hires from the type of top-tier companies that Avon was aspiring to become. Emblematic of the new look at headquarters was Liz Smith, who joined as president of global brand marketing in 2005 from Kraft (KFT). Smith tried to bring a new kind of discipline to Avon, putting in place pricing analytics for the first time, but also ruffling some feathers. “Avon’s an iconic brand,” said one former marketing executive in the U.S. business. “It’s not the same as macaroni and cheese.”
Another restructuring that began in 2009 created a revolving door at Avon that left employees demoralized and uncertain about who was in charge. Confusion around Avon’s strategic direction only magnified the issue. Rather than working toward some long-term vision, employees often felt as if they were Band-Aiding problems for the short term. “At Avon, when something doesn’t go right, just put some concealer on it,” says a former communications manager.
Take, for example, the way Avon used its catalogue to try to make its numbers. Avon, unlike other direct sellers, publishes a 150-page-plus brochure every two weeks in the U.S. market, an astonishing frequency that effectively lets the company alter its offerings twice a month.
The flexibility to change its lineup so frequently could be a blessing, but it gave Avon too much room to abandon whatever game plan it had set in motion. Despite Jung’s efforts to position Avon and some of its products as more upscale, if marketers needed to hit a sales goal, they might heavily discount items — a no-no in luxury — in a subsequent catalogue. “On the one hand you had high-tech skin care, a lot of celebrities,” said Ron Robinson, former global director of product innovation at Avon, who now runs an industry website. “And then you had the discounting going on.”
Odd strategic choices foiled other efforts to go upmarket. The company acquired Silpada, a direct seller of silver jewelry, in 2010 for $650 million, but intentionally runs it as a separate business. When questioned about the logic of the structure on the second-quarter 2010 earnings call, Jung tried to quash analysts’ concerns, telling them, “You guys are going to love this like we do.” But silver prices spiked, and the company had to take a $263 million write-down in 2011’s fourth quarter. The increase in commodity costs was bad timing, but analysts also point to the size of the charge as proof that the company overpaid.
A major gap existed between what Jung wanted to accomplish and what she was capable of executing. Fortune has learned that in 2010 Avon announced internally a plan called “Road to $20 billion.” According to several sources, Jung envisioned the company doubling its revenue in five years through a 10-point strategy, which included launching a baby line. Less than a year later, after a bad quarter, the company cut off funding for most of the initiatives. Executives communicated a new directive: Avon would eventually hit $20 billion, but not by 2015.
Even as Jung was pursuing an ambitious growth strategy, the company was struggling in key emerging economies. Brazil had surpassed the U.S. in 2010 to become the biggest market for Avon in terms of sales, but managing operations in the Latin American country vexed the company. When the government required electronic invoicing for tax purposes in June 2010, Avon’s computer systems, already nearing capacity, were further strained. The change created service issues for representatives, forecasting problems, and product shortages at three times normal levels.
A year later the company went ahead with implementing a new information-management system in Brazil, one it had been planning for nearly two years. “We have an amazing team down there that has been working day and night that is ready to launch this on Monday,” Jung assured analysts. Avon was not as ready as Jung thought. The following quarter she explained that when the new system went live, late orders were missed, which threw off demand forecasting. Products arrived behind schedule, orders went unfilled, and shipments to representatives got delayed. The service problems had dragged down sales by eight percentage points in the quarter, with three of those points coming from lost sales due to rep annoyance, Jung said. Unlike the U.S. direct sales market, representatives in Brazil often sell for multiple companies, and Avon was at risk of losing them to its strong regional competitor, Natura.
In China, Avon’s problems were even worse. With its entrepreneurial culture and demographic profile, China was a ripe market for direct sellers. Avon opened for business there in 1990 amid press reports that the company had sold out of six months’ worth of inventory in just four weeks. But a direct-selling ban by the Chinese government in 1998 forced Avon to open brick-and-mortar locations called Beauty Boutiques.
Avon received the first license to resume direct selling in China in 2006 — a coup for Jung and for Avon. The business was so important that the country head reported directly to Jung and Susan Kropf, the chief operating officer at the time. Avon ran China with a “hybrid” model, maintaining its stores while also selling through reps. But as the company shifted away from Beauty Boutiques, results took a nosedive, with China’s revenue and operating profits plummeting 35% and 154%, respectively, year over year in 2010, the last year Avon reported China as a separate business unit.
Perhaps even more troubling were the reputation problems Avon faced in China. In 2008, Avon disclosed that Jung had received a whistleblower letter with allegations of possible violations of the Foreign Corrupt Practices Act (FCPA) in China. Avon began an internal investigation, which subsequently led to the departure of six employees. The highest-level dismissal took place this January, when Avon reported that Charles Cramb, the former CFO, was no longer with the company. In October, Avon disclosed that the SEC had opened a formal investigation. The Wall Street Journal has reported that Cramb was fired because of signs that he had known about possible corruption in China as early as the mid-2000s. The Journal has also said that a 2005 internal audit report found improper actions in China at least two years before the whistleblower letter. Cramb did not respond to requests for comment.
An amended shareholder class-action lawsuit filed on March 16 against Avon, Cramb, and Jung alleges that the plaintiff found that Avon employees, in connection with obtaining the company’s direct-selling license, paid to “schedule meetings between Jung and high-level Chinese government ministers; repeatedly treated Chinese licensing officials to ‘dinner and karaoke’; and paid Chinese government officials and other employees to attend some Avon press conferences.” Additionally, the lawsuit alleges that before 2009, Avon had “virtually none of the basic legal compliance protocols that were universally expected of a public company of Avon’s size at that time.”
The investigation has taken a financial toll, with about $225 million spent so far on legal and professional fees associated with the FCPA inquiry and compliance reviews. In 2010 and 2011, Avon spent nearly $100 million a year — a figure one FCPA lawyer described as “eye-popping.” Today posters with reminders like misconduct — DON’T COVER IT UP and IS INTEGRITY ON EVERYONE’S LIPS? are on display at Avon’s headquarters.
For all the problems under Jung’s watch at Avon, she did articulate a powerful purpose for the company: that Avon empowers women around the world by giving them an earnings opportunity. Avon pushed the idea of “the company for women” in its philanthropic work as well. The Avon Foundation, with a focus on domestic violence and breast cancer, approved nearly $38 million in grants last year. In 2010, Jung declined her bonus because of Avon’s poor performance, and donated the $5.4 million to the foundation.
Jung herself was also an inspirational force with the rank and file, who viewed her as a visionary leader with a true love of the company. “Andrea’s tenure has been underscored by a deep commitment to our representatives,” a company spokeswoman wrote in an email, noting that Jung pushed a new incentive system for reps and made it easier for them to do business online. Avon executives who previously worked directly with Jung were more critical. She was image-conscious, they said, looking to outsiders such as consultants and new hires for affirmation. Early in her tenure, in a leadership-derailment assessment, which measures a leader’s vulnerabilities when under stress, Jung tested as a “pleaser.” The label meant she had difficulty with conflict and a natural inclination to meet expectations of others.
Jung was the chairman of a board that loved her. (Full disclosure: The longest-serving director is Ann Moore, former CEO of Fortune’s parent, Time Inc. Also, lead independent director Fred Hassan sits on the Time Warner (TWX) board.) Jung’s directors allowed her to join the Apple (AAPL) board in 2008 — Steve Jobs personally recruited her — and let her remain a director at both Apple and GE (GE) as her own company floundered. “Avon couldn’t be more important to Andrea,” counters Ogilvy & Mather chairman Shelly Lazarus, who serves on the GE board with Jung. “And yet at the same time she manages to be an excellent director of both GE and Apple, and I don’t find that surprising. She’s a very capable, competent woman who works very hard.”
Now the board has a new star CEO. McCoy is an A-list executive with an impressive resume; at J&J she oversees the global pharmaceutical business and the consumer unit, which includes skin-care brands like Neutrogena. She earned a master’s in chemical engineering from Princeton and worked in a number of roles at J&J, including marketing, product science, and devices. She was passed over for the CEO job at the health conglomerate earlier this year.
Her high profile — and scant experience in direct sales — makes her a lot like Jung was when she joined Avon, though McCoy arrives with significant management training and operations experience. And like Jung, McCoy is likely to want to put her mark on the beauty company. What isn’t known (she’s not giving interviews) is what kind of makeover she has in mind for the company — although Avon’s hiring of a new CEO signals its intent to fight any buyout bid. Whatever path she takes, she has an opportunity to restore Avon’s traditional balance of direct selling and its brand. And that’s a beautiful thing.
Reporter associate: Doris Burke
This story is from the April 30, 2012 issue of Fortune
Grace Eunjung ParkMKT 351Case 14Avon Embraces DiversitySummary: Avon is a leading global beauty firm that has $10 billion in annual revenue and is 125 years old. Mrs. P. F. Albee of Winchester, New Hampshire, pioneered the company;s now-fa-mous direct-selling method. Woman have always played an important role in this company and have been selling Avon products since 1886, which was 34 years before women in the U.S. won the right to vote. Moreover, being the world’s largest direct seller, Avon markets to women in more that 100 countries with the efforts of more than 6 million independent Avon sales represen-tatives. The company has merchandise such as beauty products, fashion jewelry and apparel. In recent days, the company is recognized as a leader in management diversity in which Fifty-five percent of Avon’s management positions are filled by women and half the member of its board ofdirectors are women as well, but the company has traditionally been run by men. There, the com-pany ensures that women and minorities have opportunities for development and advancement.