Coty’s recent bid to acquire Avon appears to be an audacious move given Avon is twice the size of Coty as per Euromonitor retail value sales figures, but Avon’s falling share price and Coty’s backing from its holding company Joh. A. Benckiser GmbH has brought Avon within Coty’s reach. The acquisition would help Coty expand its global reach, particularly in Latin America, which has the highest growth projection for its leading categories, but there are also formidable challenges which Coty needs to overcome to leverage the benefits of the acquisition.
Avon would help Coty far exceed its sales target by 2015
Coty’s objective is to increase its sales to US$ 7 bn by 2015, up from its current reported sales of US$4.5 bn in 2011. To this end, Coty has been on a buying spree acquiring the American skin care brand Philosophy and nail care brand OPI, German colour cosmetics brand Manhattan and Chinese cosmetics brand TJoy between 2010 and 2011. In retail value terms, according to Euromonitor, Coty’s sales in 2011 equalled US$7.5 bn. Adding Avon’s sales to Coty, would increase Coty’s retail value sales from US$7.5 bn to US$20 bn and lift its ranking in the global beauty and personal care from the 12th to 4th position. This is much above Coty’s growth target.
Avon to expand Coty’s global reach
Currently Coty derives 45% of its total sales from Western Europe and another 30% from North America, whereas growth in beauty and personal care is projected to be driven by Asia Pacific and Latin America, each contributing over US$18 bn to global growth prediction of US$54 bn between 2010 and 2016. Avon makes a strategic fit as it derives 75% of its sales from emerging markets, including 50% from Latin America. Avon would also allow Coty to further diversify into mass categories, which is beneficial when exploring growth potential in emerging markets.
Coty’s leading categories are fragrances and colour cosmetics together accounting for over 80% of its total sales. Absolute growth for both these categories is projected to be driven by Latin America. However, Latin America poses a challenge given colour cosmetics and fragrances are dominated by direct sellers. Latin American consumers prefer to buy these products from sales representatives and enjoy the social aspect of purchasing from direct sellers. Coty plans to tap into Latin America’s growth potential through Avon direct selling channel and expressed its intention to sell its own brands through Avon’s representative.
Avon can provide category synergies
Colour cosmetics and fragrances are the second and third leading categories for Avon, which would dovetail with Coty’s existing operations and additionally increase its exposure to skin care, Avon’s leading category. Coty has been focusing on expanding skin care as indicated by its acquisition of Philosophy. Skin care is amongst the most lucrative beauty and personal care categories projected to drive absolute growth in the industry between 2010 and 2016.
Coty could make a windfall gain
Coty’s bid is for US$23.25 per share, higher than the prevailing market price for Avon, but much lower than Avon’s all time high of US$46.11 in 2004. Coty’s bid underscores the challenges Avon has been facing including weakening sales, falling profit margin and a leadership vacuum. Despite these difficulties there is the potential to resurrect its fortunes, in which case Coty would stand to benefit financially, if it were able to buy Avon at a lower price than its inherent value.
Different operating models to make integration and management difficult
The challenges, however lie in Coty’s ability to provide strong stewardship to Avon with both currently operating very different distribution models. While Coty brands are sold through retail outlets, Avon sells its brands through sales representatives. Given Coty’s lack of exposure to direct selling, it would find it challenging to provide strong leadership to Avon and integrating the two different models would also be a difficult. For example, the invoicing system for direct selling is different to that of retail based models and if this acquisition is to go through, Coty will have to operate two parallel systems which would neither be efficient nor cost effective.
Direct selling growth forecast amongst the lowest
Direct selling is losing its lustre as other forms of retailing gain in sophistication, taking up share. Globally, direct selling will contribute 1% to the overall absolute growth projection for retailing between 2011 and 2016. To date direct sellers have prospered in emerging markets, where the lack of developed stored based retail channels has given them a competitive advantage. As markets develop and gain greater infrastructure this advantage could be eroded.
Looking forward
Increasing Coty’s exposure to emerging markets, primarily in Latin America due its focus on colour cosmetics and fragrances, is a move in the right direction, but it remains to be seen if Avon is the right path to growth. Acquiring Avon would instantly transfer 10% of Latin America’s beauty and personal care market to Coty’s regional portfolio, up from Coty’s current market share of 0.4%. The challenge, however, is continuing with the growth. Avon’s market share fell 30 basis points in Latin America beauty and personal care in 2011 and Coty will have to provide strong leadership to restore growth, but the different operating models would prove extremely challenging. Coty may be better off relying on the expanding store based retailing channels in the region. Given the lower penetration of store based retailing in Latin America, Coty faces comparatively less competitive pressure and can look to grow with the growth in the store based retailing channels.