NEW YORK (Trefis ) -- Avon Products ( AVP) sells products ranging from color cosmetics and fragrances to jewelry, house wares and even nutritional supplements. Avon is the largest direct selling organization in the world with more than 6.2 million active sales representatives that buy products from Avon at a discount and earn a commission on every sale. This is what differentiates Avon from the likes of L'Oreal, Estee Lauder ( EL), Procter & Gamble ( PG) and Unilever ( UL), that traditionally sell through third-party retail outlets including department stores and mass-volume retailers like Wal-Mart ( WMT) or Costco ( COST).
Our price estimate for Avon Products' stock stands at $36.63, roughly 25% ahead of its current market price. Beauty products make up almost three-fourth of our estimated stock value, while fashion and home products constitute 15% and 10% respectively.
Rise in Online and Mobile Sales
Online sales in the U.S. reportedly grew 12% year-over-year (YOY) in December 2010. Health and beauty retailers reported an even steeper rise beyond 23%. What makes these trends particularly interesting is the portion of sales generated through mobile devices. These gadgets reportedly contributed 5.5% of online retail sales, a sharp increase over November 2010. While part of this rise is no doubt a function of growth off a small mobile sales base, the report nevertheless highlights the rising trend of online and mobile retail as a crucial medium for sales. Here we explore the impact this trend might have on Avon Products, which utilizes another alternate sales medium, direct selling via sales representatives.
Avon's Direct Selling Model
Eliminating the conventional retail channel (drugstores, department stores, perfumeries, pharmacies, etc.) helps Avon avoid the relatively higher retailer margins (in excess of 40%) in favor of the commission charged by sales representatives (which we estimate to be close to 25%). This not only lets Avon offer products at more competitive prices but also helps the company to earn higher profits from the sale. Direct selling also enables Avon to be in closer contact with the final consumers, which creates better understanding of its customer base and, ultimately, leads to more efficient advertising and research & development spending. Also, since products are shipped from Avon's warehouse or centralized outlets once the order is placed, it favors better inventory management.