Andrea Jung of Avon Products: Andrea calling

This is definitely not your grandmother’s Avon. That’s not surprising given the woman who runs it.

How many other chief executives embody their companies the way Andrea Jung does? Sleek, stylishly turned out, with signature pearl choker and mane of sable hair, she is confident and assertive, the perfect image for her newly invigorated Avon Products. Jung is the first female CEO at a cosmetics company who wasn’t also its founder.

Chief executive since 1999 and chairwoman since late last year, Jung, 43, has completely transformed the staid -- some would say stodgy -- 116-year-old company. Almost everything’s changed, from the products, packaging, advertising and research to order-taking and fulfillment. The emphasis these days is on the young, the hip -- and the efficient.

One thing remains the same: The ubiquitous Avon Lady continues to drive the company’s powerful sales and distribution system. There are 3.5 million of them worldwide, and, for the record, about 1 percent of them are men. These representatives are independent contractors who cost Avon nothing in salaries, benefits or pensions. But the $6.3 billion-in-revenue Avon empire rests on their willingness to take and place orders, then sort and deliver items on their own time in return for commissions ranging from 30 percent to 50 percent. Each one generates $175 in revenue every two-week sales period in the U.S., on average.

It’s clearly a formula that still works: The direct sales force is growing at a double-digit rate. So are Avon’s earnings.

Although it’s a uniquely American company, Avon’s products have become a global phenomenon sold in 143 countries. The worldwide presence helps. In 2001 32 percent of the company’s revenue and 39 percent of its operating income came from Latin America, eclipsing profitability in North America. This year has been tougher given the economic problems in Argentina, Brazil and Venezuela. Even so, Avon’s second-quarter earnings rose 13 percent, to $155 million, on revenues of $1.51 billion, up 4 percent. That made ten straight quarters in which Jung and her managers have met or exceeded earnings estimates.

When Jung took over as CEO, Avon stock was at $29.68. Thanks to the improvement in earnings during her tenure, the company’s stock hit a 52-week high of $57 in May before falling back in the midsummer swoon to a recent $47.25.

A second-generation Chinese-American, Jung was born in Toronto and grew up in Wellesley, Massachusetts. Her mother is a Shanghai-born chemical engineer, her father a Hong Kongborn architect. Jung graduated magna cum laude in English literature from Princeton University in 1979 and joined Bloomingdale’s as a trainee. She moved rapidly up the marketing ladder at I. Magnin & Co. and then Neiman Marcus Group. Forsaking the tony end of retailing in 1993, she accepted an offer from middlebrow Avon Products to head its global branding effort. Recently, Jung discussed her career moves and Avon’s prospects with Institutional Investor Assistant Managing Editor Subrata N. Chakravarty.

Institutional Investor: From I. Magnin and Neiman Marcus to Avon is a very intriguing career shift.

Jung: My background had been primarily luxury department stores. When I made the move to Avon at the end of 1993, what was very intriguing to me, both professionally and from a personal development point of view, was the concept of a multinational company.

What does global branding mean?

We had very decentralized, localized product development, and brand advertising was done locally. When I came, only 11 percent of the product line was common across borders. There was a fragrance that had 85 different versions. Today over 70 percent of our line is the same. Globalization is about finding the right balance. If you insist on total commonality, you can miss local nuances. At the same time, if you don’t insist on some common framework and it’s completely a local decision, you don’t maximize power, brand equity and efficiency.

What else did you do to build the brand?

We renovated the product packaging to make it more modern. We changed the logo, we changed the colors of the packaging, we changed the advertising and the whole image -- models, brand, positioning -- to be far more modern. We wanted to show we’re new, hip and very relevant to many generations of women.

What was the image before?

The research said that the image was dated. “Your grandmother’s brand” was the way some people in the early ‘90s perceived our brand equity. That’s where we began the turnaround and completely modernized.

One thing that didn’t change was direct selling. Aren’t other cultures less open to direct selling than the U.S.?

I think that the reason the model works so well is that it is flexible to nuances of cultures. It isn’t simply done neighbor to neighbor. It can be done office to office; it can be done in group affiliations. I think the point of direct sales is that it’s a high-touch business where affiliation and personal recommendation matter. There’s an Avon representative who really guarantees the product and is at the heart and the soul of the business model.

The Avon Ladies are Avon’s primary sales and distribution system. But they aren’t employees. Are you surprised that the model has lasted this long?

No, because the DNA of the company is very much “Let’s give women the opportunity to be independent.” Make money, be independent in terms of hours they keep -- when they do the work. Avon offered that to women before they could even vote. That heritage has come along with us into the second century of doing business. And that’s something we’re really proud of, because, obviously, more women rather than fewer are finding this an attractive earnings opportunity.

Another interesting move was going into retail stores. At what price point?

We definitely skewed the absolute pricing of this significantly higher than our core direct selling line. The new brand, Becoming, is less expensive than other department store brands but significantly more expensive than our core line.

Why go retail at all?

There are a large number of consumers who are retail buyers in this category. We want to complement our direct sales business with an entry into retail that won’t cannibalize our business.

One of the things that you did early on was to automate the back office.

Yeah, an e-opportunity is one piece of the back-of-the-house or business transformation of the company. The lion’s share of the investment has been to e-enable our sales representatives. We had a goal of having 20 percent of them online and ordering by the end of last year. I think we have 23 or 24 percent today. Our target is to be at 50 percent.

How much did it cut your costs?

This wasn’t simply about cost-cutting. It was a combination, from the start, of fueling growth as well as improving margins. The business transformation was a reallocation of the value chain: to take money out of unproductive areas and put it into refueling growth. We did that. We improved our margins 260 basis points between 1997 and 2000. The second phase of this will be net savings of an additional 250 basis points, which we are committed to over three years.

Avon is planning to address the teenage market.

We say teenage. But I’m going to qualify that in terms of even college-age women. I believe that Avon’s opportunity with teens is not just another brand of products but also creating an earnings opportunity and an affiliation for younger women.

How are you doing overseas this year?

Avon’s model is very strong because the local currency sales business is very strong. Translation, obviously, hurts us a significant amount. Our portfolio is, over the long term, the absolute best place to be. It’s a balanced portfolio, not all weighted in one place or another.

What is balancing Latin America now?

One is a very strong U.S. business. The pipeline of new businesses and products is full, the channel is healthy, the morale is good in the sales force, so that business continues to do extremely well. Our business in Europe, fueled by good growth in the U.K. and very attractive growth in central and Eastern Europe, has fared very well. Europe will be probably the fastest-growing region again in 2002. We still have a tough situation in Japan, but China is one of the fastest-growing markets for Avon. I firmly believe that it will be one of Avon’s largest markets in the next decade.