December 14, 2011 / 9:38 PM / 6 years ago

Avon needs bold change as Jung's CEO tenure ends

(Reuters) - Avon Products Inc’s (AVP.N) decision to look outside its walls for a new CEO is viewed as an admission that the cosmetics brand needs a major overhaul rather than the small make-overs it has undertaken in recent years.

Shares of Avon surged as much as 11 percent as Wall Street welcomed the prospect of new leadership at the world’s largest direct seller of cosmetics, which has been criticized for resting on its laurels while other direct sellers and traditional beauty companies ate away at its dominance.

Late on Tuesday, Avon announced it would split the roles of chairman and CEO next year, with current chief Andrea Jung moving into an executive chairman role for two years or more, after the company finds a new CEO from outside its ranks.

The lack of an internal candidate is not a surprise, as Jung had run operations without a president or chief operating officer for years. Plus, Avon already moved its former chief financial officer, Chuck Cramb, into a new post overseeing developed markets such as the sluggish United States. But the company pushing Jung out of the CEO spot left some questioning the board’s actions.

The apparent lack of succession planning is “an extraordinary indictment of the board,” said Mark Cohen, professor at Columbia Business School and former CEO of Sears Canada.

Avon, famed for its “Ding Dong, Avon Calling,” campaign of the 1950s and 1960s, saw stellar growth through to the early 2000s as it expanded internationally, bringing the prospect of a career -- or extra pocket money -- to women in locales as diverse as South Africa and South Korea.

However, Avon took its eye off direct-sales competition, such as Brazil’s Natura (NATU3.SA) and Sweden’s Oriflame ORIsdb.ST, as well as traditional beauty businesses like L‘Oreal SA (OREP.PA) and Procter & Gamble Co (PG.N) heading into new markets.

It is still dealing with the fallout from a bribery investigation that began in China in 2008, and the slow process of moving to a direct sales model there.

Now, as Avon wraps up celebrations around the globe for its 125th anniversary, investors who have watched the stock fall by nearly 45 percent in 2011 alone have something to cheer about.

Avon shares had only appreciated about 1.7 percent since Jung was named CEO until the announcement of the CEO search. The shares shot up as much as 11 percent to $17.91 on the New York Stock Exchange on Wednesday.

Graphic on Avon shares during Jung's tenure: link.reuters.com/kyx55s

THE SEARCH

Finding a new CEO will take time, as Avon is not only dealing with internal issues such as overhauling technology and a growing presence of rivals in key markets. It also has the Securities and Exchange Commission probing whether it broke bribery and disclosure laws.

At the same time, as a company with roughly 6.5 million representatives, Avon needs someone who can motivate its sales force. Jung, 53, has been CEO since 1999 and the Princeton graduate’s persona was often a big part of the allure for representatives who liked to see a successful woman at the top of the company.

“This is a momentum business and they need to restore morale in the field,” said Consumer Edge Research analyst Javier Escalante, who kept his “neutral” rating on the shares.

He suggested that someone with sales experience and charisma should run the show, perhaps Leslie Blodgett, the creator and executive chairman of Bare Escentuals.

“You need somebody who can sell a piece of ice to an Eskimo, and she is one of those,” Escalante said.

Last year, Japan’s Shiseido (4911.T) bought Bare Escentuals for $1.7 billion.

Another strong contender could be Herbalife Ltd (HLF.N) Chairman and CEO Michael Johnson, who has a strong following among the representatives who sell that company’s nutrition products, Escalante said. Under Johnson, who previously worked at Disney, Herbalife posted five years of double-digit sales growth.

Avon has seen losses of representatives in North America, where many women find other things such as food and jewelry more appealing -- and profitable -- to sell. Some analysts have even suggested it leave the U.S. market, or get into stores to hawk its goods more effectively.

THE AMWAY WAY

While Avon continues to try and fix its maze of computer systems around the globe, which have led to products being out of stock and other issues in countries such as Brazil, other direct sellers have been updating their systems and expanding into fresh categories to keep up with what consumers want.

Sales are booming at Amway, which while based in Ada, Michigan, now makes about 90 percent of its revenue outside of the United States with a sales force of more than 3 million.

Amway, which is privately held, saw sales climb 9.5 percent to more than $9.2 billion in 2010 and they should rise “substantially” in 2011, Steve Lieberman, vice president and managing director of Amway North America, said in a recent interview.

Avon had $10.73 billion in sales in 2010, but with roughly twice as many sales representatives.

“We have advantages because we are private,” said Lieberman. “Being private allows us to look long term. Some of our competitors are having problems now, and they’re very public.”

Avon has already made some major management changes, bringing in Chief Financial Officer Kimberly Ross in late November and Fernando Acosta, president of its large Latin America business, at the beginning of December.

A committee of three long-serving board members, along with Jung, will look outside the company for a new CEO. Once Avon finds someone, Jung will have a new two-year contract for the executive chairman role, with the possibility of an extension.

The CEO search is being led by Fred Hassan, managing director and partner at Warburg Pincus LLC, along with Maria Elena Lagomasino, CEO of GenSpring Family Offices, and Lawrence Weinbach, managing director of Yankee Hill Capital Management. Hassan and Weinbach have served on Avon’s board since 1999, and Lagomasino joined in 2000.

Jung has the full support of the board, according to a statement Hassan made on Tuesday.

“This elevation to executive chair is hopefully just a face-saving ploy because it’s not credible for her to participate either in the selection of her successor or to co-exist with someone who has to be brought in to significantly turn the company around,” said Cohen.

Jung will likely have one last moment in the spotlight as chief executive -- a planned meeting sometime in early 2012 to update investors on the comprehensive review it announced in late October.

But even that exercise could be meaningless.

“We want to believe the board will encourage any new CEO to consider Avon’s entire business model with a blank sheet of paper” Barclays analyst Lauren Lieberman said.

Reporting by Jessica Wohl in Chicago, additional reporting by Phil Wahba and Jilian Mincer in New York and Doris Frankel in Chicago; editing by Gunna Dickson, Bernard Orr

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