Harvard Business School
Rev. August 5.1994
Avon Products, Inc.
On June 1, 1988, Hicks B. Waldron, chairman and chief executive officer of Avon Products, Inc., was reviewing a package of proposals that he and his financial advisors were to present to the Avon board of directors for final approval the following day. These proposals included (1) a public announcement that Avon would explore plans to divest two of its businesses, probably at a considerable book loss; (2) a reduction of the dividend on Avon's common stock; and (3) an exchange offer under which Avon would issue an unusual preferred stock in exchange for up to 25% of its common shares.
Avon Products, Inc., founded in 1886, was one of the world's largest manufacturers and marketers of beauty products. The company was famous for its direct selling beauty business, in which a sales force of independent contractors purchased products from Avon and then resold them door-to-door, largely to their friends and neighbors. In addition, by the mid-1980s , the company was an important national provider of sub-acute health care services. Avon's Beauty Group produced and sold cosmetics, fragrances, toiletries, and fashion jewelry and accessories; it also sold gift and decorative products. While it sold several fragrances through retail establishments, most of the Beauty Group's revenues were from its direct sales operations. In 1988 Avon had 1.4 million active sales representatives worldwide, including 400,000 in the United States. Avon's other principal business group was its Health Care Group, which comprised Foster Medical Corporation, the Mediplex Group, and Retirement Inns of America. They provided home health care , operated retirement living facilities, and provided certain sub-acute health care services. Exhibit 1 gives a lO-year review of Avon's financial performance, and Exhibit 2 gives data by lines of business for the period 1982-1987. Exhibit 3 shows balance sheets for 1986 and 1987, and Exhibit 4 gives an historical perspective on Avon's stock price .
Recent Company History
As a result of its strong cash flow , Avon was able to increase its dividend regularly in the late 1970s while aggressively seeking acquisitions. By 1981 Avon had raised the dividend on its common stock to $3.00, up from $2.55 in 1978. But more important, in the early 1980s, Avon made the major Professor Jonathan Tiemann prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrativesituation. Copyright © 1989 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545 -7685 , write Har vard Business School Publishing, Boston, MA 02163, or go to http: / /www.hbsp.har vard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of Harvard Business School.
Avon Products, Inc.
strategic decision to diversify its business by entering the health care field. Its first acquisition in that field was in January 1982, when Avon acquired Mallinckrodt, Inc., a specialty chemical company whose sales were largely to the health care industry. However , during this same period, an important demographic shift was beginning to th reaten Avon's Beauty Group. The majority of Avon 's sales representatives and their customers had traditionally been women who spent much of the day at home. But increasingly these women were entering occupations that required them to be away from home during the day. Therefore Avon w a s losing both its sales force and its customers. From 1979 to 1981, Avon 's margins on beauty product sales declined as the company broadened its direct-sales product line and offered increasingly generous sales...