When it comes to selling perfumes and skin care products, there is no bigger money-maker than Brazil. This might come as a surprise to many readers as some might think that the biggest fragrance market in the world would be the United States, France, or even China. Surprisingly, all of those guesses would be wrong. To find the world's biggest fragrance market, which came in at a whopping $6 billion last year, look no further than the largest country in South America.
In fact, according to a Canadian market research firm in a recent report, Brazilians use three times as much perfume as Americans do on a volume basis. Fragrance and skin care products companies worldwide are aggressively investing in this market, including struggling beauty product company Avon Products (AVP), which manufactures and sells a large assortment of beauty, fashion, and home decor merchandise. Unfortunately, Brazil alone may not be enough to turn things around at Avon.
Disappointing results
Avon Products is almost certainly in need of a new growth opportunity. While it possesses millions of independent sales reps and sells thousands of unique products, the company has been marked by years of sales declines. A quick glance at its sales results for the past three fiscal years tells the unfortunate truth at Avon, especially when compared to beauty product competitors L'Oreal and Revlon (REV).
|
Company Name |
FY 2011 |
FY 2012 |
FY 2013 |
|---|---|---|---|
|
Avon Products |
$11.1 billion |
$10.6 billion |
$9.96 billion |
|
L'Oreal |
$15.21 billion |
$18.17 billion |
$17.99 billion |
|
Revlon |
$1.35 billion |
$1.4 billion |
$1.49 billion |
The situation is direr when the profitability of these three companies is taken into account.
|
Company Name |
FY 2011 |
FY 2012 |
FY 2013 |
|---|---|---|---|
|
Avon Products |
$513 million |
$(42.5 million) |
$(56.4 million) |
|
L'Oreal |
$1.95 billion |
$2.4 billion |
$2.44 billion |
|
Revlon |
$53.4 million |
$51.1 million |
$(5.8 million) |
While Revlon has its own share of problems, it is clear that Avon needs a sales boost to keep its net profit from sliding even further downhill. It is for this reason that Avon appears to be headed for Brazil to try its luck with consumers there.
Pinning hopes on Brazil
Brazil will likely remain a major focus of Avon's management. In fact, in its latest 10-K filing with the SEC, Avon lists Brazil as a "Major Country". Perhaps that should be THE major country since Brazil has become the company's No. 1 single market. In fact, Brazil made up 20.2% of the company's entire revenue base, while the United States made up just 12.3% of it.
It should come as no surprise then that Avon recently announced a partnership agreement with beauty product developer Coty (COTY 0.09%) to distribute Coty's products in Brazil. The agreement benefits both companies as it gives Coty a stronger foothold in the Brazilian market and bolsters Avon's product line in its most important market.
Foolish takeaway
While focusing on Brazil is probably a smart move for Avon Products, it is unlikely to turn around the company's revenue and net profit for positive growth in the future. Even if Avon's agreement with Coty is hugely successful, the partnership is unlikely to solve the company's overall problems.
Brazil makes up 20% of the company's total revenue, which is exceptional, but if its Brazilian operation were to suddenly experience a 50% increase in revenue, that would only make up for the decline in total revenue that the company has experienced since fiscal 2011. Therefore, investors in Avon Products should keep in mind that while the company's focus on Brazil is creditable, it is unlikely to cause a meteoric rise in the company's financial results.
