Avon, the storied beauty brand known for its multilevel-marketing model, has filed for Chapter 11 bankruptcy protection. This filing, which affects only one major branch of the Avon brand, highlights significant challenges facing the company. Here’s a closer look at the factors behind Avon’s bankruptcy and what it means for the future of this iconic brand.
Avon’s Chapter 11 Bankruptcy Filing: Key Points
Background on Avon’s Bankruptcy
- What Happened: Avon Products, Inc. (API), the U.S.-based holding company for Avon, has filed for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware.
- Scope of Filing: This bankruptcy filing does not include Avon’s U.S. operations, which are under different ownership. Instead, it covers Avon’s international operations, primarily those outside the U.S.
The Multilevel-Marketing Model Under Scrutiny
- How MLM Works: Avon’s business model relies heavily on multilevel marketing (MLM). Representatives sell products directly to consumers and earn commissions. They also recruit new sales reps, earning a share of their recruits’ sales.
- Criticism of MLM: MLM models have faced criticism for resembling pyramid schemes. The real money often comes from recruiting new representatives rather than actual product sales.
Challenges Facing Avon
Struggles with the Multilevel-Marketing Model
- Industry Scrutiny: MLMs have come under intense scrutiny. John Oliver’s 2016 episode of “Last Week Tonight” famously criticised the MLM business model, highlighting the low success rate for participants and the misleading promises often made.
- Avon’s Legacy Issues: Despite its storied history, Avon’s reliance on MLM has faced challenges as the model becomes increasingly controversial.
Financial and Market Pressures
- Rising Competition: Avon has struggled against newer, lower-priced beauty brands like Ulta and Sephora. Retail giants like CVS, Target, and Kohl’s have also made beauty products more accessible and affordable, eroding Avon’s market share.
- Legal Costs: Avon has spent $225 million defending itself against personal injury lawsuits related to its products, particularly its talc-based items. The company’s Chief Restructuring Officer Philip Gund admitted that Avon lacked the liquidity to address these ongoing legal battles effectively.
Current Bankruptcy Proceedings
Details of the Filing
- Debt and Assets: Avon International Operations has reported debts and assets between $100 million and $1 billion. The bankruptcy aims to address these financial issues and restructure the company’s obligations.
- Natura & Co.’s Role: Natura & Co., which acquired Avon in 2020, has agreed to purchase Avon’s international operations for $125 million. They have also committed up to $43 million in debtor-in-possession financing to ensure the company has enough liquidity during the bankruptcy process.
What’s Next for Avon?
Future Outlook
- Focus on International Markets: Despite the bankruptcy, Avon remains focused on advancing its international business strategy. CEO Kristof Neirynck has expressed optimism about the brand’s strengths and opportunities, particularly in modernising its direct selling model.
- Revitalisation Efforts: Avon plans to reignite its brand and accelerate growth, leveraging its nearly 2 million representatives worldwide. The goal is to modernise operations and adapt to changing market conditions.
Conclusion
Avon’s Chapter 11 bankruptcy filing marks a significant chapter in the company’s history. While the brand faces substantial challenges, including legal battles and intense market competition, the restructuring process offers a path to potential revitalisation. For now, Avon continues to navigate its financial difficulties while focusing on its international business strategy and brand revival.
Further Reading and Resources
