This Document Contains Cases 14 to 16 Procter and Gamble Company – 2011 Alen Badal A. Case Abstract Procter & Gamble (P&G) is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Cincinnati, Ohio, P&Gs’s common stock is publicly traded under the ticker symbol PG. Headquartered in Cincinnati, Ohio, P&G is the world's largest household products company. The firm is divided into two global units: Beauty & Grooming and Household Care but P&G also makes pet food and water filters. Many P&G's products are billion-dollar sellers, including Febreze, Fusion, Always, Braun, Bounty, Charmin, Crest, Downy, Gillette, Mach3, Iams, Olay, Pampers, Pantene, Tide, Gain, and Wella, among others. P&G’s fiscal year ends June 30 every year. B. Vision Statement (proposed) To maintain our status as the number one household nondurables company in the world. C. Mission Statement (proposed) We will create and promote household nondurable (2) products that are not only known for quality and innovation (4) but for value (7) and environmentally (8) conscious. Our consumers (1) around the world (3) use our products on a daily basis (5) and trust the Procter & Gamble name and our brands. At Procter and Gamble we believe good ethics is good business (6) and stirve to conduct business in accordance to the laws of the nations in which we operate and treat our employees (9) with the respect they deserve. 1. Customers 2. Products or services 3. Markets 4. Technology 5. Concern for survival, growth, and profitability 6. Philosophy 7. Self-concept 8. Concern for public image 9. Concern for employees 10. D. External Audit Opportunities 1. Higher demand for higher-priced products such as prestige cosmetics and fragrances. 2. Younger customers are attracted by social media advertising. 3. Social media advertising is more cost effective than traditional advertising. 4. The beauty and cosmetics industry is expected to increase globally by 8.5 per cent in 2014 according to recent research from Euro Monitor International. 5. There is an endless possibility to `celebrities’ endorsing fragrances, these products are successful because many are persuaded by fame of the celebrity. 6. Men are increasingly concerned with their appearance, this provides a opening to grab a new branch of consumers. 7. Increase in online purchasing, average monthly visits in the U.S. to beauty-related websites topped 60 million and grew 94 percent over past three years. 8. Consumers are interested in products that are made with all natural products. 9. Research shows that by 2015, global women’s purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase. Threats 1. Volatile foreign exchange rates. 2. Subject to anti-trust investigation in Europe. 3. Increase in competitor expansion globally from Colgate-Palmolive, Unilever, and Clorox. 4. Regulations are increasing due to the voicing of different groups about harmful chemical ingredients in cosmetic products. 5. Diamond foods struggling financially, may not be able to purchase Pringles. 6. Premium cosmetics are a prime target for counterfeiters. 9%, according to the Global Congress on combating counterfeiting, of all the world trade comprises counterfeit goods. 7. Discounting premium cosmetics can damage its prestige image for the consumers who purchase these products. 8. The Estée Lauder companies ranks number one in prestige skin care and number two in makeup in the channel. 9. Considerable investment is necessary to bring new products to the market and to maintain their high profile. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Proposed sale of Pringles line of snacks in 2011 for $1.5 billion. 2. P&G is focused solely on the beauty and personal-care products business. 3. In 2011, Fortune ranked P&G the number one soap and cosmetic in the world. 4. New CEO, Mr. McDonald focuses on lower end products aimed at price sensitive customers. 5. P&G operates under a SBU structure. 6. 23 P&G brands routinely earn over $1 billion in revenue per year. 7. Braun, bounty, Charmin, Crest, Downy, Gillette, Pampers are all top brands owned by P&G. 8. Invested over $2 billion in R&D in 2010. 9. Market share grew in 14 of top 17 countries in 2010. 10. EPS is 3.94. Weaknesses 1. No published vision statement. 2. $57 billion in goodwill on balance sheet. 3. Profits declined 5% in 2011 yet revenues increased 2.9%. 4. Weak profitability ratios. 5. Not operating as efficiently as Johnson & Johnson. 6. Spent $772 million in advertising to Johnson & Johnson’s $366 million. 7. Consumers may not associate all of our brands with P&G rather view them as their own distinct companies. Financial Ratio Analysis Growth Rate Percent P&G Industry S&P 500 Sales (Qtr vs year ago qtr) 8.90 10.40 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) -1.90 4.00 47.20 Sales (5-Year Annual Avg.) 5.09 5.47 8.31 Net Income (5-Year Annual Avg.) 7.54 7.90 8.76 Dividends (5-Year Annual Avg.) 11.37 10.67 5.70 Profit Margin Percent Gross Margin 50.0 53.3 39.8 Pre-Tax Margin 17.8 16.3 18.2 Net Profit Margin 13.9 12.4 13.2 5Yr Gross Margin (5-Year Avg.) 50.8 53.7 39.8 Liquidity Ratios Debt/Equity Ratio 0.52 0.80 1.00 Current Ratio 0.8 1.0 1.3 Quick Ratio 0.5 0.7 0.9 Profitability Ratios Return On Equity 18.3 32.6 26.0 Return On Assets 8.7 11.1 8.9 Return On Capital 11.0 15.4 11.8 Return On Equity (5-Year Avg.) 16.7 32.2 23.8 Return On Assets (5-Year Avg.) 8.0 10.0 8.0 Return On Capital (5-Year Avg.) 10.1 13.9 10.8 Efficiency Ratios Income/Employee 91,008 70,194 126,905 Revenue/Employee 653,907 537,057 1 Mil Receivable Turnover 13.3 12.5 15.4 Inventory Turnover 5.5 4.9 12.5 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Spend $400 million in R&D to produce 3 new lines of higher end fragrances (S8, S9, S10, O1). 2. Allocate $100 million for advertising and promoting male skin care products using celebrities as spokesmen (S6, O5, O6). WO Strategies 1. Increase social medial advertising targeting teenagers by $100M (W3, O2). ST Strategies 1. Engage in talks with Pepsi to purchase Pringles if the deal with Diamond Foods is not completed (S2, S3, T5). 2. Continue to market low end cosmetics and fragrances (S4, T7). WT Strategies 1. Reduced advertising by $300M on well established products letting their brand name sell for itself (W5, W6, T9). G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Segment 2010 Revenues 2010 Profits Beauty & Grooming 34% 36% Health & Well-Being 18% 19% Household 48% 45% J. QSPM K. Recommendations 1. Spend $400 million in R&D to produce 3 new lines of higher end fragrances. 2. Allocate $100 million for advertising and promoting male skin care products using celebrities as spokesmen. 3. Increase social medial advertising targeting teenagers by $100M. 4. Engage in talks with Pepsi to purchase Pringles if the deal with Diamond Foods is not completed. 5. L. EPS/EBIT Analysis (in millions) Amount Needed: $600M Stock Price: $64 Shares Outstanding: 2,750 Interest Rate: 5% Tax Rate: 22% M. Epilogue P&G’s fiscal year ends June 30 of every year. Therefore, P&G’s Q1 2012 ended September 30, 2011. For Q1 of 2012, the company’s overall earnings fell to $3.02 billion from $3.08 billion a year earlier. During that quarter, P&G raised prices across all divisions and regions to help make up for higher costs for commodities. P&G’s overall Q1 2012 net income fell 1.9 percent, but sales increased 8.9 percent to $21.92 billion, from $20.12 billion earlier. For that Q1 2012, P&G’s Beauty division sales increased nine percent to $5.4 billion on unit volume growth of four percent. However, this division reported that net earnings declined 12 percent to $731 million. Also for Q1 2012, P&G’s Grooming division reported a 10 percent sales decrease to $2.1 billion, but that division’s earnings increased 10 percent to $438 million. For Q1 2012, P&G’s Health Care sales increased 10 percent to $3.3 billion on unit volume growth of three percent. Sales of Oral Care, including toothpaste and mouthwash, increased about 5 percent as Oral-B toothpaste was marketed in Western Europe and Latin America. P&G’s Personal Health Care volume increased about 3 percent behind higher shipments of Vicks due to initiative activity primarily in North America and Asia, partially offset by lower shipments of Prilosec OTC in North America. P&G’s Feminine Care segment revenues grew about 3 percent in Q1 2012 primarily due to new products in China and strong growth in India. Net earnings increased 9 percent to $542 million as sales growth was partially offset by a lower operating margin. Operating margin declined due to higher commodity costs, partially offset by manufacturing cost savings and a reduction in overhead and marketing spending as a percentage of sales. P&G’s Snacks and Pet Care division for Q1 2012 reported that sales increased nine percent to $776 million. Volume in Snacks increased about 9 percent due to increased distribution and market growth in developing regions, as well as share growth and market growth in North America. Volume in Pet Care decreased about 5 percent mainly due to customer inventory adjustments in North America following a June price increase. P&G’s Fabric Care and Home Care sales for Q1 2012 increased 6 percent to $6.7 billion. Volume in Fabric Care decreased about 3 percent as growth in Asia was more than offset by the impact of the forward buy in the previous quarter ahead of the price increases in North America and initiative activity in the base period. Volume in Home Care also decreased low single digits driven by the impact of the forward buy in the previous quarter ahead of the price increases in North America, partially offset by initiative activity and distribution expansion in developing regions. Volume in Batteries grew low single digits due to market growth in developing regions and increased demand following the hurricane in North America. Net earnings in this division of P&G declined 14 percent to $805 million. P&G’s Baby Care and Family Care for Q1 2012 reported a 12 percent increase in sales to $4.1 billion. Net earnings increased 5 percent to $494 million. Avon Products, Inc. – 2013 Forest R. David A. Case Abstract Headquartered in New York City, Avon Products is the world’s largest direct seller firm, and by far the largest direct seller of cosmetics and beauty-related items. Avon is the fifth-largest cosmetics and fragrance firm in the world. The company receives sales from catalogs and online, but the vast majority of its sales come from about six million independent sales representatives in 110 countries. Since 1892, Avon has empowered women to be their own boss and become leaders in communities and business. Avon is struggling to recover from poor management and global bribery investigations. Avon is pursuing a retrenchment strategy because the company has encountered severe challenges on various fronts. Avon is trimming down costs and improving working capital. Avon has decreased its quarterly dividend substantially and aims to slash costs by $400 million through 2016. The company is closing operations in some underperforming markets mainly in Europe, the Middle East & Africa. B. Vision Statement Actual: To be the company that best understands and satisfies the product, service and self-fulfillment needs of women—globally. Proposed: To provide women quality fragrances, cosmetics, and jewelry at reasonable prices backed by outstanding customer service. C. Mission Statement (proposed) To provide women (1) quality fragrances, cosmetics, and jewelry (2) at reasonable prices backed by outstanding customer service (7) provided by our thousands of representatives (9) operating globally (3). We use the latest technology (4) to profitably develop and market products desired by women all over the world (5). Avon representatives put integrity first (6) in setting a good example in every community (8) they operate in. We at Avon strive to make the world a more beautiful place (8). 11. Customers 12. Products or services 13. Markets 14. Technology 15. Concern for survival, growth, and profitability 16. Philosophy 17. Self-concept 18. Concern for public image 19. Concern for employees 20. D. External Audit Opportunities 1. The direct selling business model is still viable in developing nations. 2. In May 2012, perfume company Coty offered $24.75 a share for Avon, which at $10.7 billion was nearly 20 percent above Avon’s stock price at the time. 3. There are many qualified COOs available in the USA. 4. The USA market remains one of the top markets in the world. 5. Sales in male grooming increased by 4% in 2012, which could help the sales in Avon’s men’s products grow. 6. The increase of women's rights in other regions around the world. 7. People are becoming increasingly aware of the sun’s effects on skin and cancers associated with being in the sun. 8. L’Oreal does not practice direct selling strategies in their marketing initiatives as compared to competitors (Avon and Mary Kay). Threats 1. The direct selling business model has waned in the USA. 2. Only a 1.2% growth in industrywide beauty sales in 2012 compared to 2011. 3. Avon's inability to be sold in department stores at the level many competitors’ products are sold. 4. Industry as a whole suffered a 5-year growth rate average of negative 7.5. 5. Competitors such as L’Oreal are doing much better financially. 6. L’Oreal has $930 million invested in R&D; 3,676 researchers throughout 19 research and 16 evaluation centers; filed 613 patents in 2011. 7. Consumption of cosmetic products per inhabitant is 10 to 20 times lower in immature countries than in mature countries. 8. L’Oreal achieved 9.5% sales growth in New Markets. 9. Weaker economy customers have an increased tendency to purchase cheaper products from firms such as Procter & Gamble. 10. Competitive Profile Matrix Avon is doing considerably better than Revlon, but L’Oreal dominates both Avon and Revlon with a near perfect score of 3.92. Avon’s largest strength is also their largest weakness; the direct selling model that works well in Latin America is waning in the USA. Avon is also plagued by massive debt and poor sales from the USA. EFE Matrix Avon is performing below average on external factors with a score of 2.16. The firm desperately needs to improve its position in the USA. Rival firm, Mary Kay Cosmetics, does well in the USA so perhaps a business model akin to that firm should be considered. E. Internal Audit Strengths 1. Avon is the world's largest direct seller of cosmetics and beauty-related items. 2. Avon is the world’s fifth largest cosmetics and fragrance firm. 3. Avon products include cosmetics, fragrances, toiletries, jewelry, apparel, home furnishings, watches, footwear, children’s products, skin care, gift and decorative products, nutritional products, housewares, and entertainment and leisure products. 4. The company receives sales from catalogs and a website, but the vast majority of its sales come from its 6.4 million independent sales representatives in some 110 countries. 5. 85% of revenue is generated outside of the USA. 6. Avon training centers help women who want to become Avon representatives sell beauty products, jewelry, accessories and clothing. 7. Avon markets Regenerist and Anew skin products to baby boomers. 8. By paying commission on sales, Avon has a large and cheap labor force that does not receive benefits. Weaknesses 1. Firm still relies heavily on direct sales from sales representatives in the USA. 2. Avon is struggling to recover from poor management strategies that led to a CEO changeover and global bribery investigations. 3. Avon reported a loss of $38 million in 2012 in which every region of the world experienced worse revenues and profits than in 2011. 4. All product categories also experienced lower revenues in 2012 than in 2011. 5. Avon rejected an offer from Coty that was 20% above the stock price at the time. 6. There has been no COO at Avon since 2006, a potential strategic mistake by CEO Jung (and McCoy). 7. North American sales trail both Latin American and European sales, 8. Focus almost exclusively on women’s products and likely too many products outside their niche area. 9. Company is loaded in debt with a debt/equity ratio of 2.4. 10. Avon only spends around $75 million on R&D. Financial Ratio Analysis Profit Margin Percent Avon Industry Gross Margin 61.4 52 Pre-Tax Margin 2.44 14.95 Net Profit Margin -1.06 10.54 Liquidity Ratios Debt/Equity Ratio 2.36 0.53 Current Ratio 1.59 0.88 Quick Ratio 0.72 0.53 Profitability Ratios Return On Equity -8.85 22.21 Return On Assets -1.56 8.64 Return On Capital -4.15 12.93 Efficiency Ratios Income/Employee Negative 48,902 Revenue/Employee 270,675 461,611 Receivable Turnover 15.06 10.06 Inventory Turnover 3.41 4.85 Asset Turnover 1.47 0.82 Avon is struggling financially as the profitability ratios clearly reveal. The company also has 4 times the debt of the industry average. Net Worth Analysis (in millions) Avon is worth about $8.6 million using method four and was recently offered a 20% premium on this price by another firm. Care should be taken when analyzing the third method as Avon has negative EPS and Net Income. L’Oreal is worth about 10 times more than Avon. IFE Matrix Avon is performing below average on internal issues as indicated by a score of 2.23. The firm produces a wide range of products and is the 5th largest cosmetic company in the world. A glaring weakness for Avon is the negative profits coming from the USA market. Avon is in desperate need of a better strategy for its domestic market. Perhaps the firm could somehow switch from sales representatives to drugstores for distribution in the USA. F. SWOT SO Strategies 1. Increase the direct selling business aspect of Avon by 25% in Latin America by 2015 (S1, S2, S4, S5, S8, O1, O8). 2. Increase the direct selling business aspect of Avon by 100% in Asia by 2015 (S1, S2, S4, S5, S8, O1, O8, O9). 3. Build 10 new training centers across Mexico and Brazil (S4, S6, S8, O1). 4. Develop a line of sunscreen under the Avon brand (S3, O7). WO Strategies 1. Reconsider Coty’s offer; sell the firm (W3, W4, W5, O2). 2. Hire a COO for $2 million annually (W2, W6, O3). 3. Spend $10 million to develop a line of products for men (W8, O5). 4. Increase presence in USA drugstores and grocery stores by 20% (W1, W7, O4). ST Strategies 1. Develop a line of sunscreen under the Avon brand (S3, T2, T3, T4). 2. Invest $10 million in R&D and marketing to develop a new line of personal care products (S1, S2, S3, T9). 3. Increase presence in USA drug stores and grocery stores by 20% (S1, S2, T3). WT Strategies 1. Increase R&D spending to $100 million per year (W2, T8, T10). 2. Cease all direct selling operations in the USA (W1, T1). 3. Divest all USA operations (W7, T4). 4. G. SPACE Matrix Avon is in the competitive quadrant of the SPACE Matrix in large part due to heavy competition in the industry and the firm’s poor financial condition. The industry is also weak, and could shift Avon into the Defensive quadrant. Avon desperately needs to improve sales and reduce expenses in the USA; hiring a COO would be beneficial. H. Grand Strategy Matrix With a five-year industry growth rate average of -7.5% and excessive debt, Avon is located in Quadrant III of the Grand Strategy Matrix. Avon should consider selling the entire firm, possibly to Coty, who offered a 20% premium on the stock price. Or Avon should divest its USA based sales and focus on Latin America, Europe, and Asia. I. The Internal-External (IE) Matrix Segment Total Sales (in millions) Profits Latin America 4,993 444 Europe, Middle East, Africa 2,914 313 North America 1,907 (215) Asia Pacific 902 5 Total 10,717 547 The pie slices represent only industries that obtained a profit in 2012. Avon should move away for its direct selling market in the USA and invest resources into making products more available in grocery and drugstores. J. QSPM Increasing direct marketing in Latin America is a slightly better strategic alternative than focusing on moving away from direct marketing and into retail grocery and drug stores in the USA. However, both strategies can and probably should be undertaken simultaneously. K. Recommendations 1. Increase the direct selling business aspect of Avon by 25% in Latin America by 2015 for $20 million. 2. Increase the direct selling business aspect of Avon by 100% in Asia by 2015 for $10 million. 3. Build 10 new training centers across Mexico and Brazil for $5 million. 5. Develop a line of sun screen under the Avon brand for $5 million. 6. Spend $10 million to develop a line of products for men. 7. Increase presence in USA drug stores and grocery stores by 20% for cost of $30 million. 8. Cease all direct selling operations in the USA for a cost of $3 million. L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: $83 Stock Price: $19.97 Shares Outstanding: 434 Interest Rate: 10% Tax Rate: 28% As economic conditions improve, debt financing becomes slightly more attractive for Avon. However, with a debt/equity ratio over 2.5, it is assumed debt financing would be difficult to obtain, possibly even impossible. This analysis above assumes a 10% interest rate. The amount of capital needed is relatively small though, so a more favorable rate would not have material changes on predicted EPS. M. Epilogue Avon sees big growth coming in direct sales in emerging markets. In 2011, emerging economies accounted for about 40% of worldwide beauty spending, but that is expected to grow to 50 percent by 2016 – and Avon plans to be there leading the way. Although Latin America represents nearly half of Avon’s revenues, Asia represents just under 10 percent, so Avon sees extensive room to expand along with Asia's growing middle class. But the company is not yet doing well in Asia. Avon’s total revenue for its fiscal 2013 Q1 declined 4 percent year-over-year to $2,483.7 million, compared with $2,575.4 million the prior year. The company reported a loss of 3 cents per share for that Q1 compared with the year-ago earnings of 6 cents. During Q1 2013, the company’s total units sold declined 3 percent. For that Q1, Avon reported a revenue decline in its Beauty Products and Fashion categories, in which sales decreased 5 and 4 percent, respectively. However, sales at the company’s Home category business improved 8 percent. The decline in Beauty revenues was primarily due to weak results in its color, skincare and personal care products. For Q1 2013, Avon’s revenues in Latin America remained flat, while company revenues in Brazil, Mexico and Venezuela increased 11, 3, and 3 percent, respectively. Units sold were down 2 percent during Q1, while Active Representatives grew 4 percent year-over-year. In North America, Avon’s sales decreased 15 percent year-over-year to $406.2 million, mainly due to a decline in the number of Active Representatives. At for the company’s Silpada jewelry business, sales were down 18 percent as both average orders and Active Representatives declined. Avon’s units sold in North America dropped 13 percent year-over-year, while Active Representatives also declined 13 percent. Avon’s Q1 2013 revenues in Europe, the Middle East and Africa increased 1% year-over-year to $733.1 million. Sales increased 3 percent in Russia, but revenues in UK, Turkey and South Africa declined 9, 2, and 11 percent, respectively. Avon reported a 4 percent increase in Active Representatives, while units sold were up by 4 percent during Q1 in this segment. Avon’s Asia-Pacific division’s revenues in Q1 2013 declined 10 percent to $200.0 million, marked a 4 percent decline in Active Representatives and an 11 percent fall in units sold. The company reported a 30 percent and 1 percent revenue decline in China and Philippines, respectively for Q1 2013. Ever since Avon reported fiscal second-quarter results on August 1, 2013, of revenues of $2,508.9 million, analysts estimate that Avon’s full 2013 revenues will be down 5.2 percent and estimates for 2014 are for another 3.6 percent decline. A primary reason is that Avon continues to report declines in its North America revenues, especially the USA, mainly due to a decrease in active representatives, partly offset by larger average order. Total revenue from North America in 2009, 2010, 2011 and 2012 were $2,293.4 million, $2,193.5 million, $2,064.6 million and $1,906.8 million, respectively. Revlon Inc. – 2011 Forest David A. Case Abstract Revlon is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in New York, New York, Revlon’s common stock is publicly traded under the ticker symbol REV. Revlon is a global color cosmetics, hair color, beauty tools, fragrances, skincare, anti-perspirant deodorants and beauty care products company that produces and markets Almay and Revlon brand makeup and beauty tools, as well as Revlon ColorSilk hair color, Mitchum antiperspirants and deodorants, Charlie and Jean Naté fragrances, and Ultima II and Gatineau skincare products. Revlon beauty products are distributed in more than 100 countries, although the US is its largest market, generating about 55% of sales. Revlon products can be found in most mass merchandisers and drugstores such as CVS, Target, Shoppers Drug Mart, A.S. Watson, and Boots. Wal-Mart alone accounts for about 22 percent of Revlon’s sales. Revlon vision is “Glamour, Excitement and Innovation through high-quality products at affordable prices.” Revlon websites featuring current product and promotional information include www.revlon.com, www.almay.com and www.mitchum.com. Corporate and investor relations information about Revlon can be accessed at www.revloninc.com. B. Vision Statement (proposed) To become the number one skin care and fragrance company in the world. C. Mission Statement (proposed) Revlon Inc. mission is to emerge as leader in cosmetic and personal care (2) throughout the world (3). Revlon takes pride using current technology (4) in manufacturing e-co friendly (8) top skin care products (7) and strives to please young and older women (1). Revlon will provide career opportunities (9) for professional growth and stimulate their workers to achieve the highest returns for their shareholders (5). At Revlon, we believe good ethics is good business (6) and strive to serve the communities in which we operate. 21. Customers 22. Products or services 23. Markets 24. Technology 25. Concern for survival, growth, and profitability 26. Philosophy 27. Self-concept 28. Concern for public image 29. Concern for employees D. External Audit Opportunities 1. Wealthy consumers were not as affected by the economic downturn. 2. The beauty and cosmetics industry is expected to increase globally by 8.5 percent in 2014 according to recent research from Euro Monitor International. 3. Diversification of the distribution channels. 4. There is an endless possibility to `celebrities’ endorsing fragrances, these products are successful because many consumers are persuaded by fame of the celebrity. 5. Brazil provides a strategic opportunity for the brand to expand in the third-largest beauty market in the world. 6. Men are increasingly concerned with their appearance. 7. Increase in online purchasing, average monthly visits in the U.S. to beauty-related websites topped 60 million and grew 94 percent over past three years. 8. Consumers are interested in products that are made with all natural products. 9. Research shows that by 2015, global women’s purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to spend money. 10. Customers are increasingly shopping with “green” companies. Threats 1. Intense competition in cosmetics has increased and market initiators with quality providers. 2. New entrants, even though the market has considerably mature in the sense that it has captured customer loyalty, but there is always room for improvement in this field. 3. Premium cosmetics are a prime target for counterfeiters. 9%, according to the Global Congress on combating counterfeiting, of all the world trade comprises counterfeit goods. 4. Regulations are increasing due to the voicing of different groups about harmful chemical ingredients in cosmetic products. 5. External challenges beyond companies control. (i.e. different weather types and natural disasters). 6. Recession is causing people to spend less on makeup products. 7. Discounting premium cosmetics can damage the products image. 8. Avon increased advertising in the quarter to $97 million, up 19% from the prior year quarter. The company increased advertising mainly in Latin America. 9. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Revlon manufacturers cosmetics, hair color, skin care, fragrances, deodorants and other beauty products. 2. Products are sold in more than 100 countries around the world with sales outside the US accounting for 55% of all revenue. 3. Top brands include: Mitchum, Gatineau, ColorSilk, ColorStay, and Ultima II. 4. Sales in 2nd quarter of 2011 were $351 million for an increase of 4% versus second quarter 2010. 5. Revlon supports women’s health programs and many other community efforts investing over $65 million in medical research programs in 2010. 6. Under the direction of new CEO Alan Ennis 400 jobs were eliminated and a restricting of the organizational structure saved the company $30 million in 2009. 7. Revlon spent $24 million on R&D in 2010 employing 140 people on these tasks. 8. Wal-Mart accounts for 22 percent of Revlon sales in 2010. 9. Products can be found in Wal-Mart, Kmart, Target, Walgreens, and CVS. 10. Employee spokespersons such as Halle Berry, Jessica Alba and Jessica Biel. Weaknesses 1. Inventory turnover of 3.5 versus the industry average of 4.9. 2. Global market share declined from 4% in 2009 to 3% in 2010. 3. Mission statement is not well developed. 4. $1.2 billion in long term debt on year end 2010 balance sheet. 5. Mitchum’s market share decreased by 9.1% in the anti-perspirant deodorants category. 6. Many of Revlon’s top brands in the US are not marketed outside the US. 7. Financial Ratio Analysis Growth Rate Percent Revlon Industry S&P 500 Sales (Qtr vs year ago qtr) 5.70 10.40 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) -99.20 4.00 47.20 Sales (5-Year Annual Avg.) -0.16 5.47 8.31 Net Income (5-Year Annual Avg.) NA 7.90 8.76 Dividends (5-Year Annual Avg.) NA 10.67 5.70 Profit Margin Percent Gross Margin 64.9 53.3 39.8 Pre-Tax Margin 6.4 16.3 18.2 Net Profit Margin 22.5 12.4 13.2 5Yr Gross Margin (5-Year Avg.) 63.0 53.7 39.8 Liquidity Ratios Debt/Equity Ratio NA 0.80 1.00 Current Ratio 1.5 1.0 1.3 Quick Ratio 1.0 0.7 0.9 Profitability Ratios Return On Equity NA 32.6 26.0 Return On Assets 33.3 11.1 8.9 Return On Capital 50.6 15.4 11.8 Return On Equity (5-Year Avg.) NA 32.2 23.8 Return On Assets (5-Year Avg.) 2.6 10.0 8.0 Return On Capital (5-Year Avg.) 4.3 13.9 10.8 Efficiency Ratios Income/Employee 63,796 70,194 126,905 Revenue/Employee 283,837 537,057 1 Mil Receivable Turnover 7.8 12.5 15.4 Inventory Turnover 3.5 4.9 12.5 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Hire 2 more celebrity spokespersons in 2012 and 2013 (S4, O10). 2. Increase R&D by $100M on developing a product line for men (S7, O6). WO Strategies 1. Invest in business analytics to better predict product demand (W1, O7, O9). 2. Increase marketing and presence in Brazil by $200M (W6, O5). 3. ST Strategies 1. Increase advertising by $100M in Latin America (S2, S3, T8). 2. Increase shelf space in Wal-Mart for Revlon products by 20% (S8, T6). WT Strategies 1. Redevelop vision and mission statements. (W3, T1, T6). G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix J. QSPM K. Recommendations 1. Hire 2 more celebrity spokespersons in 2012 and 2013 for $20M 2. Increase R&D by $100M on developing a product line for men. 3. Expand advertising in Latin America by $100M. 4. L. EPS/EBIT Analysis (in millions) Amount Needed: $220M Stock Price: $15.45 Shares Outstanding: 58 Interest Rate: 5% Tax Rate: 30% M. Epilogue For Q3 of 2011, Revlon’s income fell 99 percent, mainly because of an income tax expense but the company’s revenue rose during the period. Net income fell to $0.1 million in Q3 that ended Sept. 30, 2011, compared with net income of $12.5 million in the same quarter last year. Revlon had a $22.1 million income tax expense in Q3 of 2011 compared with a $0.6 million benefit a year ago. However, Revlon’s revenue rose 5.7 percent to $337.2 million from $319 million last year. Revlon’s sales of makeup, hair color and Sinful Colors, a nail polish company it acquired in March 2011, helped results. Also in Q3 2011, Revlon’s U.S. revenue rose 10.8 percent to $184.7 million. The increase was primarily driven by the inclusion of the net sales of Sinful Colors and higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. In Asia Pacific, Revlon’s sales in Q3 of 2011 were $58.0 million, an increase of $3.5 million, or 6.4 percent, compared to $54.5 million in the same period last year. But in that Q3, sales of Revlon color cosmetics in Japan and Australia, partially offset by higher net sales of Revlon color cosmetics in China. Revlon’s sales for the first nine months of 2011 increased 7.3 percent to $1,021.6 million compared to sales of $952.2 million in the first nine months of 2010. In the United States for the first nine months of 2011, sales increased 7.1 percent to $565.8 million in the first nine months of 2011, compared to net sales of $528.1 million in the first nine months of 2010. In Asia Pacific, the company’s sales in the first nine months of 2011 were $169.6 million, an increase of $20.5 million, or 13.7 percent, compared to $149.1 million in the same period last year. In Europe, Middle East and Africa, Revlon’s sales in the first nine months of 2011 were $152.8 million, an increase of $9.1 million, or 6.3%, compared to $143.7 million in the same period last year. In Latin America, Revlon’s sales in the first nine months of 2011 were $78.9 million, an increase of $0.9 million, or 1.2 percent, compared to $78.0 million in the same period last year. Throughout Canada, Revlon’s sales in the first nine months of 2011 were $54.5 million, an increase of $1.2 million, or 2.3 percent. Instructor Manual Case for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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