With Avon Deal, Natura Aims to Break Into Top 5 Beauty Companies

Natura Cosméticos SA's acquisition of Avon Products Inc. puts it on a path to become one of the world's largest beauty companies.
The companies said Thursday the combined businesses would have generated about $9.3 billion in net sales for 2018, which would make it the fourth-largest pure-play beauty company in the world, behind L'Oréal SA, the Estée Lauder Cos. Inc. and Shiseido Co.
By dollar figure, according to the WWD Beauty Inc Top 100 report, the combined Natura-Avon business would have been the sixth-largest beauty operation in 2018, behind Shiseido but ahead of Coty Inc. The Beauty Inc figures count beauty sales from Unilever, which ranked second in the world in terms of beauty sales with $22.39 billion, and Procter & Gamble Co., which ranked fourth with $13.2 billion in beauty sales. Natura's calculation does not include Unilever or Procter & Gamble.
According to Natura's cofounder Antônio Luiz Da Cunha Seabra, the deal is not simply about ascending through the beauty ranks. "It's not about being bigger or smaller than Shiseido or any of the companies, that's not what's driving us," he said in an interview. "It's about the impact, having a bigger voice on the things we believe, and having the opportunity to have that with the consultants."
Seabra noted that Natura is against the idea of "manipulating ideas about youth" and its relation to happiness that has been around in the beauty industry for years. "Since the very beginning, it was so clear for us that having this kind or that kind of body shape doesn't matter, the importance is the quality of feeling and thought, the relationships between feeling and thought about the way that we inhabit our bodies," Seabra said.
The combination will be a transformational one for Natura. It is creating a holding company for the combined business, owned 76 percent by Natura shareholders and 24 percent by Avon shareholders.
Natura will also further diversify its geographic reach. The company has been best known as a Brazilian direct-selling company, but things started to shift with its 2013 acquisition of Aesop. Then, in 2017, the business added The Body Shop, and now, it's adding Avon. Once the deal closes, only 31.7 percent of Natura's sales will come from Brazil, while 25.6 percent will come from the rest of Latin America, and 39.4 percent will come from Asia Pacific and Europe, the Middle East and Africa, the company said. A small percentage of sales come from other places.
Avon posted $3.75 billion in sales for calendar 2018, posting a 10 percent decline over the prior year. The company has made efforts to turn itself around for years, shedding the long-troubled North America business (LG Household & Health Care recently agreed to buy it from Cerberus Capital Management for $125 million), and selling its China manufacturing business, also to an LG subsidiary. LG Household & Health Care ranked number 15 on the Beauty Inc Top 100 in 2018, with $3.85 billion in sales.
According to Jan Zijderveld, Avon's chief executive officer, "the whole point of the transaction" is to find a home under which Avon can complete its turnaround. He acknowledged that over the past decade, Avon has missed "a number of key strategic trends," which he's trying to rectify as part of his "open-up Avon" strategy. That plan includes digitizing the business and simplifying the business, as well as partnering with third parties to source increased innovation or faster product turnarounds.
"What I feel really good about is finding a better, more strategic, more long-term focus fit for Avon to execute the 'open-up' strategy — that is at the essence of what we're trying to do," Zijderveld said in an interview with WWD. He said he'll stay on to see the deal through, which he expects to take between seven and 12 months, he added.
"At the end of that, we will need to see how things pan out, but my priority is really making sure we close the deal and the transaction and make sure the integration is done perfectly well, then we will see," he said.
Natura executives said Zijderveld's plans for the business align with their own. "Since Jan came on board, the plan they call 'open-up Avon' is very much in line some of our beliefs — the digitization, modernization to social selling…we think we can accelerate some of that," said Roberto Marques, executive chairman of Natura, in an interview.
The deal comes at the same time Natura is working to turn around The Body Shop, but Marques said the company expects to be able to achieve both turnarounds. The Body Shop is turning around "about a year ahead" of schedule, Marques said, noting that if the Avon deal closes when expected, it could take the business two to three years to turn around under Natura.
Ascending the beauty ranks gives the combined business more "scale and impact" in Latin America, Zijderveld said, and gives Natura access to other global markets where it doesn't have scale.
Jefferies analyst Stephanie Wissink noted the deal could help both companies gain market share in Brazil, where they've both had share decreases over the past 10 years despite market growth.
Those markets will be some of the first to see an impact from the deal, as they'll quickly receive Natura's digital capabilities once the deal closes, Marques said. "Out of the 10 most important markets , five are in Latin America, and those are where we do have more of the overlap, and we think we can more quickly roll out the digital capabilities that Avon can benefit from," he said.
For the most part, the sales representatives would be kept separate, but possibilities could exist for cross-selling of subbrands, Zijderveld said.
"We can leverage the future brand platforms that the business will have, some of the Natura brands, some of the Natura fragrance subbrands, maybe even The Body Shop brands, into different geographies. The Avon network of millions of ladies that we have will be able to maybe sell some of those Natura products and brands in the network globally," Zijderveld said. Natura's products are priced higher than Avon's, and adding them into the mix could help representatives earn more money, which could in turn help stem the company's rep drop-out rate, Zijderveld noted.
Fashion and home are expected to remain part of the business, Zijderveld and Marques said. "We want to make sure we become more disciplined in the subcategories in fashion and home," he said, ticking off jewelry, giftable items, handbags and in-home fragrance as good options. For Natura, the category is seen as complimentary to beauty, Marques noted.
A decision on whether Avon's headquarters will remain in the U.K. has not yet been made, Zijderveld said.
The two have complimentary product portfolios, both companies said. Avon is thought to be better in skin care and color cosmetics, while Natura has a better fragrance business.
Retail expansion for Avon is also a possibility, Zijderveld said. Right now the company does have some stand-alone stores in markets like the Philippines and China, but he said he could see opening more in "iconic locations to reset and modernize the brand."
"This company, with The Body Shop, with Aesop, with the Natura stores, knows exactly how to do that," Zijderveld said.
The combined company will be driven by the "notion of a multibrand, multichannel approach," Marques said, across direct selling, but also freestanding stores, franchised stores and e-commerce. "Right now Avon is really into working with representatives, which we want to continue to evolve into social selling, but looking at Jan's strategy of 'open up Avon,' they are also thinking about potential other opportunities…that will be a benefit of being part of the group, to explore other possibilities."
While some remained skeptical of the deal, Coye Nokes, partner at OC&C Strategy Consultants, said it just might be able to work. "The direct-selling model is having a bit of a renaissance when done properly and when adapted to the current digital landscape," she said. "People are taking it a step further now and it's actually one pillar of your sales strategy, it's one channel you use."
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