Explain Avon’s position in Mexico as described in the case. Please explain the effects of both Mexican inflation and the peso devaluation on Avon Mexico and its competitors, who rely on imports to service the Mexican market. (Note: to answer this question, you have to know the inflation rates in both Mexico and the US, and the exchange rate between the peso and the dollar.) Case 8.1 Avon: dancing with volatile exchange rates17 Famous for selling cosmetics door-to-door through ‘Avon ladies’ sales representatives, Avon is the world’s largest direct seller of beauty products, with more than $8 billion in annual revenues from over 100 domestic and foreign markets.

Avon was founded as the California Perfume Company by David McConnell in 1886 and named Avon in 1939. In 1914, it opened its first international office in Montreal, Canada. By 1986, more than a third of its $3 billion sales came from abroad. By 2006, the foreign share of its total sales had risen to around two thirds.18 Extensive cross-border activities expose Avon to all kinds of effects brought about by volatile exchange rates. For example, in the mid 1980s, the dollar reached a peak in 1985. As the dollar rose to its 1985 peak, converting foreign earnings from weakening currencies into dollars reduced Avon’s profits.

However, as the dollar fell between 1985 and 1987, conversion from strengthening currencies increased the profits from foreign markets. During the Asian crisis of 1997–8 and the Latin American currency crisis in the 1990s, sharp devaluations of currencies, such as the baht (Thailand), the peso (Mexico) and the real (Brazil), also hit Avon.

Such volatile exchange rates forced Avon to introduce effective tools to reduce the risk of losses resulting from changes in exchange rates.