The depths of Avon’s U.S. despair

But the beauty products direct-seller’s salesforce has dwindled in size along with Avon’s (AVP) U.S. sales, which have been in a free fall for the last few years.

The 128-year-old beauty company, known for products such as Skin-So-Soft and ANEW skincare, has been hit by a triple whammy: the rise in sales of low-priced beauty products at mass-market chains such as Walgreen (WAG) and Dollar General (DG), the apparent obsolescence of its direct-selling model for beauty items, and ill-advised forays into fashion, jewelry and pricier skincare products that alienated many customers.

In 2004, Avon’s North American sales hit $2.6 billion. By 2013, they had fallen to $1.46 billion, despite the company’s efforts to steady the business in the last couple of years through steps such as improving reps’ cut of the action, and streamlining its product assortment to focus on lower-priced products. But the sales declines are only accelerating: in the first three months of 2014, North American revenue fell 21% and Wall Street analysts are not expecting any better when Avon reports second-quarter results in late July. Equities trading firm BTIG Research said last month it is assuming North American sales will fall 6% a year going forward.

Perhaps more worrisome for company, the Avon Ladies, its secret sauce, are dropping out in droves, the size of the salesforce dropping by a double-digit percentage in both 2012 and 2013 to about 300,000 now. (It was about 600,000 at its peak.) That makes it all the more difficult for a direct-seller reliant on “word-of-mouth” to make consumers aware of its products and for reps to make money, resulting in a vicious cycle of declining sales for Avon.

Avon CEO Sheri McCoy, who took the helm in 2012 to fix a cosmetics giant left in disarray by her predecessor Andrea Jung, has repeatedly said that because of Avon’s heritage, the fixing the U.S. business is her “No.1 priority”, and has pledged to return its second biggest market to profitability in 2015. She has dismissed calls for Avon to consider dropping out of the U.S. altogether, as it did in markets like Vietnam, South Korea and Ireland, so it could focus on more promising markets like Brazil, its biggest, Russia and Mexico.

In February, Avon’s then-new senior vice president for North America, Pablo Munoz, laid out the company’s plan to get back on its feet in its home market. That includes more marketing aimed specifically at Hispanics, who remain loyal Avon customers, and offering a smaller array of products to reduce production and printing costs. And in September, Avon will launch a new e-commerce site. But it is clear that even Avon doesn’t expect a quick fix to problems that have been years in the making: Avon last month fired 600 people in North America in its latest round of job cuts. These follow cost-cutting steps in recent years, such as closing a manufacturing facility in Ohio and two distribution facilities.

But there’s a growing sense on Wall Street that these latest efforts might be too little, too late, all the more since Avon’s previous “restructuring” attempts have all failed. Last year, it abandoned a pilot in Canada of a computer system it hoped to transfer to the U.S. to make interacting with reps, including taking orders and paying commissions, smoother. The computer system had the opposite effect and hurt sales.

“The world around Avon has changed- they can’t just do things the way they used to,” Ali Dibadj, an analyst with Sanford C. Bernstein & Co, told Fortune.

An Avon spokeswoman said that the U.S. is a strong market, with both the beauty sector and the direct selling industry growing. She said the company is working aggressively to improve its U.S. business, and specifically on initiatives to make the Representative experience in the U.S. even better.

Be that as it may, there are signs that direct selling is an antiquated way of hawking beauty products, even beyond Avon-specific issues: according to the Direct Selling Association, revenue across the industry from items sold in this manner rose 3% to $32.67 billion last year. But that growth came from categories such as wellness products like neutra-ceuticals and home goods. In contrast, sales of personal care products such as cosmetics have fallen each year since 2009. Even a successful company like Tupperware (TUP) has seen beauty product sales decline sharply since 2009, while sales of its namesake containers have soared.

One idea that occasionally surfaces among analysts is the viability of hooking up with a large retailer that would sell licensed Avon’s products, or perhaps use Avon to manufacture private label beauty products. But those models have their own complexities, such as managing supply for one big client. And besides, McCoy has repeatedly defended the viability of direct-selling and said the Avon Ladies are the heart and soul of Avon.

Still, with hundreds of millions of dollars in operating losses in North America in the last three years and counting, Avon can’t afford to stumble in the U.S. indefinitely.

When Avon reports on July 31, the first thing Wall Street analysts will look for is any improvement in the rate of decline in the number of North Americans representatives, since that will be the first gauge of whether Avon’s latest attempt to fix the U.S. market is taking hold by keeping more of the people it relies on to sell its products.

“What you want to see first and foremost is the number of reps stabilize,” said Morningstar analyst Erin Lash.