Avon in ding-dong battle over its future

Avon calling for help: the company's first-quarter profits failed to reach even analysts' lower expectations. Photograph: Avon/PA

There's a bad smell hanging around Avon's New York headquarters and it's not a waft of its £8-a-bottle perfume Scentini Nights.

It's more likely to be Celine Dion's Pure Brilliance, one of the many celebrity scents churned out by mass market perfume maker Coty. Coty is stalking the care-worn make-up giant Avon, and is now ratcheting up the pressure by dangling a new $10.7bn (£6.6bn) bid before shareholders.

Last week Coty signed up the veteran investor Warren Buffett, who has joined its large roster of celebrities including Beyoncé, Sarah Jessica Parker and Kate Moss. However, rather than lending his name to an aftershave, Buffett, one of the world's richest men, is putting some of his financial muscle into the deal.

The offer was an improvement on last month's gambit of $10bn. At that time Avon used the line of defence its 6.4 million sales people know all too well, slamming the door in Coty's face.

But the higher bid makes it harder for Avon's new management team, led by Sheri McCoy, the respected Johnson & Johnson executive parachuted into the top job last month, to rebuff Coty's attentions. She is frantically drawing up a turnaround plan but her cause wasn't helped by the poor first-quarter results she inherited, with profits of $26.5m – far below the $143.6m recorded a year ago - and adrift of the numbers expected by analysts.

The revised offer of $24.75 a share, up from April's offer of $23.25, was set out in a letter to the Avon board from the Coty chairman, Bart Becht, which was made public on Thursday. Becht is the former chief executive of UK household goods giant Reckitt Benckiser.

Best known for taking home a £91m pay package in 2009, Bart is not a man who takes no for an answer; he has sidestepped the board by appealing directly to Avon investors, hosting a call with more than 200 shareholders, who speak for well over half the company.

The battle has shone a light on the often overlooked business of selling products door-to-door, which is still surprisingly potent.

Avon, listed on the New York stock exchange, is perhaps best known in the UK for its "ding dong, Avon calling" adverts of the 1950s and 1960s, but its door-to-door selling model has not gone out of fashion and is an extremely effective way of reaching consumers in markets such as Brazil – which is the prize Coty is seeking.

Brazil is the third largest beauty market behind the US and Japan, according to Euromonitor, and is a battleground for cosmetics groups. Crucially, direct selling accounts for almost 30% of this booming market. Vivienne Rudd, head of beauty research at Mintel, explains: "The retail structure in Brazil isn't sufficiently developed yet for the beauty industry, so direct sales is a much more valuable model."

Avon's former chief executive Andrea Jung mounted a hugely successful push into Brazil, which is now its largest market, accounting for more than 20% of sales. But it slipped up there at the end of last year when a disaster resulted in lost orders, upsetting its sales reps and customers.

It also appears to have made other mistakes. For two years, Avon has been conducting an internal investigation into allegations that its staff bribed foreign officials in China and Latin America. Now it is being investigated under the US foreign corrupt practices act and could face huge fines. The scrutiny, combined with the company's deteriorating financial performance, eventually claimed the scalp of Jung, who resigned in December after 12 years at the helm.

Coty is said to have asked Buffett's permission to name him in order to send a message to Avon's board and investors that they were serious. At the last count, Buffett's Berkshire Hathaway was sitting on a $37.8bn cash pile, but the investment guru is not the only rich man in the room. Coty is owned by Germany's billionaire Reimann family through its investment company JAB Holdings. The mainstay of JAB's portfolio is a large stake in Reckitt and this week it sold roughly a third of its 15.5% holding, adding more than £1bn to the Avon warchest.

Rudd, however, believes that Coty – which has given the Avon board until Monday to respond to its new offer – does not hold all the cards. "L'Oréal has been rumoured to be interested in Avon and/or another direct seller," she says. "This is small change for L'Oréal, which is part-owned by Nestlé. There could be other companies that could gazump Coty."