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Americans' indirect route to direct sales

With jobs scarce, many people are drawn to the likes of Avon, Mary Kay and Herbalife. Newcomers can expect hurdles and surprises.

October 04, 2009|Andrea Chang

Amid rising unemployment, more Americans are selling cosmetics, vitamins, kitchen knives and other goods to their friends and neighbors. Or trying to, anyway.

Industry figures suggest that as the ranks of salespeople grow, the increased competition is making it harder for many to move merchandise. That has left people like Lisa Wilson stuck with closets full of unsold inventory.

"You get pity purchases from your family, who feel guilty if they say no or they want to support you in your new endeavor. So you think it's easy," said Wilson, a graphics designer and advertising saleswoman in Austin, Texas, who sold Mary Kay cosmetics for about a year. "But once that dries up, you go out and get a big slap in the face."

The number of people selling for Mary Kay, Avon, Tupperware and other direct-sales companies swelled 47% this decade, many lured by the prospect of earning a good income at a time when regular jobs can be tough to find.

But sales grew by just 21% over the same period, to $29.6 billion in 2008, according to the Direct Selling Assn. Last year, sales dropped by 4%, even as the industry grew slightly, to 15.1 million sellers.

Retailers of all stripes have been suffering from the economic slowdown, as consumers rein in spending. But the direct-sales business model poses additional hurdles, experts say.

Direct-sales companies typically require their representatives to pay their own start-up costs, which can mean hundreds if not thousands of dollars in upfront expenses before the first sale is ever made.

Then comes what for many is a surprise: Often the only way to earn big money is to become a distributor -- enlisting others to sell and taking a percentage of their revenue.

"It's not just about selling the product -- it's about recruiting other people to sell and become part of your lineage of sales reps," said Brent Schoenbaum, a retail partner at Deloitte & Touche. "If you're not good at recruitment and you're just selling the products, you're not going to make enough money."

That's also one of the issues in a Los Angeles federal court battle between Herbalife International of America Inc. and a group of its former distributors.

Herbalife fired the first volley, suing Robert Ford of Georgia and seven other distributors on grounds that they allegedly stole the company's trade secrets and solicited Herbalife's distributors after they left Herbalife for a rival direct-sales outfit, Melaleuca Inc.

In a countersuit, the group contended that Herbalife operates an illegal pyramid scheme, in which earnings are based on the amount of products distributors buy from Herbalife, not on what distributors sell to consumers.

Court papers detail the inner workings of Herbalife's compensation structure.

The first level are distributors, who can buy Herbalife's dietary supplements at a discount for personal use or resale. Distributors can eventually become supervisors by meeting certain volume targets, which is made easier by recruiting "downline" distributors.

The supervisor level entitles sellers to extra compensation, including what is in effect a commission on what their distributors order, according to a summary of the case by U.S. District Judge Gary Allen Feess.

The former distributors allege that the Herbalife model violates a California law against "endless chain schemes."

"The payments by Herbalife to distributors are not related to the sale of products on a retail basis," said John Stephens, a lawyer for the sales reps.

Herbalife, which is incorporated in the Cayman Islands and has executive offices in L.A., disputes the contention, saying its reps were compensated based on the sale of products to customers and that there "is no gain merely from recruiting or being recruited."

"Consider the source and motivations of the persons and their lawyers who are making allegations against Herbalife," the company said in a statement. "The allegations are a smoke screen and are completely without merit."

In August, Feess denied Herbalife's request to throw out the pyramid scheme allegation. The case is awaiting trial.

Herbalife continues to do well despite selling nonessential goods in a tough economy.

Its profit rose to $221 million last year, up 16% from 2007. Herbalife said profit declined 28% in its most recent quarter -- to more than $48 million -- from the same period in 2008, but said that was partly because of unfavorable currency changes.

Wall Street likes the direct-sales industry. So far this year, shares are up 49% at Herbalife, 69% at Tupperware and 36% at Avon Products Inc.

For those who are successful, direct selling is helping make ends meet during a prolonged economic downturn.

Patrick Folsom struggled to find work after moving from Connecticut to Pasadena last year. He applied for teaching positions, then jobs at restaurants and grocery stores.

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