Stories in this section:
Investor Bias
Private Quarters: Passing On the Entreprenurial Spirit
Tupperware Buys Sara Lee's Direct Selling Unit
VideoPlus Introduces New DUALDISC Technology to the Direct Selling Industry

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Investor Bias
Continued from page 1

Just for fun, we stacked up these Amway founders against other wealthy notables, and they compare quite favorably:

So while direct selling may not have the glamour of Hollywood, Silicon
Valley or Wall Street, rest assured, the money is no less serious.

Besides individuals, there are a lot of large, more traditional companies with interests in direct selling, further underscoring the opportunity in our view. For example, when Blyth bought Colonial Candle of Cape Cod in the early 1990s, it included a small direct selling operation that was used to clear inventory with $7 million in annual sales called PartyLite. Today, PartyLite
has grown into a $700+ million global direct selling business.

Further, while companies like Tupperware and Avon have met with great difficulty in their efforts to take their respective direct selling franchises into traditional retail distribution, one new interesting trend is for the more traditional retail and media companies to extend their brand franchises into direct selling, like Body Shop at Home or Southern Living at Home.

So what are the investment characteristics that we think investors will
find attractive? Here are some that come to mind:

1. They are cash-generating machines. Direct selling companies typically require minimal capital investments. Additionally, the companies typically receive cash up front before product is shipped, resulting in practically no receivables to fund.

2. With low capital intensity comes high return on invested capital and healthy economic profit; that is, return on capital after deducting cost of capital.

3. Direct sellers tend to feature premium priced, high quality products. Having a sales force that engages in one-on-one presentations enables direct selling companies to demonstrate the value-add of their products better than a 30-second commercial can, typically commanding a premium price.

4. Along with premium pricing comes pricing flexibility. We like to think of direct selling as the “Bizzaro” Wal*Mart, just like in the “Seinfeld” episode where the Bizzaro character is the exact opposite of the corresponding Seinfeld character. As the Wal*Mart phenomenon expands, we think consumers are feeling more and more alienated, and that it’s possible that the cold, impersonal price, price, price shopping experience may be resulting in a backlash whereby consumers are seeking the more personal, intimate shopping experience that direct selling affords, and are willing to pay up for it.

5. Direct selling is a large and fragmented industry. Two of the largest and most visible global direct sellers, Amway and Avon, each command less than 10 percent of the global market. Then there are some direct selling companies at the next level, which is either side of $1 billion in sales, such as Tupperware, Nu Skin, Marinda & Longaberger. After that, the market drops off quite sharply from there to many companies with much smaller sales bases.

We also like to point out that while the U.S. direct selling industry is still relatively small at about 1 percent the size of traditional retail, it is growing faster than nominal GDP and retail sales.

U.S. Direct Selling Market vs Nominal GDP and Retail Sales

Between 1993 and 2003, the compound annual growth rate for the direct selling industry was +7.0 percent, compared to +5.2 percent for nominal GDP during that period and slightly less for retail sales.

In 2003, however, the domestic direct selling industry recorded $29.6 billion in sales, slowing a bit to up +3.0 percent vs. $28.7 billion in 2002 and lagging nominal GDP growth of +4.9 percent in 2003. This was only the fourth year in the last 11 when direct selling in the United States grew at a slower pace than nominal GDP, and the first since it lagged during the boom years of 1998-2000. We note that each year it lagged it still grew, just at a slower pace against a robust overall economy.

So why do investors still seem reluctant to put money in the sector? We believe the industry suffers from a perception bias among money managers.

The least penetrated region for direct selling is the Northeast, which happens to be the most densely populated region of the country, and also the region in which most of the managed equity assets in the United States are domiciled.

Direct Selling by Region

Therefore, the majority of the money in the United States is managed by people who most likely grew up in the region that is least exposed to direct selling.

Another interesting factor about direct selling is that with the exception of newly emerging economies like China, Indonesia, India, etc., sales productivity in direct selling has little to do with a country’s economic wealth.

It’s interesting to note that if U.S. salespeople operated with the productivity of the French sales force, U.S. direct selling alone would be a $135 billion market. Therefore, we believe the perception bias also carries over to the ability of companies to recruit sales reps, as it appears that the industry is not viewed as favorably by the broader U.S. public as it may be in other markets.

Below are some of the misperceptions that we think dog the direct selling industry, and our response.

Pyramid scheme?
Compensation tied to product sales, not recruiting.

Unsavory characters?
As we have learned recently, no industry is immune.

Lack of visibility?
Requires good transparency and disclosure from companies.

Religious cult-like image?
Emotional bond key to motivating sales force.

Who buys this stuff?
Wall Street professionals are not usually the target market. We believe this bias is why many of these companies can often be purchased at attractive
valuations, particularly considering the cash generating capabilities of many these firms, by investors willing to take the time to learn and understand the industry.

So the bottom line is that we think this perception bias provides an opportunity to invest in what we view as a very attractive segment. As U.S. money managers become more educated on the sector, we think more
money will flow into it, and as the general public becomes more educated, then sales rep penetration has further room to expand as well.

In fact, maybe if CNBC had spent more time profiling direct selling companies and less time on dot-com stocks in the late 1990s, we might have been a whole lot better off today. As the table below illustrates, owning a basket of direct selling stocks on New Year’s Day in 2000 would most likely have put you way ahead of the game today.

Doug Lane is an equity research analyst covering Consumer Products for
Avondale Partners, a boutique investment bank in Nashville, Tenn., which was
ranked No. 1 in stock picking by The Wall Street Journal in 2005, and No. 2 in
earnings estimates by Forbes/StarMine for 2004. Lane can be reached at
www.avondalepartnersllc.com.

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Private Quarters: Passing
On the Entreprenurial Spirit
When Jeff Stroud, Co- Founder and COO of Private Quarters, was looking for a way to continue his family business, direct selling was not what first came to mind. His knowledge of the industry was based on a dated stereotype of direct selling and the business model was not even on his list.

Stroud, the son of entrepreneur Bill Stroud, who built the Strouds Linens chain, says his passion for bed and bath products had him searching for a way to continue the business after the retail chain was sold and later closed. “I just loved the business,” says Stroud. “I wanted to continue it in some fashion, but thought, ‘What should I do? Should I open another store? Should I start a mail order catalogue? How am I going to do this?’”

Then Stroud was given an article about Warren Buffet’s Berkshire Hathaway acquiring The Pampered Chef and his view of the direct selling industry slowly began to change. “I thought that The Pampered Chef must be a dot-com or a chain of stores somewhere in the Midwest,” he says. At first, when he learned that The Pampered Chef was a party plan company he couldn’t understand the appeal. “Why would Warren Buffet be interested in a company that does home
parties? It seemed so silly to me.”

After learning about The Pampered Chef’s financial success, Stroud and Co-Founder and CEO Wayne Selness began to take a closer look at direct sales as a viable option for their bath and bed furnishings business. Learning about the industry brought a new awareness and respect for direct selling companies. “We found in our research that there are some very vibrant, exciting, growing new businesses that are highly successful and don’t fit the stereotype at all,” says Stroud. The partners found the idea of direct selling to be “more exciting and hip than a lot of retail concepts that are out there today.” Through their research and by running test parties, Stroud and Selness ultimately decided that a party plan was the perfect business model for Private Quarters.

While exploring their options, Stroud and Selness found the Direct Selling Association to be a great asset. “We’ve attended the annual meetings for two years in a row,” says Stroud. “We’ve made lots of contacts and when you’re researching the industry it’s very, very helpful to get exposure to people and companies in the business. I think it was invaluable.”

Stroud and Selness soon found that their products had the potential to sell very well at home parties. After putting together a business plan and recognizing just how big the opportunity was, they realized they couldn’t do it alone. “We knew we would need outside financing in order to make this a reality and to put the company on sound financial footing.” The pair presented their plan to BEV Capital, an investment company serving the software industry, the consumer sector and business services, and soon had the backing they needed.

So, with the help of BEV Capital, Private Quarters opened for business in November 2004. Since its launch, Stroud says sales have exceeded expectations, “We’re running well ahead of our projections and we’ve been very pleasantly surprised with the growth that we’ve achieved just over the last nine months.”

Stroud says Private Quarters brings a level of personal service to the bath and bed business not found in stores. “People feel the need to touch and feel our products in order to make a decision about purchasing them.” In a retail store situation customers aren’t always able to do that. In fact, with the high-quality products that Strouds Linens carried, some of the retail locations literally locked the packages. “The customers get frustrated because they can’t feel it. They can’t experience it.” At a Private Quarters party everything gets passed around and customers get to feel the products and samples. “It’s a big difference and that’s really helping us,” he says.

Quality marketing tools and a carefully planned pricing strategy have played a role in the company’s success. The catalogue and Web site along with the recruiting and hostess packets are top-quality pieces. The full-color, professionally designed catalogue, coupled with the products they market, give the impression of unabashed luxury. While the products look like something sold only to the rich and famous, Stroud says the products are aimed at an upper moderate demographic and are “very affordable for anybody.” With an upscale presentation and affordable prices, Private Quarters is able to expand their market reach. “We’re getting the best of both worlds,” he says.

Direct selling has not only proved to be a profitable business model for Private Quarters, it’s enabled Stroud to pass along his family’s entrepreneurial spirit. “I like it because you empower independent consultants as entrepreneurs to take their business where they want to take it.” While the store managers at Strouds Linens were limited to running their particular store, a Private Quarters sales consultant can build a nationwide organization.

“In brick-and-mortar retailing, there’s an old mantra that says, location, location, location. You have to have the right location for your business to succeed. In this industry, it’s all about people, people, people,” says Stroud. “I call this a people-centric business. Of course it’s about the product. We can’t forget that. People become drawn to the industry or to our company because of the product. But in the end, it’s always about the people. That’s a very exciting part of this for me.”

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Tupperware Buys Sara Lee's Direct Selling Unit

Consumer products manufacturer Sara Lee Corp. said Wednesday it has
agreed to sell its direct sales business to Tupperware Corp. for $557 million in cash.

Sara Lee put the unit, which markets beauty and personal care products in Latin America and Asia, up for sale earlier this year as part of a restructuring in which it plans to shed $8.2 billion worth of its businesses over five years. The struggling Chicago-based company last week reported a $148 million loss in the April-through-July quarter and said fiscal 2006 profits would be lower than Wall Street expected.

The unit, which includes brands Avroy Shlain, House of Fuller, House of Sara Lee, NaturCare, Nutrimetics, Nuvo Cosmeticos and Swissgarde, generated about $470 million in sales in fiscal 2005.

“This divestiture is another key step in simplifying our organization and concentrating on driving growth in our core food, beverage and household products businesses,” said Brenda Barnes, Sara Lee’s first-year CEO.

The transaction has been approved by both companies’ boards of directors and is expected to close during the October-through- December quarter.

“We see substantial growth opportunities for the direct selling channel in Latin America and Asia Pacific, and strongly feel that beauty and personal care products will be the major driver of that growth,” said Rick Goings, Chairman and CEO of Orlando, Fla. based Tupperware.

Including its existing BeautiControl business, the household storage products manufacturer said the acquisition will increase beauty and personal care products to about 35 percent of total sales, up from 12 percent.

Simon Hemus, President of Sara Lee direct selling, will continue to lead the business under Tupperware. Tupperware shares surged $2.97, or 14 percent, to $24.07 in morning trading on the New York Stock Exchange, their highest level in three years. Sara Lee shares fell 19 cents to $20.21, down more than 16 percent this year.

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Introduces New DUALDISC Technology
to the Direct Selling Industry
VideoPlus, Inc. recently announced the launch of the new DualDisc technology to the direct selling/network marketing industry

The two-sided DualDisc allows the DVD and CD formats to be combined onto a single disc—one format per side—and so can be played on either a DVD video player or a CD audio player. Each side’s format is clearly marked on the label and the two sides can also be distinguished by their different hues, gold for the DVD side and silver for the CD side. DualDisc is compatible with nearly any device that can currently play a CD or a DVD—whether a home stereo system, a DVD video player, a portable disc
player, a car stereo or a PC.

DualDisc technology was introduced by the music industry to deliver complete CDs and“bonus music videos” on the same disc and it has
quickly become popular with music aficionados. Several million copies per month are being sold around the world, despite the fact that, at the moment, there are only a limited number of music titles available.

The importance of DualDisc technology for the direct selling industry is that a company can combine its absolute best prospecting audio content and its absolute best prospecting video content on one disc that supports both high quality, world-standard audio and video formats. Distributors get one disc, but two experiences.

Operationally, DualDisc technology enables a company to reduce its inventory costs dramatically. While a DualDisc costs a little more than a DVD, it’s less than the combined cost of separate discs for each format. And, since two programs can now be delivered on a single disc, companies can also reduce their number of SKUs.

President/CEO of VideoPlus Stuart Johnson said, “For 18 years, we’ve kept our eyes on technologies of all types, and this is the one that excites me the most. Our clients don’t have to guess which communication tool their distributors will use. No more overstocking of one or the other [CD or DVD]—it’s all combined onto a single affordable disc that every distributor will utilize.”

DualDisc technology uses the same master formats as conventional DVDs and CDs, so VideoPlus doesn’t have to change a thing about production. Simply provide the masters as always and VideoPlus “will do the rest.”

Johnson said, “This is not an unproven technology. It’s just a technology that isn’t being utilized by the business world. Frankly, it’s perfect for direct selling/network marketing companies.”

To handle the delivery of DualDisc products, VideoPlus, which owns Direct Selling News, installed manufacturing lines dedicated solely to the new technology.

“Once they see the benefits, we expect most of our clients will switch over to DualDisc over the coming months and, by adding dedicated DualDisc lines, we will continue to deliver DVDs and CDs for our clients without a hitch,” Johnson said.

Already, such VideoPlus clients as EcoQuest, Pre-Paid Legal Services, Home Interiors & Gifts and other direct selling companies are using DualDisc technology to produce several hundred thousands units each.

Teresa Day, Vice President of Sales Training & Recognition for Home Interiors & Gifts, said that DualDisc products will save her company money and give distributors the most cutting edge tools available. “We took an existing DVD and an existing CD that were already being delivered together in our starter kit and combined them. DualDisc will save us tens of thousands of dollars per year without affecting the content of our kit at all.”

The first product ever released to the direct selling industry on the new DualDisc technology is the popular VideoPlus title The Perfect Business with Robert Kiyosaki. DualDisc is the perfect medium for such a title because it carries the new The Perfect Business video on one side as well as the best-selling audio of the same title on the other.

VideoPlus is poised for the anticipated expansion in demand from the industry as the advantages of getting two programs on one DualDisc become evident to direct selling companies.

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