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The arguments have waxed and waned, and statistics have been repeatedly modeled that have attempted to prove the respective but contrary conclusions that direct sales is and isn’t recession-resistant. It always seems that if you pick the right statistics, you can justify your assertions and support any conclusion.
The latest data tracker from the Direct Selling Association arrived in my inbox this morning documenting that direct sales had suffered a 10 percent decline in sales and a 3 percent decline in recruits during the first quarter of 2009. With this information in hand, it becomes, at least, difficult to say with certainty that our companies will prosper in an economic recession. In fact, it would appear that our sales trends are worse than retail as a whole. Does this, then, mean that direct sales is not less, but rather more susceptible to recessionary economics than other business models?
Our statistics, like those of any business grouping, comprise averages of a number of companies, some showing increases, some showing decreases. However, I would submit that we are not like other business groupings and that our business model does, in fact, have the potential for greater resilience. As with anything, however, potential is only worth what we do with it. (I, for instance, was one who was always characterized in my report cards as “not living up to potential.”) Further, I would suggest that what we are encountering now is not a typical recession, nor is direct selling a typical
business model.
The recession that began in force in early September 2008 is unlike any that I’ve seen in my lifetime. As has been noted by many pundits, it compares more closely to the early periods of what became the Great Depression of the 1930s than any of the relatively brief economic downturns we’ve experienced in the 40 years that I’ve been engaged in business. The most telling and relevant comparison is the sharp increase in unemployment during the last year. In 1930, unemployment increased from 3.2 percent to 8.7 percent in one year; in the last year ending this April, the unemployment rate increased from 5.1 percent to 8.9 percent, an increase of 75 percent. This change, in concert with the psychological change among most of our population associated with the drastic decrease in their perception of wealth, will likely result in a seismic shift in attitudes and behavior about consumption.
When one marries the impact of this change with an analysis of our business model, you see the greatest opportunity, and the greatest potential problem confronting direct sales in the current environment. I emphasize that I view direct sales as a business model, not simply another channel of distribution. This distinction is important because it provides us with two primary “levers” that we can use to drive demand for our products and services. The first is that we are “retailers” (i.e., a channel of distribution) providing customers with the opportunity to buy our products and services from informed and knowledgeable salespeople. The second is that we are purveyors of “micro-entrepreneurial” business opportunities to anyone who wants or needs supplementary or primary income. In the current environment our “retail” lever will suffer the same fate as that of any other retailer—that is, as disposable income drops, retail sales to current and prospective customers will also drop. However, because we have the second “business opportunity” lever, we have the potential to capitalize on the enhanced need for income by increased recruiting of representatives. Hence, unlike a normal retailer, we have the ability to open many new “branch stores” and offset the decrease in retail demand through an increase in the number of “locations.”
As with any change, we have the potential to prosper if we mine the modified needs and mindsets that are created by the disruption. In very simplistic terms, to the extent that we provide people with a real and viable income opportunity, we will capitalize on the increased supply of individuals looking for a way to earn money. To the extent that we continue to focus on a “personal consumption” model, we are trying to pull the “retail” lever at a time (and I fear a prolonged time) when consumption will be dropping. The shift from the retail approach to the business opportunity/recruiting approach is one that requires a significant behavioral and attitudinal shift on the part of the representatives who are the “guts” of our business model. Because we are dealing with people, their learned behavior and change-resistant psychology, it is not enough to simply say,“We need to change our focus.”
As executives who lead direct sales companies, we need to recognize that in order for us to change the focus and behavior of the tens of thousands of individuals who compose our distributor ranks, we need to get their attention, and then make it very worthwhile for them to undertake to change. Since we are largely limited to using “carrots” as a motivation (sticks don’t work well with a volunteer army), we may have to spend more than is comfortable, at least initially, to refocus our distributors on the recruiting activities that will drive growth in this environment. Further, we have to position our business opportunities to attract the supply of individuals who may be unfamiliar and even uncomfortable with the direct selling business model.
Many of these actions require spending incremental promotional dollars to create visibility, beefing up compensation plans to provide a better upfront ROI for the recruit, and providing promotional incentives to make recruiting the tastiest activity for current distributors—which may seem counterintuitive in an environment where most businesses are spending less and conserving cash. However, in our business model, which is characterized by high gross margins, it is very difficult, if not impossible, to sustain profitability when sales decline significantly. Further, at least in my view, the opportunity cost of not recruiting in an environment where there is a large supply of needful individuals will result in short-circuiting the long-term growth and marketplace penetration of the enterprises we lead.
Immunotec has undertaken this approach of investing to make our business opportunity more attractive and modifying compensation to make recruiting and leadership development the most lucrative activity for our distributors. As a result, our business has enjoyed unprecedented growth during the last six months in recruiting and promoting new leaders, generating double-digit increases in sales, even despite the fact that we are a 13-year-old company. While this has meant that we are reinvesting all our profits back into the business, I believe that this growth in our distributor and leadership base will position us to not only survive, but to prosper in this recession, no matter how long or how deep.
James Northrop is President and CEO of Immunotec Inc.
