They may not be losing the war, but traditional American retailers sure are taking a beating in battle.
Forbes has reported that malls and shopping centers lost more than 10,000 stores in 2017, “perhaps the worst year on record,” wrote Ben Gamse, Market Research Manager for the U.S. Direct Selling Association (DSA), in our July issue. In 2018, long-time retailers Toys R Us and Bon-Ton announced they would go out of business for good, while anchors such as Sears and Macy’s continued to thin their ranks.
Nevertheless, with overall sales growth of 4.5 percent and 4,080 net store openings last year, retail is still a good business to be in. Gamse wrote: “The retail sector isn’t collapsing. It’s evolving.” Likewise, despite a second year of falling U.S. direct selling revenue—down 1.8 percent to $34.9 billion in 2017, according to DSA’s 2018 Growth & Outlook survey—the industry is likely experiencing more of a shift than a decline.
Traditional direct selling companies need to find more precise ways of differentiating themselves—perhaps by focusing on how direct selling enables their independent representatives to create long-term relationships with repeat customers to create an ongoing revenue stream.
The dip is prompting reflection but not alarm. The main reason for the shift can be attributed to the fact that there were less people involved in direct selling in the U.S. (1.9 million drop from previous year), mostly due to companies restructuring or re-segmenting their base of independent representatives from discount buyers to preferred customers. But that’s just the starting point. Some direct selling executives see the lower revenue as an indication of a market correction after a period of significant growth. Others believe that the low unemployment rate (4 percent) and pressure from online giants like Amazon and Etsy are simply raising the retail stakes, giving the industry a chance to step up its game.
“Companies and industries have to adjust to the market forces and economic winds that blow,” says Orville Thompson, CEO of Meridian, Idaho-based Scentsy. “We’re just in a transition period. Good companies are setting their sails differently, and bad companies are getting washed out.”
The Way Forward
DSA presented the industry’s sales results at its June annual meeting and surveyed attendees for their opinions on the main reasons for the downturn (see sidebar). DSA’s Industry Research Committee also solicited ideas for how the industry can improve to compete in the marketplace while offering several of its own recommendations:
- Leverage the still-strong desire among Millennials and Generation Z to make extra income.
- Offer support, compensation plans and incentives that resonate with modern independent representatives.
- Segment and track retail consumers and independent representatives.
- Clearly articulate direct sales’ value proposition, specifically within the gig economy.
Attendees who responded to the survey echoed these recommendations and expanded on them to include the following:
- Define products and business opportunities clearly.
- Offer competitive prices.
- Improve technology tools and the use of big data.
- Become more customer focused.
- Develop more effective training for independent representatives.
These big-picture strategies are critical to the health of the industry, but so is everyday “blocking and tackling,” Thompson says. “We need to ask ourselves, ‘Are our products on trend? Are we providing good customer service? Are consultants growing their base?’ Those business fundamentals are what give you growth that’s sustainable.”
Ben Riley, chief sales officer for Lehi, Utah-based Young Living, says that one of his company’s four primary strategies for continued growth is pretty basic, too: “Our consumers want their products faster and for less.” he says. “We are proactively upgrading our logistics solutions globally to offer a more compelling value proposition.”
A Bigger Gig
Direct selling executives who have been around for a while aren’t nervous about the downturn because they’ve seen it before. “What the overall industry numbers represent are a broad swath of companies going through a pretty dynamic lifecycle,” says Thompson, who along with wife Heidi started his company 14 years ago. “There are periods in which startup is prevalent. As those companies shift from hyper growth to rational growth, you’re going to see an overall number drop if there aren’t new startups.”
“We need to ask ourselves, ‘Are our products on trend? Are we providing good customer service? Are consultants growing their base?'”
– Orville Thompson, Scentsy CEO
What the industry hasn’t necessarily faced before, though, is competition from independent contracting competitors, like Uber and TaskRabbit, that don’t define themselves as direct sellers. In the last decade, there’s been an explosion of YouEconomy operators that allow us to make extra cash with very little investment, by selling a short-term share in things we already own—like our homes, our cars, and our talents. As many as one-third of U.S. workers can be categorized as “gig” employees.
Now, Nu Skin President Ryan Napierski would say that at a 50,000-foot level, there’s really no distinction between a Nu Skin and an Uber. “There is not much difference between the basic transaction models of direct sellers and gig companies. Direct selling companies provide a ‘gig and more’ opportunity beyond the single product or service transaction that a gig provides,” states Napierski. Both are “opportunity economy” businesses, so to measure the revenue of just traditional direct sales is to miss an important segment of a market in which the lines among players are less solid than we may think. “That $35 billion in revenue hardly represents the independent contracting business environment,” he says. “There are literally hundreds of multibillion-dollar-value business opportunity companies out there.”Direct selling companies can see the expanding gig marketplace as their biggest threat, but Napierski suggests they see it as, well, an opportunity. They can start by changing how they define themselves, he continues. “How do we identify a direct selling business? It’s a person-to-person trusted transaction of a product or service.” Traditional direct sellers no longer corner the market on freedom and flexibility. They need to find more precise ways of differentiating themselves—perhaps by focusing on how direct selling allows contractors to create long-term relationships with repeat customers to create an ongoing revenue stream. That’s an advantage that some service-oriented gigs can’t typically tout. “After the customer leaves the car, they no longer have any affiliation with the driver,” Napierski says of companies such as Lyft and Uber.
“It’s up to us to look at ourselves differently,” he says. “I’m very optimistic about our future as an industry as we embrace change. I believe that the future is bright.”
– Ryan Napierski, President Nu Skin
The marketplace reality that no company—gig, direct selling or otherwise—can ignore is the Millennial Effect. Businesses that don’t adjust their branding and operations to appeal to the working population and consumers in the largest generation since the Baby Boomers are going to be at a disadvantage.
For the direct selling industry, this often means scrapping traditional pieces of the model, executives say. “Last year, for instance, Young Living allowed new members to sign up without a Social Security number if they only wanted to buy our products and not build a business,” Riley says. This particular operational shift not only appeals to Millennials, who aren’t willing to obligate themselves the same way their parents or grandparents did, it satisfies tighter regulations around the industry’s retail sales channels.
Similarly, Nu Skin is waiving sign-up fees for new customers, Napierski says, as well as restructuring compensation and incentive plans to reflect what young independent representatives want instead of “forcing them down a single way of doing business.”
If there’s a macroeconomic lesson to be learned from the industry’s revenue decline, Thompson says, it’s this: “Too often we think we are affected by a poor economy when we’re the cause of the poor economy.” His point is that the downturn, while brief, is a sign that the industry needs to be more responsive to market desires. “Scentsy doesn’t do well if consultants can’t address the needs of customers,” he says.
Napierski agrees. “It’s up to us to look at ourselves differently,” he says. “I’m very optimistic about our future as an industry as we embrace change. I believe that the future is bright.”