Turning the Economic Corner: Direct Selling Leads the Way

Turning the Economic Corner

Think back about 30 years. It was 1980. Unemployment was high, interest rates were higher, and we escaped to the movies to see E.T., Star Wars and Batman. It was also the last time direct selling experienced a decline in sales.

But the ’80s were also a time when some of today’s most-respected direct selling companies—such as Herbalife, Nu Skin and Primerica—were born. Direct Selling Association President and CEO Neil Offen notes that history may be repeating itself.

“It appears that direct selling may be a leading indicator of economic recovery, supported by the fact that in 2008 we saw a slight increase in the number of direct sellers,” he says. “Reports from some companies and our recently released third-quarter DataTracker indicate this trend is continuing.”

Offen believes that by the third quarter of 2010, the industry’s sales figures will begin a healthy recovery, which he hopes will preface the recovery of the broader economy.

Until that happens, the industry must deal with an economic two-edged sword. With one in 10 Americans unemployed during 2009, direct sellers were faced with both an opportunity and a challenge. People looking for income were more open than ever to business opportunities, but those same people and their friends had tight household budgets. They eyed every purchase carefully, looking for value and asking, Do I really need it right now?

Life Essentials Scott Van Winkle, CFA, who is Managing Director, Equity Research for Canaccord Adams, follows the food and nutrition industries, including several direct selling companies. He theorizes that the product categories that should have performed the best in 2009’s economic environment have products that buyers view as least-discretionary.

Luckily for some companies, their consumers continue to consider their products essential, so distributors have a strong sales story to tell prospects. For those direct sellers, the sour economy took on the taste of sweet lemonade.

“For the devoted supplement consumer or person in need of weight loss, these needs are not optional,” Van Winkle explains. “Ironically, the U.S. weight-loss industry contracted, as the consumer appeared to operate under the assumption that he or she could achieve weight loss on their own, and thus save money. In the case of Medifast [which owns direct selling company Take Shape for Life], its offering has a value perception—$10 per day gives you five meals. More important, Medifast entered this cycle with tremendous momentum. And the quality of its product offering, tools, distributor training and leadership has improved so materially that even the worst recession in generations couldn’t break the momentum.”

Luckily for some companies, their consumers continue to consider their products essential.

Medifast CEO Michael McDevitt says that Take Shape for Life’s (TSFL) business model helps consumers lose weight at a tremendous value.

“For those looking to lose weight, it’s not discretionary. But they’ll shop around,” he explains. “Most people trying to lose weight do about seven diets a year. They will look for the best diet for them at the best price. We offer one of the best values in the weight-loss industry. Take Shape for Life wasn’t created to be recession-proof. It was created because customers called in to the company saying that they loved our products and wanted to help their friends and family lose weight the way they had. They wanted to be associated with the business. But this happens to be a model that in a recession can do well.”

Do well, indeed. TSFL has grown 40 percent year over year since 2002, and its third-quarter 2009 even exceeded those remarkable results. In the third quarter, parent company Medifast revenues increased 65 percent to $45 million, compared to 2008, and TSFL sales increased 105 percent year over year.

“It is the ability to be positive and see the vision for the future that will get people through the negative media and difficult times.” —Angela Loehr Chrysler, President and CEO, Team National

Turning the Economic Corner: Direct Selling Leads the Way

Trade Down to Trade Up

Value has been part of the message at Herbalife, too. The message was especially meaningful at Herbalife because it was actually born during a recession. Founder Mark Hughes started the company by selling products out of the trunk of his car.

“Inevitably, from a consumer perspective, when people are worried about their jobs and the economy, they start looking for ways to save money but still buy good nutrition for their families,” notes Des Walsh, Herbalife’s Executive Vice President of Worldwide Operations and Sales. “Our distributors have been successful in getting across to their customers what a great value our products represent. For about $2, they can get a wonderful nutritional meal. As a result, daily consumption of our products has increased substantially.”

He adds that consumers tell the company that they’re prepared to give up their Starbucks latte and muffin before they give up good nutrition for themselves and their families.

“Consumers are willing to trade down in some things, but they’re trading up in nutrition value,” he says. “That really has put us in a sweet spot.”

With its life-essential energy services, Ambit Energy benefitted from this year’s drop in natural gas prices and passed the savings on to its customers. That resulted in greater customer retention and a slight increase in customers per consultant.

“People shop around,” observes Chris Chambless, Ambit’s Chief Marketing Officer. “But that has translated into more customers for us. You can’t eliminate that expense from your budget.”

He explains that the company tracks consultant retention by measuring the number of consultants who have a replicated Web site and have produced either a customer or consultant in the last 90 days. Those figures have climbed every month since the company was founded in 2006. Ambit forecasts almost $400 million in revenues this year, up from $197 million last year. The company was honored as the fastest-growing privately held company in Dallas for 2009 by the Dallas 100 Awards™, co-founded by Southern Methodist University’s Cox School of Business and the SMU Caruth Center for Entrepreneurship.

DSA programs often used technology to allow participation without travel.

DSA programs often used technology to allow participation without travel.

Lemons into Lemonade

So how do companies do well when the economy doesn’t?

The Direct Selling Association set the tone for the year by recognizing that budgets would be tight. Its programs often used technology to allow participation without travel.

“Our educational programming in 2009 focused on providing targeted content with minimal time and travel commitment through offerings such as our new ‘Coffee Break’ series—a monthly topical online presentation designed to run no longer than the time it takes to enjoy a cup of coffee,” Offen says. “These offerings will continue in 2010. We’ve also made participating on committees and councils easier for our executives by offering virtual participation for a number of our meetings.”

He also noted that attendance at this year’s Communications & Internet Marketing Seminar transcended tight travel budgets and set an attendance record, as it focused on what’s working for direct sellers in the realm of social media and new media.

The DSA gained strong results from its Image Enhancement program, with hundreds of articles and news segments published, most of them focusing on the great benefits of direct selling, particularly in a poor economy.

Companies took advantage of the DSA offerings, often sharpening their focus on foundational activities.

Adjustment Process

Like many companies, Ambit recognized in ’08 that 2009’s economy would present challenges, so it decided to focus on the basics, such as training. Once consultants had honed their skills in the areas that let them earn money—recruiting consultants and gathering customers—it ran special promotions that encouraged them to do those very things. In its strongest market, Dallas/Fort Worth (DFW), it also developed and ran a brand-advertising test using television and billboards. The poor economy had impacted advertising rates and availability in the market, so Ambit was able to grab space at an attractive cost. It wanted to see if it could increase the company’s brand recognition and help soften the market for consultants. They got the hoped-for impact, seeing a 40 percent increase in recruiting and customer gathering in the DFW area, compared to their other markets during the test. As a result, Ambit plans to expand its brand-awareness campaign to the Houston market in 2010 and to continue to monitor results. As long as the ads help its field to be more productive, they will continue the campaign.

At Vemma, which has experienced rapid growth in the last couple of years, the tone was realistic.

“This ‘new economy’ has been a shock to everyone in and out of our industry,” says CEO and Founder BK Boreyko. “I wish I had one thing I could point to that allowed us to grow during the meltdown so I could share it with everyone, but there isn’t. Basically, I think the biggest reason [for good results] was the change in our core message. We shot a new DVD, and I cut down on the typical networking ‘hype’ and just talked to people about the problems they’re facing every day. I feel it resonated with people needing to just earn an extra couple of hundred dollars a month and gave them a plan to pull that off.”

Herbalife also focused on one of network marketing’s basics—attendance at meetings. They began the process at the end of 2008 by engaging distributor leadership. They recognized that 2009 would be a difficult year, based on the closing months of ’08, so they put an action plan in place that resulted in tremendous distributor engagement and activity, right from the first quarter.

“If our distributors sit home and watch TV, then all they’ll hear is more and more negative news,” Walsh says. “Inevitably, that has an impact on their confidence. The antidote to that is to get away from the TV, get to meetings, and get around other distributors whose businesses are successful. Then, when they talk to customers and are enthusiastic about our products and business opportunity, amazing things happen. That’s why we did ‘Why Herbalife?’ tours all over the world. We invited special guest speakers, and our CEO Michael Johnson participated in several. People welcomed the opportunity to come to the meetings, hear positive things, and learn about growth and opportunity.”

Walsh notes that the meetings were only one of many things that kept the salesforce’s attention trained on their business. Herbalife continued its branding efforts, social awareness programs and sports sponsorships.

“That may be even more important in challenging times,” he observes. “We’re out there in the community, being active, showing that our commitment to our social responsibilities is undiminished. It gives everyone a sense of confidence and purpose.”

Ignite, which markets Stream Energy in two states, exercised its strong belief in events as a driver of the business. Ignite’s Managing Director Doug Witt says, “In 2009, we stepped up the number and the level of our events in the field. As a result, we haven’t let the economic downturn adversely affect our way of thinking. In the field, our training and recognition events have continued to stimulate activity, which has continued our momentum even as the national economy struggles.”

“It is the ability to be positive and see the vision for the future that will get people through the negative media and difficult times.”

—Angela Loehr Chrysler, President and CEO, Team National

Turning the Economic Corner: Direct Selling Leads the Way

Stay Solid

Fast-growing Scentsy started a “world tour” around the United States last year and continued it during 2009. But President and CEO Orville Thompson believes that the company’s basic values may be the real key to its continued momentum.

“Simplicity, authenticity and value are the cornerstones of Scentsy,” he says. “We talked about them before the economy turned, and afterward, those things have increased in their value to customers and distributors. We were lucky to have principles before the recession that speak well to people during the recession.” He adds, “One of the things that might have led to success is the fact that we didn’t do things differently.”

Thompson believes that the economy has a neutral effect on the company and is actually a little disappointed that growth figures weren’t even higher than they were. Since it established its direct selling model in July 2004, Scentsy has had an average annual increase of more than 300 percent in both revenue and consultants. It projects nearly $180 million in revenue for 2009, compared to $63.7 million in 2008. Moreover, the company boasts a 12-month consultant retention rate of about 60 percent—about 50 percent higher than the party plan segment of the direct selling industry. And those consultants are engaged, too. About 78 percent of them placed orders during October.

Some of Scentsy’s growth came from international expansion, part of which was accidental. In September, the company intentionally entered the Canadian market—its second international market. The first was Puerto Rico, which it entered unintentionally a year before. During a companywide software upgrade, a switch was accidentally left open that allowed Puerto Rico residents to enroll as consultants. What happened next seemed like the very personification of “if you build it, they will come.” Without any Spanish-language marketing materials or customer support, by the following summer, the Puerto Rico market was growing at a rate six-times higher than the U.S. rate. Just as remarkably, the company found that consultants were beautifully aligned with the Scentsy values. Somehow the Scentsy message made it smoothly through the language barrier. Puerto Rico’s family-oriented, close-knit culture offered a perfect environment for the Scentsy model. The episode is a perfect example of what Thompson refers to as the company’s “magic dust.”

Business was more methodical than magical at most companies, including party plan company Tastefully Simple. But it took a long-term view of the challenging economy as it focused on supporting its consultant base. It launched an enhanced compensation plan and introduced a richer and more rewarding host program that promotes higher party attendance, sales and recruiting. It also enhanced its e-invitation and Web-related business tools.

“This year has posed unique challenges for business growth in all sectors, says the company’s Vice President of Sales Darrin Johnson. “That Tastefully Simple has remained strong and poised for renewed growth in 2010 is a testament to the advantages of the direct sales model in general and Tastefully Simple’s strategy in particular.”

Results at Team National have been steady, according to President and CEO Angela Loehr Chrysler, because the company has stayed positive and has continued to invest in its sales field and itself.

“We have invested in the production of new marketing tools, enhanced our products and invested in new category launches,” she says. “We also invested in the company itself by purchasing a new $3 million, 20,000-square-foot corporate headquarters, because we believe in our growth and future.”

Financial Reflections

Whatever their approach in 2009 and whether their business results were fabulous or flat, the companies that spoke with Direct Selling News said that being their best during bad times would carry them to good ones.

“It’s important to encourage and teach personal growth prior to difficult times,” says Team National’s Chrysler. “It is the ability to be positive and see the vision for the future that will get people through the negative media and difficult times.”

Herbalife’s top managers found that the troubled economy underscored what they already had learned through prior experience.

“This is a business based on distributor confidence,” Walsh observes. “We’re working closely with distributor leadership to ensure that they are confident that, notwithstanding the poor economy or external circumstances, in Herbalife we have the best products and business opportunity—exactly what people are looking for in these challenging times.”

Vemma actually encouraged distributors to modify their approach to the business and to focus on the unique needs that customers have right now.

“I think the new term for ‘sales’ in this new economy is ‘caring.’ People have changed their views, habits and the things they respond to,” notes Vemma’s Boreyko. “I feel you can’t use the same approach that worked for you a couple of years back. You need to let them know that you care about them and their needs first before they ‘buy in’ to what you’re offering. It’s a strange and exciting time we’re living in right now. You need to be transparent and believe in your message. You need to reach people on their level, and their level has been changed forever. Some companies will adapt and respond to the times we now live in, and some, sadly, will just keep doing the same things and hope for a different result.”

Bill Shaw, President of Entertaining at Home and Southern Living At Home, says 2009 was unique not just for direct sellers, but also for their customers. He suggests that they will need to adjust to the shock of an economy like they may have never experienced.

“If you think about it, the average age of our customer is 39,” he says. “That person was 12 years old in 1982. They have no memory of that recession, so they have no memory of the recovery. Why is this time different? This time, the audience is in shock. But they’ll wake up one day and realize that the president and Congress won’t turn this around overnight. This will be a protracted, slow climb-out in the economy. We will go from feeling that inviting friends over will be burdensome to seeing it the way it’s always been. It will be an opportunity to help someone start a business, and that will restart our economy. When that happens, we’ll see resurgence in the direct selling business, especially in the hard-goods side I’m in. We’ve seen it before.”

Taking It to 2010

After a challenging year, what are direct sellers looking forward to in 2010? Direct Selling News asked a sampling of companies, and here’s what they told us:

Orville Thompson Orville Thompson, Scentsy: “This year’s theme was expansion, and we’ll continue that as appropriate. Next year we’ll focus on excellence. We’re looking forward to polishing off some of the rough edges. We’re in that difficult situation of having to scale, and we’ve invested a ton of money in it and in human resources. Sales are continuing to grow, but change management is difficult. We want to nail that down so that we can provide world-class consultant training, support, technology and delivery.”
Darrin Johnson Darrin Johnson, Tastefully Simple: “Additional strategies, including expanding awareness of our unique product offerings and recognition of the Tastefully Simple brand, are in development and are expected to drive substantial growth in the future.”
Des Walsh Des Walsh, Herbalife: “Next year we’re celebrating our 30th anniversary. For us, it’s a wonderful time to be able to look back on the accomplishments of the last 30 years. We couldn’t have asked for a better test of what Herbalife represents than to have our distributors come through this 29th year. It’s not an economy we would have wished for, but it proved beneficial for that message and the resulting strong confidence we’ve seen.”
Doug Witt Doug Witt, Ignite: “We are expecting an amazing year in 2010. It’s important to put in perspective that we are only a 5-year-old company doing business in only two states. For 2010, we plan to take our game to the next level, not only by building on our existing marketing and training programs, but we also intend to expand our recognition program, as well as expand into new markets.”
Dan Chard Dan Chard, Nu Skin: “We feel like we’re on a run. There’s nothing to knock us off of some really great things that are happening. We have incredible leaders in our field. They have high energy. We have a good, solid product platform, and we plan for continued innovation. A lot of things are happening for us. We have an amazing group of people out there sharing our story.”
Michael McDevitt Michael McDevitt, Take Shape for Life: “It’s going to be another great year for the business. We have a product and a program that provide the consumer with clinically proven weight loss. You have only to turn on the TV or look at the newspaper to see that health care is on the minds of the consumer while obesity is continuing to rise. We have a tremendous solution to the problem.”
Bill Shaw Bill Shaw, Entertaining at Home and Southern Living At Home: “I’m looking forward to a decrease in the resistance to host parties by customers who feel that they are somehow burdening their friends when they invite them to attend a home party. As this resistance goes away, we also expect to see more and more people look at direct selling as a legitimate business opportunity. For people who would have sought traditional part-time jobs in the past, those jobs simply aren’t going to be available during a protracted recovery. I’m looking forward to a renaissance in our industry.”
Heather Chastain Heather Chastain, Celebrating Home: “I can’t wait to see how we can harness all this passion and energy and see how much we can accomplish when we have the freedom to focus just on the business. The Celebrating Home name is on its way to becoming better known than it is now, and we’re getting more involved in ways to do that. We recently participated in Extreme Home Makeover in North Carolina, and we will get more involved in those kinds of things.”
Chris Chambless Chris Chambless, Ambit Energy: “I’m eager to see how big we can get next year. I’m not sure I have a handle on it yet, but I’m expecting double-digit growth again. We’re preparing ourselves to focus on fundamentals again in 2010, reevaluating all our tools and existing support systems to try to improve them where we can.”
Angela Loehr Chrysler Angela Loehr Chrysler, Team National: “You get what you expect, therefore, I’m expecting terrific things, of course! I believe consumer confidence is beginning to rise and therefore people will start spending money again. The direct selling opportunity is needed today, tomorrow and next year, regardless of the state of the U.S. economy. We need to continue to encourage our sales field to stay focused on their dreams and to never give up.”

BK Boreyko

BK Boreyko, Vemma: “I’m the eternal optimist, and I’m gearing upfor growth. Vemma’s focus will not be on launching a bunch of new products. In fact, we just have one scheduled for all of 2010. Our focus will be squarely on growing people and developing leaders. If we can double the leadership in our company, we can effectively double sales.”

Four Became Two, But Stronger

Heather ChastainEven though the global economy seemed to be running a fever, entrepreneurial spirit was alive and kicking in direct selling during 2009. Several new enterprises were launched, getting off to a fast start. And industry insiders watched with interest as four established party plan companies began their journeys to consolidate into two.

Entertaining at Home’s Bill and Robin Shaw acquired Southern Living At Home from Time Inc., and Penny and Steve Carlile’s Home & Garden Party acquired Home Interiors & Gifts, which had filed for bankruptcy. Each respective management team approached merging their companies in a different manner, but both are pleased with the results they’re seeing.

The Shaws had purchased Taste of Home Entertaining in July 2008 from Reader’s Digest, rebranding it as Entertaining at Home. Not content to wait for the natural viral growth of EAH, they saw an exciting opportunity when Southern Living At Home became available this year. Because he had served as Southern Living At Home’s General Manager and Vice President for four years, Bill had great insight into the company’s business model, performance and culture. He saw a chance to achieve significant economies of scale by acquiring the company.

The consolidation process started in July, but the companies continued to operate as two separate entities. As part of the agreement, Southern Living At Home will relinquish its brand in July 2010. At that time, the two companies will become one, and a new brand will be launched.

Bill and Robin Shaw“The clock is ticking on a mandatory new name for the company,” Shaw says. “In creating the new name, we see this as an opportunity to reinvent ourselves. There’s risk associated with giving up the name Southern Living At Home, but there’s also opportunity around branding the new company.”

The task is large but not daunting, according to Shaw. He says he’s never worked so hard for so long.

“The biggest decisions we’ve had to make revolve around our identity going forward,” he says. “What do we take with us and what do we throw overboard on the journey? Who will we become? We have a unique opportunity, not only to learn from the mistakes of others, but to take a critical view of our own past performance, both good and bad. In many ways, it’s about a do-over.”

Although the two companies have different infrastructures, they have similar cultures, product lines and management styles, thanks in large part to Shaw’s foundational influence on both companies. His insights even enhanced the due diligence process and allowed him to more accurately assess the value of the acquisition and the risks associated with the purchase. Shaw’s management team has approached the consolidation process carefully and methodically, but always with one prime consideration.

“But our first consideration all along was securing the future of the consultants who depend on an income from Southern Living At Home,” he says.

He hopes that the expanded company will be able to offer those consultants some technological innovations that will enhance their businesses. While he keeps the specifics confidential, he emphasizes that innovation is critical to drive the business forward.

“Every great advance in direct selling is largely because of an innovation in product or service or related technology,” Shaw explains. “An example would be when we launched Southern Living At Home, as we were the first major company to have Web-based order entry. Since then, software providers have made it available to everyone. So we’re looking for the next application of new technology in our space to gain competitive advantage.”

He acknowledges some surprises along the way, especially among consultant reactions to the merger. He hadn’t expected how well the leadership at Southern Living At Home embraced the acquisition and how much resistance came from Entertaining at Home’s leadership. But as those leaders come together repeatedly, he sees resistance diminish and a new, stronger team emerge.

Field leaders have been the key to success at Celebrating Home, too. While the company attacked the consolidation of the two companies with a vigor that amazed the industry, the evidence that they succeeded is seen in their consultants.

“Everything we hoped they’d do, they have done,” Celebrating Home’s President Heather Chastain says proudly. “Everything we believed they were capable of doing, they’ve done. We’re doing joint meetings all over the company now. It’s been touching and exhilarating to see what people have been capable of.”

Celebrating Home relied on consultants to shoulder the extraordinary tasks of launching the new business while staff continued to focus on daily requirements. Together, they launched new branding, new marketing materials, a new compensation plan and, most difficult, a new IT platform.

“The most challenging thing we tackled was our new IT system and the integration of our new order entry system, hands down,” she says. “No matter how strong our partners were—and we have good ones—we still crammed six months of work into about six weeks. It was a bumpier road than I had hoped it would be. We turned the final corner in September, and we’ve now had two months with zero issues.”

What went best? The name change. Chastain notes that both Home & Garden Party and Home Interiors & Gifts were brands with committed leaders and loyal customers.

“Everyone got around the name Celebrating Home,” she says. “It spoke to them and what they wanted, believed and needed to communicate to their customers and hostesses. It might be the home run of it all.”

Like Shaw’s companies, the predecessors of Celebrating Home shared similar values, which made combining the two companies easier. Chastain points to both companies’ Christian values as the foundation that eased the fusion of two established companies—one 52 years old and the other 12—into a brand-new company.

Bringing together distributors has been another key element. The company held its first national rally as Celebrating Home in August. Included in the agenda were three recognition ceremonies: one that recognized Home Interiors consultants for their achievements while they were at Home Interiors, one that recognized Home & Garden Party consultants for their achievements at that company, and then one that recognized the top achievers at Celebrating Home.

“Leader after leader told me that when she walked out on stage to receive her award, that’s when the page turned,” Chastain observes. “We’re now together. It was extraordinary. We absolutely came out of that event as Celebrating Home, and nobody looked back. We have had our best months of sales since then. October set records left and right.”

Chastain reports that sales in 2009 have more than doubled those from the individual companies in 2008, and recruiting has increased by 20 percent.

“We consider ’09 a real success,” Chastain says. “As a team of home office and field, we worked really hard. Now we’re enjoying the fruits of our labor.”

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