October 8, 2009 in Business

Hard times drive many to direct sales careers

Spiking number of sellers outpacing industry growth
Andrea Chang Los Angeles Times
Los Angeles Times photo

Tammy Bateson pitches products from LMS Fragrances Inc. to friends and neighbors at her home in Santa Barbara, Calif. She received about $800 in orders.Los Angeles Times
(Full-size photo)

Sales tips

The direct sales industry has gotten a bad rap from companies that have taken advantage of their sales representatives through pyramid schemes or other scams. If you’re interested in becoming a rep, here are some tips and red flags.

Understand the company’s compensation plan, including commission rates and bonuses, before committing.

Although many companies require new sales reps to pay some sort of upfront cost (usually in the form of a starter kit containing several products that can be shown to customers), don’t put too much of your own money down. Reputable companies “do not require any substantial capital investment,” said Neil Offen, president of the Direct Selling Association. “The median start-up kit is $99.”

Be wary of companies that have monthly sales or inventory requirements. Often this is a way to penalize reps who don’t sell enough by making them pay for products themselves.

Know what you’re getting paid to do. “The money that is earned should ultimately come from the sale of the product,” Offen said. “If it’s based on head-hunting fees, if it’s based on inventory purchases, if it’s based on training fees, if it’s based on anything other than the sale of the product to the ultimate consumer, you have a fraud. It’s that simple.”

Source: Los Angeles Times research

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 percent 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 percent over the same period, to $29.6 billion in 2008, according to the Direct Selling Association. Last year, sales dropped by 4 percent, 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 startup costs, which can mean hundreds if not thousands of dollars in upfront expenses.

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.

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

Its profit rose to $221 million last year, up 16 percent from 2007. Herbalife said profit declined 28 percent 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 percent at Herbalife, 69 percent at Tupperware and 36 percent 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 the Los Angeles area last year. He applied for teaching positions, then jobs at restaurants and grocery stores.

A year ago, he became a sales rep for Cutco Corp., a direct sales company specializing in high-end kitchenware such as knives and utensils. He paid $146 to join, which covered the cost of a sample set that he uses to demonstrate products.

“I was willing to try out anything, and I needed to get a job,” the 30-year-old salesman said.

The first month, Folsom sold nothing and considered quitting. But sales started to pick up. In July, he sold $8,000 worth of products, pocketing $3,000. His commission rate, which started at 10 percent, has since increased to 50 percent.

“I really like that it’s so nonconventional as far as jobs go, and you’re kind of your own boss starting your own business,” Folsom said.

Direct sales have also helped supplement the income of stay-at-home moms, college students and full-time workers.

Many direct sales companies are appealing to potential sellers by playing into their fears about the economy. In a commercial for beauty products seller Avon, a sales rep gushes: “Even in these tough times, my business is growing! I can’t get fired; I can’t get laid off.”

Although the direct sales industry saw sales fall 4 percent in 2008, Neil Offen, president of the Direct Selling Association, said the industry usually does well during recessions. He attributed last year’s dip to a typical “lag between recruitment of a new seller and productivity in terms of sales” as first-time reps work to get their businesses up and running.

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