Retail overall may be struggling, but the direct sell channel is booming.
Although Avon, the world’s largest direct selling company and arguably the most visible player in the U.S., has had its recent share of woes—its U.S. sales have declined for the past two years and the company is in the midst of a global restructuring—the direct sell business model itself is alive and well.
Sales of beauty products through direct selling channels have been steadily climbing at an average annual rate of about 8 percent over the past five years. Personal care, including skin care, cosmetics, fragrances and jewelry, has grown to become the largest product category among direct selling firms in the U.S., with sales accounting for 31 percent—or about $9.2 billion annually—of the $30 billion market, up from 25 percent in 1999, according to the Direct Selling Association. The number of sales representatives has more than doubled in the last 10 years, from 6.3 million to 13.6 million.
“This channel is about word-of-mouth referral and there is nothing more influential than that,” says Roger Barnett, chairman and chief executive officer of Shaklee. “It goes directly to the consumer.”
Barnett, the founder of Beauty.com, is no stranger to the beauty industry. An investment group led by Barnett acquired Shaklee, known primarily for its nutritional offerings, for $310 million in 2004. This year sales are estimated at $500 million. Without hesitation, Barnett declares his plans to grow Shaklee into a $2 billion global company, including making the 50-year-old firm a bigger player in beauty.
Barnett isn’t alone is trying to reap the rewards of a channel that is frequently under the radar screen of the mainstream industry. As retail consolidation continues in both the department store and mass market sectors, an increasing number of manufacturers are experimenting with new selling strategies. Upon the release of its year-end results in February, Jones Apparel ceo Peter Boneparth noted that 2005 was a challenging year for several reasons, including the consolidation of “our two largest wholesale customers.” Those customers, of course, are the Federated and May companies.
Along with e-commerce, direct selling is being viewed as another avenue to reach consumers. Jones launched Million Wishes, a direct selling fashion accessories business, in March, while Jockey just celebrated the one-year birthday of its Person-to-Person business. Even AT&T has been using home party methods to introduce a new home entertainment service.
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In beauty, the activity is equally as heated. The Body Shop launched The Body Shop At Home; sales of its Girls Night Out party plan grew 14 percent globally last year to $99 million (converted from pounds at current exchange rates). The U.S. piece was $43.3 million, up 9 percent. Established direct sellers such as Tupperware, Arbonne and Herbalife have expanded their beauty programs, along with fledgling mom-and-pop operations such as Northridge Gardens of Kirkland, Wash.
Considering the numbers, it’s no surprise: Mary Kay reported sales growth of 13.7 percent to $2.2 billion in 2005, while Tupperware chief executive Rick Goings expects beauty to grow from 35 to 50 percent of the company’s sales. Domestically, sales of its BeautiControl brand rose 24 percent to $146.7 million in 2005; last August Tupperware bought Sara Lee’s international direct selling beauty business that includes the Fuller Cosmetics brand.
Twenty-six-year-old Arbonne International, whose core business centers on a Swiss-based skin care collection, has been making inroads in the U.S., with sales growth of 164 percent, according to Brad Wayment, senior vice president of marketing. Its national training conference in April drew 17,400 consultants, up from 8,000 the year before. Attendance is expected to double again in 2007.
Even Amway, the world’s second largest direct selling firm after Avon, has been padding its selection and recently added the Eddie Funkhouser makeup artist cosmetics line.
Social factors are contributing to the boom. “Direct selling is highly relevant in today’s wired world, where there is such a premium placed on relationships and one-to-one connections,” says Andrea Jung, chairman and ceo of Avon Products. “With the Internet, our representatives can marry ‘high tech’ with ‘high touch’ to reach more customers and grow their businesses.”
One-on-one communication is particularly resonant now, says Candace Corlette, partner of WSL Strategic Retail, as women’s lives become ever busier. “There is this thirst for kicking back and mingling and socializing,” she says. “We’ve programmed ourselves to always be productive. At a [home party],” she continues, “we can accomplish our shopping and also socialize, relieving some pangs of guilt.”
Douglas Lane, an analyst with Avondale Partners who specializes in direct selling companies, believes that consumers are willing to pay more because of the service they receive. “Customers are seeking a more personal, intimate shopping experience and are willing to pay for it, rather than feelings of isolation associated with a cold, impersonal Wal-Mart experience,” he says.
For the most part, direct selling still appeals to an older demographic. Two-thirds of U.S. direct selling consultants are 35 and over. There are initiatives to bring in younger sellers and consumers—most notably Avon’s Mark brand and Mary Kay’s Velocity. Regionally, direct selling is most popular in Southern states, accounting for 36 percent of U.S. sales, and least favored in the Northeast, with only 16 percent. The West and Midwest each account for about 23 percent.
While at the core direct selling methods are essentially unchanged, new approaches and developing technology have made selling easier. Technology has made the operations side of the business more efficient, as well as proven to be an effective marketing tool. Through the Internet, Avon and others are better able to provide reps with live inventory updates and order status reports. Avon has also expanded its online training programs with new courses on topics such as launching your business, money management and managing orders. For many firms, the bulk of ordering is now done online, eliminating the need for phone calls, faxes or snail mail.
Nu Skin, which considers itself the prestige line of the direct selling market with price points as high as $150, even has a program that enables reps to sign up other reps not just in their neighborhood but in other parts of the world. “Demographically, our distributors are highly educated. We have to offer something to them that comes with a compelling story,” says Joseph Chang, chief scientific officer.
Still, direct selling is burdened with a negative public image for its association with pyramid schemes—that is, bilking sales representatives for products that they have difficulty selling and can’t return, while people at the top earn commissions off those sales.
The DSA has embarked on an image-enhancing campaign, with ads in USA Today and Fortune magazine, and there have been efforts to curry favor with Wall Street. Over the past year, DSA has sponsored two seminars for the investment community.
Because direct sales are not tracked by third party firms such as ACNielsen or NPD Group and can’t even be monitored by store checks, the business as a model has been for the most part unexamined.
But a few analysts are starting to look at direct selling firms as a specialized market. In its weekly report dated July 17, Avondale Partners gave a rosy overview of the direct sellers it covers, grading Herbalife, Mannatech, Tupperware and Nu Skin as market outperformers. Says Neil Offen, ceo of DSA: “We feel the companies are undervalued and we hope to change that.”
This article appeared in WWD BeautyBiz a special publication to WWD available to subscribers.