December 28, 2011

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Article

Recession Resilient

Utah’s Direct-selling Industry is Up and Running

Alex Koritz

December 28, 2011

The reasons Utah is a Mecca for direct selling companies are many, but can be narrowed down to a few key characteristics: the state’s close-knit community, foreign language skills and Utah’s entrepreneurial spirit. Utah is not alone, however. According to the Direct Selling Association, estimated U.S. sales exceed $30.8 billion with 15 million direct sellers nationwide. The Direct Selling Association defines direct selling as the sale of a consumer product or service, person-to-person, away from a fixed retail location. Direct selling companies are seller-based, meaning more income goes to the distributor when he or she makes a sale and not to up line management. They often market higher-end, one-time-sale items, such as water filters or cookware. There are other sales models, such as the network marketing model, also known as multi-level marketing, which allows sellers to build a long-term residual income. Network marketing distributors typically sell to their social network, but compared to the direct selling model, retail commissions are much lower and most money is made on commissions to up line management in the network tree. And then there are the illegal pyramid schemes. These scams involve large numbers of people at the bottom of a pyramid paying money to people at the top of the pyramid. Each new participant pays to advance upward as newcomers join the scheme. An Image Problem Today the direct selling industry has come under the microscope of the media and business community. Heath-oriented companies have been accused of allowing the exaggerated claims of their distributors to run rampant. While image problems are not new to direct selling companies, and are in fact part of its legacy, these accusations have led to changes in the way some of these companies do business. “MonaVie does not turn away from this and we take it very seriously. We have an entire department dedicated to educating our distributors,” says Dell Brown, chief operating officer of MonaVie. “We are very conservative about MonaVie’s health claims and believe it’s completely unnecessary for distributors to exaggerate its health claims. The product will sell based on its real, substantiated health properties.” XanGo, the first company to market the dietary mangosteen juice, also employs a full-time department of professionals whose job it is to educate their distributors. Education consists of seminars, conferences, videos, written materials and other instructions about the right ways to promote XanGo products. This also involves discipline, when needed, for those who do not comply with the company’s policies and procedures. USANA, a maker of nutritional and personal care products, has its distributors enter into an agreement that authorizes them to sell USANA products and earn a commission based on sales, provided only that they follow the terms and conditions contained in the agreement. Distributors must make only authorized claims regarding the benefits of USANA products. If a distributor makes an improper claim about the product’s benefits, they are in breach of the contract and can lose the right to sell USANA products. Questions Answered To ensure creditability, and to help their distributors sell product, many direct selling companies are undertaking third-party verification efforts. USANA, for example, bases its manufacturing on Good Manufacturing Practices (GMP) and undergoes regular audits of its Salt Lake City manufacturing facility. Additionally, the National Sanitation Foundation (NSF) has certified the label claims on its core products. NuSkin employs 100 scientists to help validate its products. “Scientific validation is a key part of our product development process,” says Kara Schneck, senior director of corporate communications for NuSkin. “In addition to our in-house scientists, we also uniquely operate four full-time laboratories.” The cosmetic company has also stepped beyond traditional skin care and introduced a slew of technology devices. The Nu Skin ProDerm Skin Analyzer takes a scientific approach to skin care by combining pattern recognition science, optical imaging and dermatology, giving the user an objective assessment of their skin. Growing Strong According to the Direct Selling Association, direct sales performance generally follows the overall economy. For example, if economic growth is one percentage point above average, real direct sales growth is slightly more than one percentage point above average. Retail sales in general also follow the overall economy. However, recession years appear to be different. In years in which the economy has experienced a recession in any part of the year, direct sales have grown. The period of 1987-2007 contains three recession years (1990, 1991, 2001). In all three of these years, direct sales grew more than the Gross Domestic Product (GDP) did. Two of these years, 1990 and 1991, saw inflation-adjusted direct sales growth in excess of 5 percent. “The current economy is unprecedented and people are looking for ways to take control of their financial future. Direct sales provide a way for people to do just that,” says MonaVie’s Brown. In fact, 2009 is looking quite optimistic for MonaVie. Maria Fiorini Ramirez, who was named the top inflation forecaster from 2001-2004 by The Wall Street Journal, recently stated that MonaVie is perfectly positioned for growth. The direct selling industry typically runs counter-cyclical to a recession-burdened economy. As people lose their jobs or experience a cut in benefits or bonuses, they look for other ways to supplement their income. A direct selling opportunity offers little financial risk and an opportunity for people to increase, or in some cases replace, their income. “Direct selling offers a unique and flexible business opportunity in the current economic environment,” adds NuSkin’s Schneck. “Some people have been laid off and some are nervous about their current jobs. Direct selling offers them a safety net and a way to complement their income.” Utah’s direct selling strength has played a key role in keeping the state’s economy strong and ranked among the nation’s best. As the U.S. economy experiences a recession, the direct selling industry is resilient, and if the past is any indication, it will continue to be so.
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