In 2019 Direct Selling Faced Some Strong Headwinds
Throughout this year the editors at Direct Selling News have had no shortage of topics to talk about. Never before have we seen such a year that has so dramatically impacted the future of direct selling.
We began 2019 with troubling news out of China and ended with a landmark change for one of our industry’s biggest companies. In between, a new ingredient from the old world became liquid gold for many direct selling companies, learned customer behaviors are still rapidly evolving, while growth in gig work alternatives continued to challenge our status quo. Finally, 2019 was a year we had to look at ourselves in the mirror and eventually come to the conclusion that the status quo isn’t a path to the future. Our friends at the FTC reminded us not once, but twice. In this year end wrap-up, we examine the five events that had the biggest impact on our channel. We reflect on what we need to do to thrive in the 2020s.
China Cracks Down
For many direct selling companies, breaking into China is a big goal. But when a Chinese company broke the direct selling rules in late 2018, being a direct seller in China became more complex than it already is.
In December, a Tianjin-based health and wellness products company made unsubstantiated claims about how its products can fight cancer. By January, the Chinese government had launched the “Hundred Days of Action,” in which it investigated direct selling companies all over the country, revoking selling rights for 49 products.
Whether or not the government came knocking, all direct selling companies were on edge, and financials took a hit. Earnings at USANA Health Sciences, Nu Skin and Herbalife Nutrition, three of the industry’s largest publicly traded companies, fell significantly—between 8 percent and 25 percent for the first quarter. Hopes were high that business would rebound once the review period ended in April. Still, sales continued to fall dramatically in quarter two, resulting in all three companies resetting expectations for the second half of 2019.
“We are looking for stabilization [in China] for the rest of this year, and then we should see a resumption of growth in the early part of next year as the whole 100-day episode is further and further in the rearview mirror.” —Douglass Lane, Securities Analyst
In the most favorable times for direct selling, China can be a tricky place to do business. The government heavily regulates and keeps a close eye on this model, which in China is particularly beset by scams and pyramid schemes. In 1998, China shut the channel down, calling it an “economic cult.” U.S.-based legacy companies like Amway, Avon and Mary Kay helped rebuild trust in direct selling in China, but the country continues to be a volatile market for us.
As of September, the Chinese government was reportedly conducting random compliance checks. These were keeping direct selling companies on high alert, and prolonging the rebound experts were predicting would happen this year.
“The clear theme is that this is going to take a while,” securities analyst Douglas Lane of Lane Research told Direct Selling News in August. “But I get the sense from the conference calls and narratives that these companies are starting to head in the right direction. We are looking for stabilization for the rest of this year and then we should see a resumption of growth in the early part of next year as the whole 100-day episode is further and further in the rearview mirror.
Gigs Dig In
“We are now moving into what I call ‘the war of the side hustle,’ LifeVantage President & CEO Darren Jensen told an audience at the fall Direct Selling Association conference.
Jensen’s right. Companies like Uber, Task Rabbit, Airbnb and other gig income providers have turned our once proprietary playing field into a battleground. We used to be the only choice for people who wanted to make their own hours and control their own income. Now we’re fighting for their attention and commitment.
According to a recent McKinsey Global report, more than 160 million people in Europe and the United States are earning money in the gig economy. This is more than three times the 18.6 million U.S. direct sellers—4.1 million of whom are discount buyers or have no plans to sell the products and 9 million of whom have gone inactive. Direct selling worldwide is a $189 billion market, with North America accounting for $39 billion of that total. But on its own, Amazon, which got into the gig game recently with Amazon Marketplace, a market capitalization of $865 billion. Uber’s market cap is $55 billion.
The lure of non-direct selling gigs is strong because they usually require little capital or training. You don’t need sales skills to be an Uber driver, Lane told Direct Selling News. “You wake up, turn on your phone—and customers fall out of the sky.” On the other hand, Lane asked, are Lyft drivers deeply passionate about being taxi drivers?
“The Hemp Farming Act made hemp legal in all 50 states—it had been legal in 40 prior to that. The law came with several restrictions, but it still opened the floodgates for sales of products with cannabidiol (CBD).”
This is where our industry has a prime opportunity, experts say. We can be competitive by appealing to the desire most people have to work for more than a paycheck. We want what we do to have a greater purpose, and we are wired for continuous change. Direct selling sits perfectly at the intersection of those two things: Our high-quality research-based products and our business opportunities can transform people’s lives in small and big ways.
“During a tight labor market that’s achieved 50-year lows in the unemployment rate, the gig economy has increased the appeal of flexible, part-time earning opportunities,” wrote DSA Market Research Manager Ben Gamse in July. “This should be direct selling’s sweet spot where we can compete and win.”
CBD Sales Soar
In December 2018, when federal lawmakers said they are (basically) cool with hemp now, CBD became the hottest new wellness ingredient to hit the market in years.
The Hemp Farming Act made hemp legal in all 50 states—it had been legal in 40 prior to that. The law came with several restrictions, but it still opened the floodgates for sales of products with cannabidiol (CBD), a nonaddictive oil derived from the hemp plant.
The direct selling industry has dominated the CBD market, with such companies as Kannaway, HempWorx, PrimeMyBody and Green Compass reporting exponential growth. In 2016, Kannaway’s revenue was $2 million, and last year it generated more than $60 million. HempWorx’s sales were $9.6 million in 2017 and $100 million in 2018. Some experts project that direct selling CBD revenue alone will be $1 billion next year.
Midway through this year, the Direct Selling Association (DSA) put a bit of a damper on the enthusiasm about CBD. The DSA code administrator announced that the sale of ingestible CBD products violates DSA’s code of ethics. But then the DSA said it wouldn’t cite member companies that sell CBD products for 90 days. It said it wanted to give the U.S. Food and Drug Administration time to “articulate a path forward” that would exempt CBD from a rule that prohibits using a new substance in food or dietary supplements unless the substance was first marketed as such.
“With the rise of mobile, social, and cloud technologies, customer expectations are increasing dramatically, and they are demanding a more seamless experience.”
Industry executives responded with disappointment. “We believe the DSA has not accurately portrayed the law with respect to CBD,” said Blake Schroeder, CEO of Kannaway. “And we vehemently disagree with their position.” In August, DSA suggested it might extend the moratorium on citations. In September, the industry trade group formally requested clarification on the FDA prohibition and asked the agency to make a timely decision.
Customer Behaviors Are Changing Rapidly
According to a 2017 Direct Selling Association “Evolving Marketplace Survey,” at least 60 percent of companies’ segment business builders from buyers with no intention of selling their product. And roughly half offer a preferred customer program, allowing members to buy products at wholesale prices without having to sell products in exchange for the discount.
We’re getting better, but we need to be even better. Recruiting customers has to be just as important as building our distributor base.
For starters, we could pay more attention to how our retail counterparts are marketing to and serving customers. They’ve been doing this for a long time, and they’re savvy about whom they target and how they talk to them.
The most fundamental changes that are happening right now are centered on the consumer. With the rise of mobile, social, and cloud technologies, customer expectations are increasing dramatically, and they are demanding a more seamless experience. They want to buy products where, when and how they want. In our November cover story entitled “Think Like a Retailer” guest author Wayne Moorehead, CMO of Young Living, stated that we need to remember that customers don’t think in terms of channel, even though we do– they just think in terms of product and availability. This has really brought about the rise of the direct to consumer brand (DTC). It’s fundamentally changing the relationships that companies have with the end-user.
Partnering With Our Distributors On Customer Acquisition
“There is a huge opportunity for us to partner more closely with our distributors, to be more involved in telling the brand story and in customer acquisition,” says Moorehead. “I predict the brands that are able to bring together the best of direct selling with the best of direct to consumer are the ones who will be the most relevant five years from now.
Moorehead went on to say that it’s important that we start acting and thinking more like a retailer, and how we appeal to, communicate with, and provide value to today’s customer. “We need to make learning about interacting with us more convenient, seamless and simple. We can no longer expect our customers, prospective customers or distributors to put up with outdated designs, clunky processes and outdated technologies.”
Finally, says Moorehead “The best way to get more distributors is to get more customers. Customers are the warmest market and most qualified lead pool that we have. They’re the best people to transition into distributors.”
Past Can’t Be Prologue & The FTC’s Heavy Hand
For years, many direct selling pitches led with promises that “You, too, can be a millionaire!” Images of beautiful people in expensive clothing on impossibly luxurious vacations dominated our marketing.
Thankfully, we’ve been moving away from that approach for some time—but subtle and sometimes explicit suggestions that network marketing and certain products can make financial and health worries go away still plague our industry.
It has to stop, say leading industry executives and experts. “The appeal to greed is repugnant,” said LifeVantage President & CEO Darren Jensen at the Direct Selling Association’s 2018 Fall Conference. “We keep going back to that well time and time again, and we need to shift away from it.”
First, massive wealth is not what motivates the majority of people to become direct selling distributors. Only one in five direct selling distributors works 30 or more hours per week, according to the latest DSA research. And of those who are interested in building a full-time business, fewer than one percent will become elite performers, says Direct Tech Labs. These numbers strongly indicate that the majority of people who come to you aren’t interested in being entrepreneurs. They’re picking up side work mostly to cover an income gap while adding some flexibility to their schedules.
ADVOCARE Settles, NEORA Decides To Fight
Perhaps the most headline-grabbing examples that happened in 2019, unfortunately, were FTC related. In October, AdvoCare and its former chief executive officer agreed to pay $150 million and be banned from the multi-level marketing business to resolve Federal Trade Commission charges that the company operated an illegal pyramid scheme that deceived consumers into believing they could earn significant income as “distributors” of its health and wellness products.
Two top AdvoCare promoters also settled charges that they misled consumers about their income potential, agreeing to a multi-level marketing ban and a judgment of $4 million that will be suspended when they surrender substantial assets.
“We can be competitive by appealing to the desire most people have to work for more than a paycheck.”
Then one month later, the FTC announced they were suing Neora for essentially the same reasons. One difference, Neora has decided to challenge the FTC’s claims and is suing them for essentially changing the rules of the game, which is a fair assessment given some of the language used by the FTC in settlement documents and their media briefings.
The first paragraph of the Neora complaint doesn’t mince words. “A business cannot operate without being able to know the law. Improper attempts to retroactively change federal law and to effectively preempt state law are unconstitutional. In fact, Neora is going as far as saying the FTC is trying to put an end to our long-standing, legitimate, and popular method of making direct sales to consumers: multi-level marketing.”
This is a fight I think the channel is ready for, and we predict many companies will join in supporting Neora’s fight. As Co-CEO Deb Heisz stated to DSN, “In talking with the FTC they wanted to limit commissions in our businesses to only the person making the sale and the person who recruited the person making the sale,” says Heisz. “We’re not willing to make that change and disrupt the businesses that our brand partners have worked so hard to create. The reality is the lawsuit that we filed doesn’t just protect our business; it is to protect the businesses of the 20 million Americans that are engaged in direct selling.”
Going Forward
The significance of FTC’s ruling on AdvoCare—and now with Neora under the same scrutiny—cannot be overstated. So what does it mean to our channel going forward?
For years, the FTC has made their dislike of volume requirements known. Former FTC Commissioner Edith Ramirez in her keynote remarks at the DSA Business & Policy Conference in September of 2016, said the following: Any requirements or incentives that participants purchase product for reasons other than satisfying genuine consumer demand—such as to join the business opportunity, maintain or advance their status, or qualify for compensation payments—are problematic.
As Todd Eliason, Publisher & Editor in Chief of DSN said in a recent post, “If your company is skirting any number of these compensation plan requirements, be aware because you have just been put on notice. This behavior will not fly with the FTC going forward. Yes, you can take the risk and fly under the radar for the next five years, but is it worth losing your company over? This means looking at the purchase requirements for paying out bonuses, maintaining certain ranks or commissions, along with any sponsoring fees, even hidden fees.”
Rooting Out The Bad Actors
“If we are constantly operating in this gray area that allows operators to masquerade as legitimate direct selling companies, the regular public can’t distinguish between the two,” says Jensen. “I want to live in the sunlight in full transparency because I believe that the truth is enough.”
Fortunately, most companies in this industry are committed to ethical business practices, and we are slowly changing perceptions. But we still have to be aware of and do our best to counter stereotypes. “The misunderstandings of our industry are sometimes rooted in truth,” says Eliason. “There are people who have behaved badly, and maybe we haven’t always corrected those bad behaviors quickly enough. We need to call out any bad actors; if we don’t, it hurts everyone.”
Looking In The Mirror
Direct selling has been doing a lot of soul searching lately, and that’s a good thing. Asking tough questions about who we are and who we want to be moving forward is the only way to determine whether we’re positioned correctly for growth. We are an industry built on the idea that doing things differently is the surest road to success. So let’s embrace these opportunities for change and see where they take us.
Balancing Customer Focus with Distributor Loyalty
Half the companies that responded to a 2017 Direct Selling Association (DSA) “Evolving Marketplace Survey” said they allow customers to order directly from the company, bypassing registered distributors. While this reflects the trend toward direct selling companies being more customer-oriented, some industry executives think online direct-to-consumer sales are a huge threat to the channel.
In August, new Avon CEO Paul Yi announced the company would no longer sell directly to consumers on Avon.com and would instead use online tools solely to support business builders. The news was applauded by some, including former Direct Selling News Publisher & Editor in Chief of John Fleming, who wrote an open letter to Yi in August: “There are many who found your [decision] to be the equivalent of a breath of fresh air. … a demonstration of leadership that recognizes the Avon Representative as the focus of the brand and the chosen channel of distribution.”
Jeff Kaufman, outgoing Chair of DSA’s Research Committee, also believes that the industry must be careful to preserve the things that make it unique in the retail marketplace—including the critical role that distributors play. “Direct selling, like any industry, needs to evolve with macro and consumer trends,” he told DSA Market Research Manager Ben Gamse in July. “But it should not compromise on its inherent points of differentiation, such as the priceless personalized experience a customer has with their direct seller.”
Still, the industry must be careful not to fall back into the patterns that put it in regulatory hot water to begin with.
We must continue to collect data that tells us who our retail customers are and who our distributors are. We must be able to quantify real demand for our products. We also have to continue to study what our customers want so that we can use technology—whether or not we have an online shopping cart—to create seamless buying experiences.
Jordan Meyer, Director of Market Entry for Lehi, Utah-based Younique, talked at the DSA Growth & Outlook breakout workshop in June about the ride sharing channel and how it has created a win-win for drivers and riders.
“If you’re a driver, you don’t have to do anything [to get customers],” Meyer said. “You just sign on to the app, and the customers are there waiting for you. I know several people in the industry think this is an important model that direct selling needs to adopt—pulling customers on our platform and matching them with distributors.”
