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HARD KNOCKS IN DIRECT SALES

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% 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% over the same period, to $29.6 billion in 2008, according to the Direct Selling Assn. Last year, sales dropped by 4%, even as the industry grew slightly, to 15.1 million sellers.

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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 start-up costs, which can mean hundreds if not thousands of dollars in upfront expenses before the first sale is ever made.

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.

Court papers detail the inner workings of Herbalife’s compensation structure.

The first level are distributors, who can buy Herbalife’s dietary supplements at a discount for personal use or resale. Distributors can eventually become supervisors by meeting certain volume targets, which is made easier by recruiting “downline” distributors.

The supervisor level entitles sellers to extra compensation, including what is in effect a commission on what their distributors order, according to a summary of the case by U.S. District Judge Gary Allen Feess.

The former distributors allege that the Herbalife model violates a California law against “endless chain schemes.”

“The payments by Herbalife to distributors are not related to the sale of products on a retail basis,” said John Stephens, a lawyer for the sales reps.

Herbalife, which is incorporated in the Cayman Islands and has executive offices in L.A., disputes the contention, saying its reps were compensated based on the sale of products to customers and that there “is no gain merely from recruiting or being recruited.”

“Consider the source and motivations of the persons and their lawyers who are making allegations against Herbalife,” the company said in a statement. “The allegations are a smoke screen and are completely without merit.”

In August, Feess denied Herbalife’s request to throw out the pyramid scheme allegation. The case is awaiting trial.

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

Its profit rose to $221 million last year, up 16% from 2007. Herbalife said profit declined 28% 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% at Herbalife, 69% at Tupperware and 36% 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 Pasadena 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%, has since increased to 50%.

“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.

Tammy Bateson, a mother of three young children, wanted to help with household costs, so in February she became a rep for direct-sales company LMS Fragrances Inc.

At a recent perfume party in her Santa Barbara home, Bateson, armed with order forms and fragrance samples, chatted with eight friends and neighbors about the company’s newest products.

An hour later, she had received about $800 in orders. She said she would use her 30% cut to pay for her family’s groceries and utility bills.

“Especially in this day and age when you’re really budgeting, to have that extra money is so beneficial,” said Bateson, 36.

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% in 2008, Neil Offen, president of the Direct Selling Assn., 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.

“We’re seeing an increase now in productivity, and we’re seeing an increase in consumer spending,” Offen said. The trade group is “expecting a record number of sales people in 2009, and perhaps enough to set a record in sales.”

But as the industry grows, experts and former sellers say they are concerned that desperate job seekers will be tempted by the prospect of making easy money without understanding its pitfalls.

“There has definitely been some undercutting and shady sides of direct sales,” said Marshal Cohen, chief industry analyst at market research firm NPD Group. “In every industry there’s always going to be something to scam and scheme. If you haven’t heard of the name of the company, better do your homework.”

Georgette Thompson, 61, quit her job selling Mary Kay cosmetics in 2007 after spending thousands of dollars on inventory, including $3,600 on her first batch of products that she ultimately was unable to sell.

“When you make a profit you have to reinvest it in inventory, so it’s hard to really see any money,” the Chicago woman said.

Mary Kay executive Rhonda Shasteen defended the company’s practices, noting that people can join the company for $100, which covers the cost of a starter kit with samples.

“Mary Kay’s approach to doing business is not to convince people to do things that are outside their comfort zone,” said Shasteen, the company’s chief marketing officer. “With 2 million people around the world involved in our business, I’m certain that, with anything else that is large, there are going to be people who have a bad experience. But we do our best to offer a great business opportunity.”

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andrea.chang@latimes.com--

(BEGIN TEXT OF INFOBOX)

Seller beware

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 Assn. “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: Times research


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