Direct sellers adjust to record inflation, low unemployment and a looming recession
By: David Bland
We’re seeing two sides; June, July and August tend to be slower months for the direct selling industry because people are on summer vacation. But then you add the pending recession—which, I believe, is already here, especially with the inflation we are seeing and the interest rate increases—and we see an uptick in the number of people who want a second business. — Dustin Gardner, Chief Financial Officer, Tranont
As the past several years have demonstrated, the direct selling channel is not only unique in its approach to marketing goods and services to the public, but also in the ways that it responds to and is affected by the various dynamics of today’s economic trends, pressures, and realities.
There is no better example of this than the direct selling sales boom of 2020. As the U.S. and world economies faltered in the face of COVID-19-related shutdowns and disruptions, the direct selling industry experienced a 13.9% year-over-year increase in retail sales as well as a 13.2% increase in distributors working part-time or full-time.
Herbalife stock rose more than 100% between March 2020 and February 2021. Even companies that rely more heavily on person-to-person direct sales and party plans, such as Tupperware, saw explosive growth. The food storage giant saw its share price increase from $1 to $30 per share between March and October of 2020. Nutrition and skincare direct seller USANA reported a 7% increase in net sales in 2020, including a 14% jump in the fourth quarter of that year.
However, in 2021, as the U.S. economy rebounded from its pandemic-induced drop off, including a full recovery of the U.S. stock market and significant improvements in national employment figures, sales and participation growth began to slow for many direct selling companies compared to 2020 numbers. While the channel as a whole reported a record $42.7 billion in retail sales in 2021, up 6.4% over 2020, the number of direct sellers decreased by 5.2%.
2022 So Far a Mixed Bag of Economic Indicators
The U.S. economy in 2022 has seen record levels of inflation, interest rate increases, stock market losses in the double digits and continued supply chain disruptions. In the first quarter of 2022, the GDP fell for the first time since 2020. However, other indicators are quite positive; unemployment is at near-historic lows, wages are increasing at their fastest pace in decades, and consumers are spending more in many sectors, including travel, lodging, and dining—clearly a rebound from the lockdowns of 2020.
Success Amid Recession
With the direct selling channel’s recent history of explosive sales and participation growth in the face of national and global economic downturns, the current outlooks suggesting a possible recession have some direct sellers seeing reasons to stay positive.
Dustin Gardner, chief financial officer at Tranont, believes the recession is already here, but that the difficult economic times are resulting in more people needing additional income through gig work.
“We’re seeing two sides; June, July and August tend to be slower months for the direct selling industry because people are on summer vacation. But then you add the pending recession—which, I believe, is already here, especially with the inflation we are seeing and the interest rate increases—and we see an uptick in the number of people who want a second business.
“Our Chief Sales Officer comes to meetings and confirms this, and we are hearing this from the field as well,” Gardner adds.
John Licari, chief operating officer at Total Life Changes, also recognizes the inherent strength of direct selling during economic downtimes.
“I would not go as far to say that direct selling is recession-proof, but I believe we are a recession safe haven. People need that extra money, and that will offset the inflationary pressures for the consumer. I know this, my partner Jack knows this, and so many C-levels in our industry know this—we’re not afraid of recession.”
Licari says that having more brand partners during difficult economic times serves to offset the decreases in discretionary spending affecting product sales.
“Unfortunately, in most people’s budget, health and nutrition is close to the bottom. It’s their house, their mortgage or rent payment, gas for the car, insurance, etc. And if there is any money left, they’re going to buy our vitamins and drink our detox tea. But if we get an influx of distributors, we can offset that. And most of the time, we not only offset it, but we beat it. It has happened so many times before. We took off as a company and really made our mark in 2007 and 2008, when things were falling apart financially in this country.”
The Effects of Low Unemployment on Gig Work and Retail Sales
In a continued recovery from the mass shutdowns and layoffs following the start of the
COVID-19 pandemic, U.S. unemployment currently stands at 3.6%, just a tenth of a percent lower than before the pandemic.
With fewer unemployed Americans, the number of people seeking out gig work could logically decrease. However, more people working also creates more consumers with disposable income and more potential distributors with money for starter kits.
“As people work full time, they do have extra cash for our products. And some of these products, quite frankly, are very expensive,” says Garner.
“Furthermore, when people have full-time employment, that also gives them extra cash to start a direct selling position. Our demographic here is primarily women who are looking for a job that they can fit into their busy work and home schedules.”
TLC’s Licari confirms the difficulty in increasing distributor numbers when competing with employers offering increasingly high salaries and hourly wages, along with good benefits.
“From a representative standpoint, there are so many companies offering great pay, great benefits and work from home,” he says. “These employers are so desperate to fill positions that they’re willing to do anything to make that happen. I mean, the local restaurant near me is paying $25 an hour for dishwashers because they just can’t find any. Let’s use that dishwasher as an example. They are making $25 an hour. If they were making $15, they might be looking for a side gig, but now they’re not.”
Large vs. Small – Companies React Differently to Economic Stress
While channel-wide trends and behaviors are worth studying, the diverse companies of the direct selling industry by no means respond to economic pressures and changes in the same way.
Company size and exposure to international markets and risks is certainly one important factor, according to Gardner.
“I would say that there is a direct correlation between the size of a company and their exposure to larger national or global economic trends,” he says. “When we’re talking about global companies like USANA, Nu Skin and Herbalife, the majority of their revenue is coming from outside of the United States. So, the problems that come along with international logistics and supply chain issues or problems in China and Russia can be a bigger contributor to sales decline.”
Conversely, larger companies will often have the resources and experience to withstand national or global economic downturns, supply chain problems or shutdowns, according to some experts.
Ray Chipman and Marc Andrus, partners at Squire & Company, a tax and audit accounting firm that services many direct selling companies, say that a company’s size contributes in both positive and negative ways to economic challenges.
“It seems like a tale of two worlds,” says Chipman. “The direct selling space has always been a tale of companies that are taking off or going down. And so the largest, most successful companies obviously have found a way to just maintain and have a good growth model because of their product brand loyalty. But some of the smaller companies have a quick pop and then a drop.”
Conversely, Andrus observes that larger companies may not be as quick to adjust to changes in the market or economy that affect the top line.
“The flip side is that larger ships take a lot more time and effort to change course,” he says. “When they are moving in one direction and have to pivot, they have to move the whole field as well. Thus, more resources have to be used to figure these things out with the larger companies.
“There are pros and cons to being both big and small, but the pro to being a small company is that you can come out of the gates with a model that is more appealing to the younger generation, as opposed to having to transition to that.”
Chipman says that larger companies tend to be more proactive in bracing for economic problems by establishing core processes to manage surges in growth as well as declines.
“Small companies are often less sophisticated,” he says. “Larger companies are able to be more proactive getting their expenses in line with where they’re really going to be. And that will help the long-term viability of the company, as opposed to some of the startups, which end up being a flash in the pan because they never built the underlying core processes to help them manage growth or decline.
“I see companies that are down 20%, 30% in revenue because they are slow to adjust their G&A, and they don’t let people go until it’s too late. So we’re seeing some of that right now where executives say, ‘I had really good margins and net income, and I didn’t want to let my people go. So I didn’t, and now I’m dealing with a loss,’ ” says Chipman.
Distributor Behavior Is an X-Factor
As the direct selling business model relies on independent contractors to connect its products to consumers, changes in the behavior and mindset of these distributors during different economic cycles or global events becomes an important factor for companies to consider.
Herbalife has recognized this phenomenon, as explained by its Chairman and CEO John Agwunobi during the Q1 Earnings conference call in May.
“Despite the adaptability and ingenuity of our distributor base, we’ve begun to see an emerging shift in behavior,” Agwunobi says. “Specifically, we’ve begun to see that as a group, the behavior of distributors that joined the business during the pandemic has diverged from historic trends. The number of distributors from this cohort that are ordering and recruiting is below last year and below expectations.”
Herbalife reported an 11% decrease in net sales in the first quarter of 2022. The company’s chief financial officer, Alex Amezquita, addressed this challenge during the call as well as the decision that was now in front of them.
“We see a change in behavior of the cohorts,” Amezquita says. “We know what that problem is. It’s actually a known issue that we have addressed in our 42-year history thousands of times as each market goes through a cycle.
“We’re just looking for that data, and we’re looking for the strategic initiatives that each market is employing to figure out—is it a better use of time to reengage or is a better use of time to recruit new?”
Squire’s Andrus sees this distributor phenomenon as well from a demographic perspective.
“I think that the industry as a whole is needing to figure itself out a little bit,” he says. “What we’re seeing is that a lot of newer companies are trying to figure out the problem of the millennials not wanting to build a business, not wanting to build a team and instead taking the affiliate route.
“They want to put a link up on Facebook and get people to buy the product and take a commission from it. So, companies are working to figure out what that solution looks like, such as a hybrid between a traditional commission model and a newer type of one-level affiliate model. I don’t see the direct selling industry going anywhere. It just needs to migrate at some point or pivot a bit.”
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