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Articles from 2014 In May


NBJ

Letter from NBJ May Edition

Letter from NBJ May Edition

Science fiction offers us two futures. In one, we’re onboard the Starship Enterprise and everybody is wearing jumpsuits for some reason. In the other future, everything has gone Mad Max and desolation, but the fashion sense is less dorky.

     In direct sales, the future offers more options. We’re not talking drone delivery for your omega-3s, but it’s easy to see technology shaping a market in which consumers get more out of nutrition than they do staring at those giant tubs of multivitamins at Costco.

     Self-quantification is one destination in that future. In a few years, the Fitbits and other fitness monitors on the market now will look like dial-up modems in a broadband world. Predictions include devices tracking heart rate, blood pressure and more. Google is testing a “smart” contact lens that will monitor glucose levels.

     It’s not a big step from that to your iPhone planning your menu and ordering supplements tailored to your lifestyle. Imagine a protein shake customized to your metabolism.

     Personalized medicine offers even more potential. Progress is less than steady, with the recent 23andMe debacle with FDA chilling innovation, but industry insiders foresee a day when your genetic code will optimize a combination of diet and supplements. That can’t happen at Costco. People will need “genetic counselors.” There is opportunity here for direct sellers in an emerging practitioner channel.

     Online sales are an obvious future in direct, but the tie-in to mobile has not been fully exploited. Neil Thanedar, interviewed on page 22, presents his LabDoor app as bringing meritocracy to supplements with rankings of product quality by lab testing and ordering right from your phone. That’s a start, but a wide-open frontier awaits.

     With all this, it’s starting to look very Star Trek, but Mad Max lurks. If becoming a “genetic counselor” becomes as easy as getting ordained online by the Universal Life Church, viral skepticism could scuttle the movement. When “20/20” does a “Your iPhone Is Trying to Kill You!” segment, self-quantification as a diagnostic tool retreats to the techy fringe.

     That doesn’t mean we’ll be driving hotrods in the wasteland, but we’re not going to be living as well as we could if the ideas above aren’t executed carefully and responsibly. Direct marketing— particularly MLMs and infomercials—does not have a stellar reputation for either with much of the public.

     It’s a proceed-with-caution moment. The future is there for the taking. But don’t order your jumpsuit just yet.

NBJ

The Changing Face of MLM

The Changing Face of MLM

Pink Cadillacs. Pyramid schemes. Schmoozy guys in bad toupees peddling vacuum cleaners door-to-door. These are but a few of the tired, unsavory images attached to multilevel marketing. And yet, despite the many negative connotations, this sales channel continues to thrive—especially in the nutrition world. Last year, total MLM nutrition sales hit $5.6 billion on 5.8% growth, according to NBJ estimates. This continues the channel’s steady ascent since clawing out of the recent recession that ransacked sales of pretty much everything.

Clearly, selling products through independent distributors rather than retail or even directly to consumers is a strategy that still works, but it hasn’t come without some serious innovation and reinvention. Consumers today have more pathways to purchase products, more access to information than ever before, and greater expectations for manufacturer transparency—not to mention a deep-seated aversion to many traditional MLM tactics. Therefore, given the success of this channel, multilevel marketers have undoubtedly found ways to not only shake the model’s bad rap but also make it legitimate, exciting and ultimately effective.

The power of a name

The first signal of change within this channel is the very name of it. Rather than multilevel marketing, network marketing, referral marketing or—God forbid—pyramid selling, the term social selling is increasingly being used. “MLM, pyramid schemes and network marketing have all developed negative connotations, especially now with the spotlight on Herbalife and its business model,” says Bernie Landes, NBJ board member and president of Nutritional Products Consulting Group. “The term social selling is an effort to re-characterize MLM. It gives it a much nicer appearance than the traditional image of people loading up their garages with products to sell and only making money if they convinced others to load up their garages.”

Instead, social selling places the emphasis on social rather than selling. “Where selling was once the primary characteristic of MLMs, now it’s moving more toward likeminded people gathering and being interconnected in a way that brings them common solutions,” Landes says. “Really, it’s just a use of the variety of social connecting tools to find solutions.”

But at the end of the day, you can call a cow a pig and it’ll still be a cow. It’s taken more than just a name change to move this sales channel into the new millennium. For consumers to view get-togethers hosted by independent distributors as “gatherings of likeminded people seeking common solutions,” as Landes predicts, and not as thinly veiled attempts to peddle products and recruit sales underlings, this must be more than a matter of nomenclature. Experts who keep a close watch on the MLM market say there’s a key factor differentiating today’s social selling from its earlier incarnations: better products.

Products first, recruitment second

Of course, there are still plenty of MLMs out there selling worthless widgets and nutrition products that are no better than what consumers can buy at the drugstore. But by and large, the successful companies—especially newer ones—are focusing on the quality of their offerings in order to gain and retain traction. Given how crowded the MLM market is, along with heightened competition from other channels, there has to be a value proposition—something that addresses consumers’ specific needs that they can’t get elsewhere.

One such company is Orem, Utah-based doTERRA, which has amassed huge sales in short order with its therapeutic-grade essential oils. According to Landes, doTERRA has found a niche mostly among educated, active women, many of whom are caring for families, elderly parents and themselves, and are seeking solutions for everyone in their lives. The essential oils provide that, along with a reason to convene with others with similar lifestyles.

Another newcomer MLM, Boulder, Colo.-based organic skin care company Pangea, exited the retail world in 2013 after 13 years. Tired of fighting competitors’ cheaper “natural” products for shelf space and unwilling to downgrade from top-quality organic ingredients in order to stay competitive, founder Joshua Onysko decided to throw all of his chips into MLM. In this channel, Pangea products are truly unique. “There’s nobody else in MLM selling certified-organic skin and body care,” Onysko says.

According to Onysko, the quality of Pangea products is the primary focus of his business and the main reason why independent distributors are making sales. Recruitment, both of new primary distributors (or beauty ecologists, as they’re called) and people to work beneath them, is much farther down the priority list. Pangea empowers its ecologists to “choose their own adventure” by selling as many or as few products as they want. They can earn commissions from up to seven levels of sellers below them, or they can opt to not recruit anyone else and not be penalized.

Similarly, Boulder, Colo.-based Skoop first launched its micronutrient-dense drink mixes in the MLM channel because the founders believed so strongly in their product and wanted to get it into the hands of as many consumers as possible. It was not a priority for them to encourage distributors to recruit more sellers. “A lot of MLMs are all about, ‘Okay, now that I’ve got you signed up, you need to get 10 more people signed up,’” says Skoop cofounder Greg Stroh, who also cofounded Izze Beverage Co. back in 2002. “Our whole thing is, ‘Hey, if you really love our product, and it can complement what you currently do in your life, then we want to work with you. You can make some money, but not enough where it’s going to change your life or put you in a BMW.’” Skoop has since modified it sales model (more on that later), but the company continues to thrive by putting product quality above all else.

The new social seller

Another big shift happening in the MLM scene is the changing profile of the average independent distributor. This market used to be dominated by career salespeople who often represented multiple companies at once and would jump from one to the next faster than they could fulfill orders. “Traditionally, this market has been very fickle,” says Landes. “Because there was only so much growth you can get before sales slowed, there was significant movement from one MLM to another.”

But today’s social seller is less Mr. Schmooze and more your average guy or gal just looking to score some cash on the side. Therefore, instead of continually hunting for the next great opportunity, they are more apt to stick with one MLM company. “The profile of social sellers is definitely changing,” says Lindsey Carnett, CEO of Marketing Maven Public Relations, which specializes in supplement sales and marketing. “Rather than just staying at home and trying to set up parties, many of these people have full-time jobs but are looking for ways to make extra money.” Rather than repping just any product, social sellers are signing on with companies that align with their lifestyles or make products they already use. “Let’s say someone is a fitness enthusiast,” Carnett says. “It can be a fun hobby for her to sell sports nutrition products. She’ll make extra money doing the things that she loves.”

This description fits many of Pangea’s ecologists to a T, says Onysko. “This model allows people to buy into something they already believe in,” he says. “One ecologist told me she started because she realized that, even at the top rung of her profession, she only got paid if and when she working. But in this business, she can continually create income even when she’s not actively working at it.”

Let’s get virtual

There’s another huge reason why today’s social sellers are able to work it as a side gig: the internet. Rather than cold-calling, ringing neighbors’ doorbells and turning family gatherings into sales meetings, social sellers can maintain a sales presence via their own websites, which MLM companies often furnish. Pangea gives its ecologists a site that’s the company’s homepage slash the seller’s name.

More recently, social media has become one of the most effective sales tools for independent distributors. Sharing product info on Facebook and Twitter, posting photos to Instagram and offering personal testimonials in blogs allow sellers to easily expand their reach without having to hard-sell. “Seventy-one percent of the things we buy stem from peer review or social networking,” Onysko says. “This lets people create a living by sharing the things they were already sharing.”

These mediums also resonate with MLM companies, which would otherwise have to spend big bucks to advertise. “MLMs have free advertising on social media,” Carnett says. “It’s smart for these companies to incentivize their independent consultants to post about them, because regular Facebook users are not prohibited by all of the rules that affect businesses. Business feeds don’t get nearly as many eyeballs as personal posts. Beachbody and Visalus do a great job of having their independent reps share content and run challenges.”

The manufacturer’s perspective

Aside from MLM becoming a legitimate moneymaking opportunity for more everyday consumers, it’s also an increasingly attractive route to market for manufacturers. “With traditional brick-and-mortar retail, you have the retailer, the supplier, the distributor, etc., and everyone is taking a piece of pie,” Landes says. “But with MLM, there is more gross to work with.”

When Stroh was building Skoop, he decided early on to look outside the traditional retail channel and explore MLM. Even though he had great success in retail with Izze, he feels the landscape has changed and become much more difficult to navigate. “Retail is a great model that works, but it has gotten hard for smaller companies to be successful,” Stroh says. “There aren’t as many independent retailers, and a lot of consolidation happened. It’s mostly big companies out there. So distributors are asking for more margin and doing less. Then you’ve got retailers who are asking for more margin and more out of you. And that’s just to get the product onto the shelf. Then you have to get the darn product off the shelf.”

Stroh and his partners felt that a modified MLM model would be a better fit for Skoop. “If I were doing a ready-to-drink beverage, I’d have taken the traditional route to market,” he says. “But for companies like us, we can use modern technology and a centralized warehouse and can efficiently distribute directly to consumers. We thought if we could truly partner with health and fitness influencers and give them some reward for their partnership, that would feel really good. That led us into MLM.”

After testing the model for six months, Stroh and Co. realized they needed to tweak their game plan. “The feedback was that people loved our product, but the downline isn’t that great,” he says. “So we made a conscious decision to still have direct sales, still work with influential distributors, but just not have them recruit others.” Even though MLM ended up not being the best fit for Skoop, Stroh still believes the channel can be an excellent venue for companies offering innovative products that don’t want to play the tricky retail game.

Pangea is proof of this. Onysko was fed up with several aspects of natural products retail and feels that switching to MLM was the right move. “Over the past 14 years, we’ve seen the landscape of the natural products industry change a lot,” he says. “It’s been flooded with lots of mediocre brands hanging their coats on natural terminology, so it got much tougher for us to tell our story. If we had stayed in retail, we would have had to cheapen our packaging and ingredients to stay afloat. But I didn’t get in this just to roll over and go with the tide. I realized I had to stop fighting and that we could remove these obstacles by creating our own market. MLM has allowed us to have very close relationship with customers, get them products quickly and never have to change our values.”

Onward & upward

Success breeds competition, and that competition can create fertile ground for innvoation. Given that manufacturers and independent distributors alike have incentive to jump on board, that’s all the more reason to expect more new companies to choose this channel and even some established entities, like Pangea, to cross over from retail.

“There are still ample opportunities to emerge and grow, but MLMs need to keep modifying and reinventing,” Landes says. “One in a hundred MLMs will get to $100 million, but an awful lot of smaller ones tend to proliferate, at least for awhile. But these days we’re seeing a proliferation of companies operating in very small environments.”

Carnett thinks technology will come even more into play going forward. “It’s a disruptive marketplace right now,” she says. “And consumers have a thirst for new technology. So the MLM that brings to the table a really sound, innovative vitamin, supplement or other nutrition product—along with some type of disruptive technology to consume the product, such as an app—will be put on the map and have staying power.”
 

NBJ

The next generation of smart food tech

The next generation of smart food tech

Behold the ongoing computerization of the farmer: 

Niwa is a San Francisco startup looking to raise $100K via Kickstarter to bring hydroponic hardware and software from prototype to reality. Using all of the necessary tools -- sensors to monitor temperature, water requirements and humidity, not to mention heavy social sharing functionality via its app-based monitoring platform -- Niwa is right in sync with an early trend in natural products to bring a little make-it-yourself spirit into the consumption of healthy food.

It's a trend we see gaining traction in backyard chicken coops, rooftop gardens, home mixology tonics and the maker movement of DIYers across any number of consumer product staples. So, no real surprise to see Niwa sitting strong at $110K raised with 22 days left to go. City farmers unite.

NBJ

Full Downloadable PDF May 2014: Direct to Consumer

Network Marketing Meets the Modern World

NBJ

China: MLM’s Biggest Market & Biggest Headache

China: MLM’s Biggest Market & Biggest Headache

 

With a population of 1.34 billion people, sales of consumer goods growing at 20% annually, and a middle class hungry for health products with the U.S. stamp of approval, China has become the direct-selling industry’s shiny new thing.

In 2013 alone, according to market research firm Euromonitor International, direct sellers did $14.3 billion in sales in China, up 18% from the previous year, with consumer healthcare products making up roughly half of those sales. Direct selling accounted for 58% of all dietary supplements sold in China. And U.S. supplement companies like USANA, Herbalife, and Nu Skin have been enjoying triple-digit growth and extraordinary consumer popularity since wading into the virgin market over the past decade.

But it appears the honeymoon may be over.

In recent months, Chinese regulators have begun to up enforcement of a 2005 law which essentially bans multi-level marketing, and strictly spells out how direct-sellers must operate there. They made an example of Nu Skin in January, publicly launching an investigation into its business practices and subsequently fining it $540,000, which sent sales and the stock price into a bit of a tailspin. Meanwhile, press reports in both the Chinese and U.S. media have skewered Herbalife, Nu Skin, and other direct-sellers operating in China, alleging everything from “brainwashing” to “operating an illegal pyramid scheme.” Par for the course?

Joe Mariano, president of the Washington, D.C.–based Direct Selling Association (DSA), isn’t worried. “I don’t think it has been a difficult year in China at all,” he says. “There have been some press accounts and a government investigation that have garnered some attention, but generally the tone about the industry there is very positive. I am optimistic about the further growth of the industry.”

Others see it differently, and are advising their clients to steer clear of China. “Unfortunately, for the multi-level marketer, that frontier is mostly closed,” says Scott Warren, a Laguna Hills, Calif.-based attorney who specializes in representing multi-level marketers. “The barriers to get in are so high and there is so much risk. Under the current rules of China, it would be very difficult to do it all right and still make a profit there.”

The end of MLM in China?

In the face of a flood of unscrupulous pyramid schemes which cropped up as China slowly began to open its market to trade in the 1990s, the Chinese government in 1998 instituted a ban of all direct selling while it launched a review. Well-respected multinationals who had been operating in the area for years were stunned.

“The action the government pursued was extreme—outlawing direct selling and punishing legitimate as well as unethical sellers,” wrote Amway CEO Doug DeVos, in a recent article in the Harvard Business Review. The company was making $200 million annually in China at the time, and direct selling was the foundation of its business. “The idea that direct selling could be outlawed was incomprehensible to us. It appeared that we could be put out of business, despite our commitment to and investment in our China operation.”

The DSA and other players intervened, and by 2005, as part of its entrance into the World Trade Organization, China agreed to allow direct selling under very strict circumstances. “Multi-level-marketing”—a form of direct-selling in which sales associates can make money on both the products that they sell and the products that “downline” salespeople they recruit sell—was prohibited. Just to get into the country, direct sellers must now invest upwards of $10 million in local manufacturing facilities and offices, show a good track record of several years of selling in their home country, and successfully apply for a highly coveted direct-selling license from the Chinese Minister of Commerce. Once in, they must cap sales commissions for associates at 30%, and make all salespeople wear badges.

“It was a good thing,” says DSA’s Mariano, of the 2005 legislation. “It clarified what was allowed and what was not.”

By the end of 2013, 41 companies—roughly half from the United States—held direct-selling licenses in China, according to Euromonitor, and many were becoming increasingly reliant on China for revenue.

Herbalife received its first license in March 2007, and by 2013 held licenses in 25 provinces, according to the company’s website. It now draws about 10% of its earnings from China. Anti-aging company Nu Skin also developed a heavy presence there, deriving more than one-third of its global sales from China by the end of 2013, while high-end supplement direct seller USANA gleaned about 40% of its earnings there.

Excitement among consumers and potential sales associates also grew, as people grew weary of contamination issues with Chinese food, and low-income residents—particularly women—began to see direct selling as a way to feed their entrepreneurial instinct without navigating the bureaucratic hurdles of starting a new local business there.

“Essentially, direct selling can offer entrepreneurship opportunities there with a much lower barrier of entry than other industries,” says Euromonitor analyst Chris Schmidt.

It's a hard-knock life

One of the first signs of trouble for direct-sellers in China came in November 2012, when a report by the online investment newsletter Citron Research—edited by activist short seller Andrew Left— alleged that Salt Lake City-based supplement direct seller USANA was “blatantly operating an MLM pyramid in China.” The report claimed USANA got around Chinese law by encouraging representatives from the mainland to open bank accounts and addresses in Hong Kong (where multi-level marketing is legal) so they could have products shipped through there for sale to mainland customers. Several former USANA employees interviewed by NBJ last year said this practice was indeed commonplace. Of Note: USANA has since limited cross-border purchasing of products and was named by several sources interviewed for this story as a company that is “doing it right” in China.

In August 2013, a Chinese publication, First Financial Daily, published a story calling Herbalife’s sales practices in the country “suspicious.” Then, in January 2014, came a scathing report in the People’s Daily—the official Communist Party publication—accusing Nu Skin of “brainwashing” its local door-to-door sales force and overstating the benefits of its products. In a press release, Nu Skin said the story “contains inaccuracies and exaggerations.” Nonetheless, it swiftly halted recruitment of new associates as a government investigation ensued, and vowed to “take additional steps to reinforce its training and education efforts.” From Dec. 31, 2013 to March 31, 2014, sales of Nu Skin products in China fell 40% and its stock price plummeted in equal measure as investors wondered just how the Chinese government would proceed.

Other U.S. direct sellers operating in China have also been taking a hit.

After a rocky few years of switching back and forth between retail “beauty boutiques” and direct-selling models in China—and seeing sales slide as a result—Avon (the world’s largest direct seller of cosmetics) was required to pay $135 million in fines in May after a U.S. Department of Justice and Securities Exchange Commission probe found it guilty of paying bribes in China, and elsewhere.

Amway Corp. was among the first direct sellers to set up shop in China, and still controls 33% of the market there, largely via its Nutrilite line of supplements. Yet it saw its sales grow less than 10% in 2013. Amway’s CEO blamed increased competition.

Some analysts in China say they are beginning to see a slow shift in sentiment among consumers.

“Consumers’ overall satisfaction of the MLM structure of selling dietary supplement products is low,” says John Fang, an analyst with China Market Research Group, noting that consumers see the products as too expensive and the sales people as less “trustworthy.”

On the upside, many industry observers saw the $540,000 fine levied against Nu Skin in March as a relief, a sign that the government isn’t moving in the direction of another ban. “It was a very small fine,” says Scott Van Winkle, managing director at investment bank Canaccord Genuity. “It illustrates that the government is open to these direct-selling businesses.”

More competition, more scrutiny

Everyone interviewed for this story agrees—direct-sellers in China are in for years of greater scrutiny by the government and increased competition not only from online and brick-and-mortar shops but also from more new direct sellers. Interestingly, of the eight new direct sellers to get a license and enter the Chinese market in 2013, zero were from the United States, according to Euromonitor.

Jeff Crowther, executive director of the U.S.-China Health Products Association, which has no direct selling companies among its members, notes that the Chinese version of the Food & Drug Administration is expected to issue new regulations soon that will be more friendly to dietary supplements overall, opening the market to an array of companies operating via different sales channels.

He believes the future will bring more internet sales—via sites like Alibaba’s Tmall Global. “This is still in the evaluation stage, to see how well Tmall can navigate Chinese customs, which is notorious for being problematic,” Crowther says. He also sees chain health food stores, and health food sections within supermarkets in China, expanding their offerings of supplements. “As the regulations become more reasonable, the direct-selling companies will see a shrinking in their market share.”

But if the dietary supplement pie continues to grow larger, which he expects, there is still money to be made for legitimate direct-sellers willing to comply with the laws. What advice would he offer to a U.S. direct seller interested in entering the Chinese supplement market? “I would advise them not to place all their eggs in one basket,” Crowther says. “They may find entering the market with a variety of business models best, in case regulators decide to stop issuing direct-selling licenses or—worst case—ban direct-selling companies altogether.”

Riley Timmer of fledgling supplement company Ariix is willing to take a risk. Timmer is among several former USANA employees who fled the company to form a new one after disagreements flared over how the company was handling direct-selling in China. They launched Ariix on July 4, 2011 with a promise to create quality products and treat distributors fairly.

More than two years later, Ariix is doing all it can to get back to China. The company has already set up an office there, leased a new manufacturing facility, hired some staff members, and begun the long and arduous process of getting a direct-selling license. Is it really worth it?

Absolutely, says Timmer. “There is risk, but there is risk wherever you go. China is too big and bright of an opportunity to pass up.”

NBJ

The Rise & Fall of ViSalus

The Rise & Fall of ViSalus

 

The story of nutrition and weight-loss direct sales company ViSalus Sciences has all the makings of a Hollywood movie—bright, charismatic cofounders, a multi-million dollar enterprise and an almost evangelical following that took the company to dizzying heights, with revenues at their peak of $623 million. But virtually overnight, the company fell into a sales spiral caused by declining numbers of sales distributors that lead to a cancelled IPO, a shareholder lawsuit and a competitor alleging espionage.

ViSalus is now pursuing a turnaround strategy, with new products, new markets and acquisitions that cofounder Ryan Blair believes will recapture former sales numbers, but the cards would seem stacked against them. Few MLM companies emerge from such a dramatic free fall to regain momentum. Coupled with the current negative atmosphere for direct sellers, highlighted by Bill Ackman’s highly publicized crusade against Herbalife, both direct-sales experts and critics question whether the company can come back.

Still, a modest turnaround may already be happening. In financial results released in early May, ViSalus claimed 39,500 qualified promoters, up from 38,500 from the prior quarter, and first quarter 2014 sales hit $57.4 million. Sales force growth is critical and based, Blair says, on the company’s new Project 10 Challenge, piloted in 2013 with a simple sales message. Crunch, a new high protein, low sugar, and moderate-carb cereal product pre-launched in October 2013 is also driving an uptick in sales, Blair told NBJ. New products are in development, and the company is applying for a patent for its Neuro energy drink.

Already established in Canada and the UK, ViSalus launched in Germany and Austria this year and plans to enter one additional market—Ireland. “There is a lot of new investment in the business,” says Blair. “We are in the process of acquiring new product lines and looking for savory snack companies to add to our portfolio. We have already made one acquisition, and we plan to do a lot more.”

In good times …

Modest goals compared to the heady days of 2012. Roller coaster rides like the one ViSalus experienced are not uncommon in direct sales. Many fail within two years and a majority see a momentum drop within three to five, according to direct-selling consultant Len Clements, owner of Las Vegas-based MarketWave Inc. “Most companies go into a momentum phase and when it peaks, they either stay at that level and then growth slows and levels out—like Herbalife and Amway—or they bell curve and slide down the other side,” says Clements. “Most do drop off because they don’t have products that distributors will stay on autoship with if they are not in the business.”

ViSalus appeared to follow that pattern. The company was founded in 2005 by Ryan Blair, Nick Sarnicola and Blake Mallen, based on research and products created by Dr. Michael Seidman, MD. “I was becoming a health enthusiast,” Blair recalls. “I had been 260 pounds and was working to lose weight and be healthier, so that was my focus and state of mind. It was also the perfect timing for this opportunity.”

Fit, hip and handsome, the cofounders embodied the ViSalus lifestyle. They built a strong distributor community and developed promotions like the Body by Vi 90-Day Challenge and an arsenal of social media strategies to recruit distributors, which the company calls “promoters.” The core products are its Body by Vi 90-Day Challenge Kits, with versions geared toward different goals, from slimming down to adding muscle. Customers could access a network of fellow challenge-takers. The kit’s Shape Shake, a high protein, low carb, low sugar mix, became the top-selling weight loss shake in the US and Canada in 2012, according to Blair.

“We encourage our promoters to be walking billboards for their business,” says Blair. Promoters take the challenge, attain success and enlist friends and family. “We know that our promoters will have a higher probability of success when they do the challenge with other people.”

ViSalus was acquired in 2008 by Blyth Inc., a publically traded company in Greenwich, Conn., but it wasn’t until 2011 that the company began its meteoric rise. ViSalus starting 2011 with $20 million in revenue and 16,000 promoters. By its peak in mid-2012, the company had grown 171%, reaching $623 million in sales from 114,000 promoters and $69 million in profits. ViSalus was dubbed the 21st largest multi-level marketer in the world, on track to reach the ranks of long-lasting companies like Amway and Herbalife.

ViSalus operated on the cutting-edge of direct sales technologies, offering promoters an application to turn their Facebook pages into commerce sites and a mobile app for tracking sales, commissions and organizational reports. But Blair attributes their success primarily to the 90-Day Challenge and the Three for Free incentive program, offering a month’s product free when promoters signed three new people. “Promoters learned how to have success with the program and they could offer an opportunity to get healthy and make a wonderful, and in some cases, extraordinary living,” he says. The company also established its BMW incentive, awarding luxury cars to promoters who sold $12,500 a month. “There are other companies that have similar programs—like Mary Kay has its pink Cadillac program—but they gave theirs out at much higher levels. We made our BMWs achievable for the everyday average promoter.”

... and in bad times

These incentive programs, Blair adds, are what moved Visalus into the momentum phase, but the sales skid came suddenly. In 2013, the company’s sales dropped by 44% to $351 million with 4th quarter revenues at $63 million, bringing ViSalus back to 2011 levels. Promoters fell to 37,500.

In September 2012, ViSalus’ parent company Blyth cancelled its planned $175-million IPO, noting poor market conditions. Further compounding the company’s problems, ViSalus and Blyth were named in a shareholder lawsuit alleging investors were misled to stage a more successful IPO. The company was also accused by a competitor, Oceans Avenue, of hiring a private investigator to hack into email accounts and steal proprietary information. ViSalus denied the allegations and both suits have been resolved, says Blair.

When asked what he believes happened, Blair calls ViSalus a victim of its own success. “We went very quickly from 50 employees to 500 employees. I basically got a degree during that time in product development and supply chain issues, so there were a lot of growing pains.” In 2013, Blair says, the company intentionally slowed to focus on building a lasting business.

“If there is one thing I wish I could go back and do differently it would be to launch into new markets and be ready with new product innovations when we became number one in the shake category,” Blair says.

Understanding the rise and fall of ViSalus requires understanding the MLM psychology, says Clements. Companies are constantly expanding and contracting, and often the growth of one company comes at the expense of another. What happens, he explains, is that once a bubble begins to expand, it gets the attention of other bubbles, and if one top sales person leaves a company for another, it can create a domino effect as sales leaders try to anticipate momentum, catching the wave and building an easy downline.

The heart of the problem goes deeper, says industry critic Robert Fitzpatrick, president of Pyramid Scheme Alert. “What it comes down to is the business model that all MLM companies use. No matter what products they have, what they are really doing is selling a business opportunity.” The math doesn’t work, Fitzpatrick contends. About half of the distributors in MLMs quit within a year, he says, making it virtually impossible for investors to gain value. “ViSalus has another element against it, in that they are selling products that claim to be health-related but they can’t make health claims.”

Rapid rises are not sustainable, Fitzpatrick adds. Distributors quit and those that remain must buy product to keep their rewards coming. “It becomes punitive, and most distributors will eventually quit,” says Fitzpatrick. “The only way to keep this going is to open new markets by going global.” 

 “Companies have been known to buy talent to get momentum started, and there are even agents that work with people to get these deals done,” Clements noted.  ViSalus was rumored to have engaged in such practices, which are legal. “These top distributors will always say the company did not compensate them in any way, but what they aren’t saying is that maybe an owner of the company personally paid them $3 million.” The point is, Clements adds, “people don’t leave a $20,000 to $40,000 a month income to start over without a deal. I don’t want to take away at all from the culture ViSalus created. It undoubtedly played a role in their success, but if you are truly not getting people in for the product but to catch a sales wave, then once that tops out, you have what I call the ‘window shade effect.’” In other words, once the wave crests, it’s not easy to move over and have your downline follow. Distributors start looking around for the next wave.

ViSalus’ troubles in 2013 helped companies—like Vemma, Oceans Avenue and Yoli—gain traction. A disproportionate number of distributors went to Oceans Avenue, prompting discourse on contract disputes between the two companies and the lawsuit. “So now you have the full reverse psychology in play,” Clements says. “ViSalus had four straight 45-50% drops (quarter over quarter), but they may be nearing a bottom. What typically happens is that a company will render down to a core group of die-hard distributors—around 25,000 to 35,000—which is about where ViSalus is now.”

Clements believes ViSalus can revitalize the business. That’s up to Blyth, he says. “As they give ViSalus the ability to extend into international markets, which is very expensive, then they absolutely could turn this around.”

In the US, the prospects are longer term. “They are the bubble that popped, but the industry has a short attention span,” says Clements. “Every few years you have a different core group of people who don’t remember the free fall.”

NBJ

Network Marketing Meets the Modern World

Network Marketing Meets the Modern World

 

The question for network marketing isn’t whether it can change with the times, it’s whether it can change fast enough as the landscape lurches from one direction to the next.

Any channel based so closely on social ties must obviously evolve with society. Facebook keeps us in daily touch with friends we might otherwise go years without seeing. You watch their kids grow up on Instagram. Are these social contracts of the virtual variety more fleeting? Yes and no. People move more often now. Social and service clubs have lingered in a protracted decline as their average age climbs and new recruits grow scarce. PTA membership dropped from 12 million in the 1960s to under 5 million in 2012. LinkedIn may connect us to people we’ve never met, but it’s a lousy spot for a Tupperware party.

None of those changes and challenges, however, have stalled growth in direct-sales channels for nutrition products. Multi-level marketing grew at 5.8% in 2013 to reach $5.6 billion, and undoubtedly would have gone higher without ViSalus’s negative 44% implosion. Loren Israelsen, president of the United Natural Products Alliance, calls last year’s growth a “leveling.” “If you look at an industry that is now roughly 60 years old and has grown as dramatically as it has, I think we find there are periods of spring-like growth, followed by a taper and a leveling period,” Israelsen says. “Right now, it seems to me that generally it’s a period of leveling, that the mature companies are investing for the near future. Those companies who have not really made that investment in R&D and building international markets are increasingly dealing with the headwinds of those decisions.”

Changes in the MLM top companies list suggest which crews are navigating those headwinds most keenly. Beyond ViSalus public stumble, NBJ saw Medifast jump Market America Science and ViSalus to move to 7th place. In addition, Advocare jumped XanGo to move up one spot to 12th overall. Across the broader universe of direct sales, the practitioner channel continued strong growth at 9.9%  on $3 billion in annual sales and internet posted a 14.2% gain on $2 billion in sales. Customers looking to buy nutrition and wellness products from direct marketers are not short of options. Across all direct channels, 2013 sales grew 7.8% on $12.3 billion, or roughly 35% of the total US supplement market.

A little extra income

These shifts do not suggest a lack of opportunity abroad, but domestically, the secret to growing the MLM industry may be to remake the image to rebuild the model. Bernie Landes, president at Nutrition Products Consulting and NBJ advisory board member, has watched the industry develop over decades. “I go back to the ‘70s when Amway was basically soap powder and Nutrilite was sort of a twinkle in their eye,” he says. Landes calls recent changes in the MLM model profound, and says nothing illustrates those changes better than how the value proposition is presented to distributors. “MLMs in the past sold the great dream. ‘You can fly your own jet.’ I’d go to their meetings and there’d be a Rolls Royce and a Lamborghini right on the meeting floor. The last car I saw on the floor was a Smart Car, and then there were no cars.”

It’s not a get-rich-quick sell anymore, according to Landes. It’s selling the idea of generating extra income. “The messaging became, ‘You can earn $500 or an extra $1,000, and it can mean a difference in your life.’”

John Blair, senior vice president at NSA/Juice Plus, would agree. He calls the Juice Plus network marketing model “not opportunity driven,” and describes the biggest contingent of distributors as “moms on a mission.” Those moms are helping Juice Plus grow in the mid-single digits, according to Blair, with a model that “allows them to stay home and still have the satisfaction of having a career.” But the sell isn’t get rich quick, or really, ever. “We try to create realistic expectations early on,” says Blair. “But $500 or $1,000 a month is still a big deal.”

Even how the product gets to the end consumer is part of the shifting model. Consumers may learn about the product from a distributor—the distributor still makes the sale— but they get the product direct from the company via an autoship program, a monthly package at their door. The scare story of distributors with garages full of product they paid for but can’t sell doesn’t happen in the autoship era. “No one sells from the trunk of their car,” says Blair. Randi Neiner, also an NBJ advisory board member and consumer research executive at Shaklee, keeps a close eye on the industry as a member of the Direct Selling Association Industry Research Committee. Neiner says autoship is growing and represents about “half the sales” of nutrition products in network marketing. The distributor introduces the product but in the end, the consumer controls the purchase. “It has to be easy to cancel, easy to change,” Neiner says. “With more sales going online people can go in and control it themselves.” That doesn’t make the distributor any less important, Neiner contends. People are quick to consult Google with health and nutrition questions but in the end, personal connections still matter. “Suddenly you buy it because you weren’t aware of the benefits of the product,” says Neiner, “but it didn’t jump into your shopping basket until someone made you aware.”

 That’s always been true in weight loss. Everybody wants to know how that slender coworker downsized. Neiner, however, sees that changing too. It’s not just weight loss for weight loss’s sake. “The whole idea of weight—healthy weight—is becoming part of overall good health, as opposed to a separate item by itself.” Neiner calls this a major shift that highlights protein drinks and meal supplements purchased by people who may not have considered them in the past. After waves of low-carb and low-fat fads, protein is the macro nutrient last standing, but that doesn’t mean consumers know which powder or shake to buy. That’s where network marketing comes in. “It’s a relationship,” Neiner says. “You want somebody you know or trust communicating that positive message.”

Tech disrupts again

With autoship, the task of keeping those customers often shifts to the company. If the consumer gets that next month’s shipment and there are still a few tubs of protein powder in the pantry, they will likely cancel their subscription. Diets are notoriously difficult to maintain. Smart companies, Neiner says, are stepping in with apps that fit the overall wellness goals. The product is almost de-emphasized. “You talk more about exercise. You put in everything that serves a healthy lifestyle, and it’s kind of a tool to help you get there,” Neiner says.

That kind of technology, coupled with the distributor-consumer relationship, could put MLM in an ideal spot to capitalize on coming advances in personalized medicine, Israelsen says. Like many in the supplement industry, he sees promise in personalized genetic tests building optimal nutrition programs for individuals. MLM is a high-touch channel where a custom program built for the customer may be more likely to gain acceptance. People are unlikely to grab a genetic test off the endcap at Walgreens. “If you are in the brick-and-mortars, it’s far more difficult to engage that consumer,” Israelsen says. Personalized medicine could be the big win but it’s also a space where size really matters. “Some of the leading companies in that sector are investing heavily in that,” says Israelsen.

The obvious technology angle for MLMs remains social networks. People who might think of a few dozen friends off the top of their head have hundreds of friends on Facebook. Blair calls Facebook the ultimate “memory jogger.” “It has redefined who is a contact,” he says. “It really has accelerated the connection and network process.” That’s more than obvious in the MLM world, but Blair says there are still surprises. For Juice Plus, it’s millennials in the United Kingdom. Sales are growing at triple-digit-levels in that market. The company theorizes a mix of underemployed young people looking for income and consumers looking to shave down their grocery bills with protein shakes as meal replacement. “We don’t yet know if this is primarily the result of a perfect storm in that market,” Blair says.

Juice Plus is seeing the phenomenon spread into other European markets as well, but Blair says the company has yet to replicate that success domestically. Millennials are on everybody’s wish list and, particularly with meal replacement shakes, would seem an ideal target market. They are busy, tech-connected and informed early adopters, but Neiner says she has yet to see anybody crack the code. “Everybody wants their piece of that fruit, but I don’t know of one company in particular that is a Millennial company.” The lower-hanging fruit includes Gen-Xers. “Gen X is in the sweet spot for direct selling right now,” she says. She likes Baby Boomers who are “kicking and screaming as they age,” and looking for income to supplement their retirement budget.

Landes isn’t sure age groups are as important as interests, and it’s easier than ever for people to find others who share those common interests online. He points to doTERRA as a good example. The company sells essential oils promoted for uses that include nutritional antioxidants, and it’s growing fast, Landes says. The growth model could be described as every bit as holistic as their product philosophy. “Their growth was footed on the creation of large social networks of women who were seeking solutions,” he says. “It became a network of people with common issues, as opposed to people who were just looking to build a multilevel marketing business.”

The formula has worked. In 2013, Doterra marked its third straight year topping 30% growth. Pieces of that model can be seen in the sales training at other companies, Landes says. He sees more companies training their distributors as experts and coaches. It’s still sales, but it’s wrapped in support. “Instead of being ‘Mary—the friend who is selling a product,’  it’s ‘Mary—the health coach who has been trained and certified to be your resource.’” The certification may be no deeper than a weekend webinar, but it adds an aura of authority to the relationship. However it’s presented, success comes most often when there is that shared need, Landes says.

On the world stage

Still, finding the combination of a group with a common interest and a product that’s applicable to that interest may be the exception. Introducing a ‘me-too’ MLM program is, as always, difficult when the field gets crowded. The United States is still the single biggest direct selling market, with the World Federation of Direct Selling Associations (WFDSA) pinning 2012 sales at $31.6 billion—27% of that in wellness—but the international market hit $166.9 billion in that same year, with wellness approaching the same split at 25%.

Those are the kind of numbers that can turn a company around. After years of double digit declines, Mannatech popped back with a 22.9% jump in 2013 while domestic sales dropped 1%. 

The money in those international markets, however, comes wrapped in challenges. It’s another arena where size matters, according to Israelsen. EFSA regulations are infamously complicated, and growing more so. Looming harmonization in the ASEAN countries presents its own set of hurdles. In some of the markets, large companies can ease their way in by building manufacturing in-country, but that’s a major investment. “It’s hard to get to the big dinner table,” says Israelsen.

As more global markets mature, the opportunities shrink. Japan and the United States are relatively flat, Israelsen says, and “There’s a finite limit to how many countries in that tier-two group there are.” That said, Israelsen points to Eastern Europe—“Amazingly, Russia has been a robust market”—and advises a focus on countries like Russia where the idea of entrepreneurship could still be considered novel. “American-style own-your-own business is very exciting, because that’s new to them.”

One of those countries is China, a part of the Asia-Pacific region that WFDSA calculates at 44% of global MLM sales and a $73.4 billion market. Of the regions in WFSDA statistics, Asia- Pacific is also the most promising for nutrition companies with the highest percentage of sales in wellness—36%. But some of the biggest MLM headlines came out of China last year, and they weren’t good.

In mid-January, China Daily published an investigation into Nu Skin, the Utah-based health and beauty company that had seen explosive growth in the country and was aiming for $1 billion in 2014 sales from its China distributors. China Daily is the communist party’s mouthpiece and government investigations were announced almost immediately. Nu Skin stock, after growing sevenfold in seven years and enjoying a 52-week high the same week as publication, plummeted 40%. China subsequently fined the company $540,000—a modest amount, according to analysts, and indication that MLM is not, in fact, dead upon arrival in China—and Nu Skin stopped promotional meetings, ceasing new applications for sales representatives and limiting sales to retail. Canaccord Genuity research placed the sales force attrition at “roughly 50%” for the first quarter.

What about Herbalife?

Some of that China Daily coverage drifted over to Herbalife as well, with reports of Chinese authorities considering investigations. Herbalife has experienced regulatory skirmishes in that country before. Of course, Herbalife’s biggest headaches live back home in the US, as investor and outspoken critic Bill Ackman found some investigatory traction in his short-sale bet on the company’s demise. Ackman has loudly called the company a pyramid scheme, and his lobbying of politicians, including Sen. Edward Markey of Massachusetts, is widely seen as the trigger behind a Federal Trade Commission investigation opened in March. The story strays further into the conspiracy zone with news that the FBI and the Securities Exchange Commission are investigating investors on both sides of the argument on suspicions of stock manipulation.

Whichever way the story twists or turns, the industry figures we talked to for this story called Herbalife the victim of false accusation. “Herbalife is being challenged on their basic business model and I suspect that their model will be vindicated,” says Landes, who describes Herbalife as evolving away from the common perception of MLM as ravenous expansion machines built on endless recruitment. “It’s not your father’s Oldsmobile,” Landes says. “They’ve evolved based on the reality that there is a limited number of human beings on the planet who can be distributors.”

Neiner calls Ackman’s crusade “totally unfair” and largely ineffective. The news has cast no shadow on direct selling, she says. “It didn’t hurt everybody. It isn’t even hurting Herbalife. Their sales popped back.” While Neiner admits that “every industry has a few players that we want to go away,” Herbalife isn’t one of them. “Their management is doing a good job. Any company can be attacked, and I think that’s what’s happening.”

Blair worries that the fracas “perhaps makes some consumers more cautious about direct selling,” but he thinks the smart companies have already revised their business model to deflect any criticism. “In our case, our model is so dramatically different that we don’t expect any fall out.”

Israelsen calls it a distraction, for Herbalife and everybody else. “It seems to be a soap opera,” Israelsen says. “They have other things they’d like to be working on.” That distraction, whether or not Ackman wins his $1 billion bet, is not slowing MLM down. Innovation happens. What Israelsen calls “a high risk tolerance” keeps the barrier to entry low for new ideas. “There is a Silicon Valley-like tradition here, which is to move through bad ideas quickly,” says Israelsen. “The market will tell you pretty fast which is a good or bad idea.”

Even older companies can keep up and pull ahead in changing markets. Founded in 1956, Shaklee doubled sales over the past two years. Change, as in all things, remains the constant, but the rate of change can shift ever higher. There are new markets to enter and new networks to master. For now, the MLM industry is keeping pace.

NBJ

Can you do MLM Half Way?

Alex Bogusky never liked the first M in MLM. He laughs about calling the sales model for Skoop a “ULM” (uni-level marketing) or a “1LM” (one-level marketing), but he’s most happy describing the way the Boulder-based company sells its plant-based superfoods drink mix as “crowdselling.” “It was the one euphemism not taken by the MLMs,” he says.

It’s not that Bogusky doesn’t think the MLM model can’t be done well, it was just outside his comfort zone. Bogusky and the executive team at Skoop wanted to leapfrog retail to get the product to consumers, but they didn’t like the idea of a situation that “incentivizes people to recruit people.” “That’s where you wind up in an elevator with somebody saying ‘Hey, I want to talk to you about a unique opportunity,’” he says. It was not a conversation he wanted to hear. Skoop wanted people to sell Skoop and not the idea of making a fortune.

So they tried a 2LM idea. People would sell product and recruit other distributors, but they made more money on what they sold than what they got other people to sell. That’s not the MLM way, he says. “Normally, they’re flipped. The further the sale gets away from you, the bigger your commission.” It turned out 2LM was 1L too many.  “We had de-incentivized people to use the levels,” Bogusky says.

The experiment had lasted less than six months before Skoop dumped the second level. “We decided about a month ago to get rid of the MLM,” Bogusky says. The result was a model he’s calling “crowdselling.” “People sell to people, and the people can be anywhere from a gym to a yoga studio to a nutritionist. You don’t build a downline. You don’t make commissions on somebody else’s sale.” Bogusky was back in his comfort zone. He never liked the MLM idea anyway. “We just found that we would always get to that part about MLM and say, ‘Oh, but we’re a cool one,’” Bogusky says. “But I think multi-level is kind of tainted by the bad players who have been in the space.”

There were other problems as well. “You can’t get press about it, or at least it’s very difficult. I think writers are concerned that they’ll become part of promoting some pyramid scheme.” By dropping the MLM structure, one problem was solved and another opportunity created. Eliminating the commissions freed up money to build a mission-based agenda that wasn’t possible before. “We couldn’t even figure out how to do 1% for the Planet. Where was that extra 1% margin from sales? Suddenly we pivoted and we had all this money to do something pretty awesome.”

Something pretty awesome turned out to be a program bringing fresh produce into schools. Skoop teamed with Ann Cooper, the Renegade Lunch Lady from the Boulder Valley School District, to help stock the salad bars she deploys in schools. Every serving of Skoop means a serving of fresh fruit or vegetables for kids. A 30-serving bag equals 30 servings in a school. “When you Skoop in the morning, you know that a kid is getting a serving of fresh produce.”

Bogusky believes everybody in the Skoop sales chain is part of that mission to provide a better nutrition alternative. The mission was never to “make a zillion dollars” or overhaul the way people eat, he says. “We are not in it because we think powdered super foods are what you are supposed to be eating 100% of the time. We are in it because we think it’s a good way to start the day, so that later in the day you are making great decisions and eating more fresh foods and veggies.”

The motivations that often appear inherent to MLMs didn’t fit with either of those missions. “The idea that somebody could be in it for the wrong reasons was sort of a turn off,” he says. “Not sort of. It was totally a turn off.”

So that first M is gone. Skoop is one level now. They don’t even call it a level. They call it crowdselling.

NBJ

Let’s Solve Local

Let’s Solve Local

John Fisk is the director of the Wallace Center at Winrock International, where his recent report—“Food Hubs: Solving Local”—seeks to understand and develop sustainable and equitable food systems for
the 21st century.. NBJ spoke with Fisk from his offices in Michigan.

nbj: Tell us about your work in understanding food hubs.

John Fisk: The Wallace Center has taken the national lead in developing something we call the National Good Food Network, and within that is the Food Hub Collaboration. It’s a collaboration of organizations, typically national in scope, who see that food hubs play a vital role in the success of their work—USDA, Wholesome Wave Foundation, Farm Credit Council, Center for Regional Food Systems at Michigan State University, National Farm to School Network, and School Food Focus.

nbj: What role does government play here?

Fisk: USDA has seen the growth in direct marketing and local and regional food systems. Because that benefits farmers, and the food system as a whole, USDA has a clear interest there. They recognize that food hubs are a critical link in the supply chain for regional food systems, which represent a scale-up opportunity for farmers.

nbj: Is regional one step along the way to local, or is this the way you make local happen?

Fisk: This is the way that you make local happen. A lot of local food has been direct marketed—farmers’ markets, CSAs, box share programs, farmer stands—and USDA tracks the growth of those. There are upwards of 7,000 farmers’ markets nationwide, but that’s still an occasional market and a farmer can only do so many. Any farmer of any size is going to be too large for direct marketing. They need to go into intermediated markets—wholesale of some kind.

We see a lot of farms that are too big for direct but too small to compete effectively in the commodity markets. If they recognize local food as a market for them, then it needs to be done in a larger way. That’s where you get to regional food systems—if it’s regional, you can draw from a larger area, you can add to the diversity of products, and you can gather the quantity that’s needed for retail and food service.

nbj: We hear so much about the challenges of healthier food—
pricing and accessibility, supply around organic and non-GMO.

Fisk: If we want to scale this and make more opportunities for
farmers, and have more sustainable practices on more acres across the country, and feed more people with more access to healthy food, then we’ve got to grow this thing up. We’ve got to find solutions that allow it to become 10, 20, 30% of our daily food spend. Otherwise, it’s always going to be marginal, and it won’t achieve the social and economic outcomes we want. Food hubs are a pivotal piece of the solution.

nbj: With 30% as the goal, where is local food now?

Fisk: Local and regional food systems—it’s a shot in the dark—but we’re maybe at 4%.

nbj: Let’s define the notion of ‘food hub’ a bit more.

Fisk: We’ve done a bunch of work to bring forward the food hub as a strategy, and a bunch of research to figure out what it is and what it looks like. Food hubs are businesses that are actively managing, distributing and marketing source-identified food products. They do the core functions—aggregation, distribution, marketing—and they keep the source identification of the products from the farmers with a focus on local and regional. The majority of the products, if not all the products, are local and regional.

      These are also social enterprises, so they have a purpose underlying them. Often that purpose is to support the growers in the hub, to give them new markets, to build that regional food system that gets the products into retail, wholesale and institutional demand. A lot of these hubs are values-driven as well, with interest in sustainable production practices, whether that’s organic, antibiotic-free, grass-fed, or any regime that builds the resource base instead of extracts from it. Others place more emphasis on access and reaching consumers inside food deserts. You can use regional and local food systems—that connection to the farmer, that connection to production—as a model to increase access and make it affordable.

nbj: Where are these hubs?

Fisk: We’ve found about 300 of them across the country, with clusters in the Northeast, the Midwest, and on the Mid-Atlantic coast.

nbj: Any specific examples?

Fisk: Sure, let’s talk about Good Natured Family Farms (GNFF), an association of 150 family farms in the Kansas City area. All of the product—everything from cheese to beef to fruits and vegetables—goes through the hub to maintain the story and the single brand. It’s a for-profit structure—about 60% of food hubs are for-profits or cooperatives, and 40% are nonprofits with a social angle—that’s been around for about 15 years with about $5 million in sales. They do a lot of volume through Balls Foods with 28 stores in the region, which helps maintain the infrastructure and supply chain. This commitment to the region is also a point of distinction for Balls Foods in the marketplace, in comparison to the larger, national retailers.

      Building upon that relationship, GNFF then partners with a church in Kansas City to supply a retail store that sells to inner-city, low-income congregation members challenged by food access. So you’ve basically taken that successful supply chain and applied it to a food access issue in a way that creates a market for those growers and creates access and empowerment for the local population. The hub is big enough to pull this off as a real solution—the product is diverse and sells year-round, so it’s a viable partner for a scaled-up retail situation or institutional sales.

nbj: What brings the network all together? Is it branding? A seal?

Fisk: It can be that, but it’s really about having that leadership at the front end of supply. The hub coordinates back with the growers about volumes, seasonality, product selection, packing, insurance, training on food safety. It’s the hub that does the coordinating, and then in some cases, as with GNFF, it also brings a brand. In other cases, the hub just brings forward the farm brand. Red Tomato in New England has a great brand with strong eco themes, but they also bring forward the farm names.

nbj: Are the hubs centralized and staffed?

Fisk: Most will have some infrastructure. They’ll have a warehouse with square footage of coldspace, and some have freezer space. They’ll have pallet jacks and forklifts. They’ll have a loading dock. Oftentimes, they’ll have some marketing staff, some managers for the warehouse, and bookkeepers. Sometimes they’ll have a fleet of their own trucks, or hire that out to a local company for distribution. It just depends on the nature of the hub.

There’s a wide variety of models in the 300 hubs across the country that ranges from larger operations at $40 million in annual sales to some at $50K per year. We know from a recent survey that average sales are $3.5 million per year per hub, and the median is more like $800K. In terms of employee count, the average is 19 and the median is five.

nbj: Any other examples?

Fisk: La Montanita is interesting. It started
as a retail co-op that said, ‘We know there are hundreds of farmers out there with valuable product and we’re committed to regional food systems, so let’s start a food distribution center.’ They have the infrastructure now to collect the product, and then they distribute out to their own five stores but also to outside accounts like Whole Foods and Bon Appétit. La Montanita is up to $4.5 million in sales with eight employees, and they’re buying from 1,300 farmers. The logistics are a real challenge.

nbj: What does the future for food hubs look like?

Fisk: Most food hubs are six years or younger, and the market is growing—we see 16% annual growth in the number of food hubs. What that growth means is there are more small businesses facing all of the typical challenges that small businesses face—access to credit and capital, infrastructure and software meeds. Since this is the food business and margins are low, hubs face some additional challenges as well, like reaching sufficient scale to spread costs and stay financially viable, and complying with regulatory pressures from FSMA and building food safety capacity.

      I think the future lives there—providing more technical assistance for these small producers to scale up. We’re working on a group GAP (Good Agricultural Practices) food safety certification for farmer cooperatives and food hubs that could provide stronger food safety results at lower costs. The opportunities are there if we can provide more of that technical assistance. The market continues to grow, and USDA continues to invest in farmers who want to sell into this sustainable, local supply chain. That’s really what the food hubs need, more supply.

NBJ

Courting the Cord Cutters

Courting the Cord Cutters

 

Direct-response marketers of nutritional products might want to tune in: In 2013, online advertising revenues in the U.S. surpassed those from broadcast television for the first time ever.

The $42.8 billion consumers spent responding to search, mobile and digital video ads represented a 17% increase over the previous year, eclipsing the $40.1 billion broadcast TV brought in, according to a study released in May by the Interactive Advertising Bureau (IAB). In a recent survey of its 400 members, the Electronic Retailing Association (ERA) found half reporting at least 40% of sales online, and for 20% of members, 60-to-80% of sales happened online. 

Is this a seismic shift for direct-response companies, whose lifeblood has long been the TV-based (in some cases, radio-based) infomercial? 

The decline of the infomercial

Television is becoming more fractured, with broadcast, cable and video on-demand services widely available, and many consumers cutting the cord in favor of streaming programming. “For sure, I think we’re seeing a deterioration of the traditional television
audience,” says Jason Kam, vice president, business development for Plainview, N.Y.-based Purity Products, which has long relied on television and radio ads. “I think the trend is pretty much irreversible, akin to what happened in the newspaper industry. Young kids don’t listen to radio anymore. Now you’re seeing the same thing happen with television,” says Kam. “In the end, you’re trying to buy eyeballs or earlobes.”

Given these changes, one might expect to see media rates drop, or at least remain stable, but instead, they’re rising. “Although audiences are diminishing, there’s still an increased demand for television advertising,” says Kam. “There’s a perception that it’s still more effective, pound for pound, than online advertising.” Despite DVRs and other devices allowing viewers to skip TV commercials, online ads are easier to ingore. “Banner ads online get lost very easily. Even on YouTube, the ads come up and 98% of the time, you’re just going to skip them.”

Another reason infomercials remain effective for driving advertiser demand and consumer response is they allow midnight marketers to present compelling stories, with interviews and testimonials, in long-form promos lasting 30 to 60 minutes.

Competition is more intense on television than ever, Kam says. “Direct response is very difficult to do today with natural products, and do it compliantly. You’re going against a lot of competitors who are willing to make very, very strong claims. They can pay more for the same media you can because they’re going to get more phone calls than you.” In addition, Kam says: “Many of the companies buying direct-response advertising on TV today are doing so more to drive retail sales than to derive ROI from the ad itself.” These include non-natural brands like George Foreman Grills and the P90X workout that don’t require the return a hardcore direct-response advertiser needs. “As more companies see the merits of direct response, you get a greater demand for the media in a diminishing audience space.” On top of that, consumer response rates aren’t as strong, Kam says.

Julie Coons, the president and CEO of ERA, agrees, but says it’s premature to declare the infomercial dead. “Television still drives an enormous, enormous response,” she says. In fact, in 2009, infomercials in the U.S. brought in $170 billion, and as recently as 2012, analysts predicted that number would exceed $250 billion by 2015— a full percentage point of the national GDP.

“It’s not that we’re ditching cable,” Coons says. “Everyone still believes in the power of television.” In fact, though internet sales outperformed broadcast TV sales last year, broadcast and cable television remain formidable. The IAB report showed broadcast and cable combined drew $66 billion in sales—about a third more than online.

Still, in an environment where media rates rise amid fragmented audiences and stiffer competition, margins drop and advertisers work harder for every dollar. “The mainstay of the industry, being long-form, is not performing as well as it used to,” Coons says. “If you talk to production companies, the majority of what they’re doing is short-form. The infomercial is not dying, but it is changing.”

The shifting tide

Even as companies find ways to make infomercials work, they look for audiences online. ERA’s data indicates the top three techniques members use: SEO (90%), email marketing (82%), and social marketing (73%). “Facebook marketing is emerging more,” Coons says. “The membership at large is active on Facebook as individuals, so often their greatest familiarity is going to be with that medium.”

Pharmavite, manufacturer of Nature Made supplements, has 682,000 followers on Facebook, says Doug Jones, a spokesman for the Mission Hills, Calif.-based company, and about 1,700 Twitter followers. Kam says Purity uses both channels, but it’s difficult to measure ROI. The company uses social media primarily “to stay relevant and keep the conversation going.”

Few direct-response companies hire social media experts. Despite at least half of ERA’s members deriving significant sales online, few throw serious money at it. ERA reported that 80% of members spend less than 33% of their marketing budget online. Coons says that’s likely because they still perceive television to be a higher response medium. “The online upsale is more difficult than it is on the telephone,” she notes.  But as television’s challenges become more apparent, investments will shift.

“I expect that 33% number to grow,” Coons says. Five years ago, she notes, “members talked about online sales being in the 20% range,” she says. “I have every reason to believe that this is a dramatic shift.”

Video kills the SEO star

As online sales take off, video might seem to be the next natural progression for marketers accustomed to TV. Still, only a few nutritional companies have dipped their toes in those waters. Nature Made has videos on its website and on YouTube. Jones says that once posted, the videos “are then shared out on other social media platforms, depending on the target.” Most of Nature Made’s YouTube spots have a few hundred to a few thousand views, though one posted three years ago has about 55,000 views.

Likewise, Purity has videos on its website and on YouTube, typically featuring an expert discussing a supplement. Purity’s most popular YouTube video—“Is 5,000 IU of Vitamin D per Day Too Much?”—is the eighth installment in a 15-part vitamin D series. Kam acknowledges the videos are “not heavily sought after” and haven’t driven significant awareness or sales. “I don’t really know anyone who’s been able to unlock that and monetize it any sort of way. I suppose you can create a video that goes viral, and that’s just a lucky thing that might happen.”

Peter McGraw, marketing professor at the University of Colorado’s Leeds School of Business, says it’s not strictly a matter of luck. “If you’re trying to find some way [for your online marketing] to become popular without paying for it, you’ve got your hands full because that’s a really crowded space.”

To break through the noise, videos need a boost from people with big soapboxes—journalists or someone whose site draws a lot of eyeballs. A recent example was HBO’s John Oliver poking fun at claims in POM Wonderful’s videos. POM sent Oliver a refrigerator full of pomegranate juice and a hilariously worded letter suggesting Oliver might try POM as an enema. Oliver’s response went viral. “It depends on if you believe there’s no such thing as bad publicity,” McGraw says.

To get mainstream outlets like Buzzfeed or Huffington Post to take notice of your product—perhaps without the mockery—you have to build a story and be creative, McGraw says. It might be wiser to target marketing where your committed consumers spend time online, he suggests. “It’s not hard to figure out because you already have an existing customer base.”

Kam agrees, noting that it’s generally easier to target online than on TV. Selling sports nutrition means advertising on websites drawing men in their 20s, for example. With an infomercial in the middle of the night, however, “You’re throwing a dart at a random dartboard because you don’t know who’s watching,” he says.

Even with SEO, you get select views via search, McGraw says. “Those are good views because these are highly involved consumers—people who are looking for solutions. Those 2,000 views are likely to be better than 2,000 views coming from some other method.”

If a video or other online advertising becomes popular, the challenge, Kam says, is getting people to see it and then take action. “You’ve got to have a compelling banner ad or video that consumers watch and are excited about and click through to your website,” he says. “Then you have to have a website that has good content and a good offer. Then all your conversion metrics have to be in place, and you have to hope that people click through at a price where there’s still some room for profit.”

Coming attractions

As marketers attempt to wade through all the challenges of marketing in the ever-changing media landscape, video is likely to play a role. Coons points to Sukhinder Singh Cassidy, founder and chairman of Joyus, an online portal for clothing and lifestyle products. “Her model utilizes web-based video that looks and feels an awful lot like TV. We’re going to start to see some experimentation,” Coons predicts.

Purity is a perfect example. Kam says the company is building an in-house video team. “The goal is to do a lot more with video over the next year.” It may also consider retail. “We are now in the process of looking at potential strategic retail launches,” he says, noting Purity has the infrastructure to do both direct response and retail.

The most important thing for any company to consider, says McGraw, is research. “Companies often don’t have big marketing budgets, but whenever possible, try to
collect some data. Understand who your customers are, and what their media habits are. Once you know that, it presents a much better blueprint for the tactics. Then you
can move forward with some comfort that, even though it may not be perfect, it’s
better than what everyone else is doing.”