Direct Sales as a Recession Fallback

From the New York Times

March 15, 2009

By EILENE ZIMMERMAN

THREE weeks before her third child
was due, Susan Drucker Hunsaker had more than 20 women over to her home
in Burlingame, Calif., for conversation and refreshments. She also
invited them to look at Stella & Dot costume and semi-precious
jewelry, which she had begun selling the week before.

Ms. Hunsaker, a former high school art teacher with a master's
degree in education, sells jewelry because she needs cash, and she
needs it quickly. Her husband works on a commission basis in commercial
printing sales; his income dropped by half in 2008, and he expects more
of the same this year.

"We had already pared down as much as we could," Ms. Hunsaker said.
"I knew as soon as the baby came, I would probably have to go back to
work. But with three children under 5, if I went back to teaching I
wouldn't make enough to pay for child care." In the first two months of
this year, she sold $12,000 worth of jewelry at six parties, taking
home 30 percent of that as commission.

Ms. Hunsaker is not alone in turning to direct sales to make ends
meet. Many direct sales companies report rising numbers of sellers
signing up. In February of last year, 24 new sales consultants joined
Stella & Dot; this February that number is 160.

The number of new sellers at Lia Sophia, another jewelry company, is
up 26 percent from January-February 2008 to 2009; the number of sales
consultants at the Cutco Corporation, a manufacturer and direct seller
of high-end kitchen cutlery, was up 20 percent this January over last.

The average annual growth in direct sales in nonrecessionary years
is 3.3 percent; during the last three recessionary years - 1990, 1991
and 2001 - it was 4.5 percent, said Amy Robinson, spokeswoman for the
Direct Selling Association, the industry's trade group.

People may use their earnings to pay off specific debts like credit
cards or as a way to bring in cash while they - or their spouses - look
for jobs, Ms. Robinson said. The barriers to entry are fairly minimal.
Start-up kits - required by most companies - cost about $99 on average.

Products are generally sold at small parties and earn the seller a
commission of about 20 to 50 percent on their sales, usually several
hundred dollars a party. The median income from direct selling is
$2,400 annually, according to the association, but those who recruit
and manage others can earn significantly more.

People interested in direct sales often sell products they use
themselves. Mindy Kershnar, who owns four Siberian Huskies, turned to
selling pet products for Shure Pets of Chicago when she was laid off
from her job in administration at Oracle in January.

Ms. Kershnar telecommuted from Greeley, Colo., where she and her
husband recently bought a house. They need two incomes to pay the
mortgage and credit cards, so Ms. Kershnar is selling Shure Pets
products while looking for another job.

Products moved through direct sales, like jewelry, cosmetics or home
décor items, are sometimes considered recession-resistant because most
are priced under $50. And economists have made note of the lipstick
factor, a term coined when lipstick sales rose during the last
recession in the United States, in 2001. The belief is that in tough
economic times, women cut back on pricey purchases but splurge instead
on inexpensive luxuries.

The need for quick cash, however, can lead some salespeople to sign
on with companies that are really pyramid or recruitment schemes,
rather than true direct-sales companies. Consumer watchdog groups and
the Federal Trade Commission (ftc.gov/bcp/edu/pubs/consumer/invest/inv12.shtm)
advise would-be sales representatives to scrutinize a company first. If
a seller's earnings grow mainly by recruiting other sellers rather than
selling the product, that is a red flag.

"Most of the commission should go to the salesperson, not the recruiters above her," said Robert L. FitzPatrick, founder of PyramidSchemeAlert.org, a nonprofit consumer education Web site. He advised asking a company how sellers are compensated

Another red flag: companies that require upfront purchases of their
products, which could wind up unsold and sitting in the seller's
basement for years.

The Direct Selling Association, which requires member companies to
go through a review and waiting period before admitting them, has at
least one member - www.YourTravelBiz.com
- now under investigation by the attorney general of California under
suspicion of being a pyramid scheme. The company says the allegations
are without merit.

There are many legitimate direct sales organizations, and in
addition to the earnings, the experience itself - selling and possibly
managing a sales team - can be valuable professionally, said Joel
Whalen, academic director of the Center for Sales Leadership at the
Charles H. Kellstadt Graduate School of Business at DePaul University in Chicago. He expects that about 30 percent of recent recruits will stick with direct sales even after the economy recovers.

THAT is Amanda McCrary's plan. She began selling Mary Kay cosmetics
in December, when her husband was told he might be laid off. "We
decided we needed to be proactive and put together our own bailout
plan," said Ms. McCrary, who also works full time as a human resources
manager.

The couple live in suburban Detroit with their young son and are
paying off college loans and other debts. Ms. McCrary sold $1,500 worth
of products her first month, pocketing 40 percent as commission.

"We are putting it all into savings until we find out if my husband
is getting laid off," she said. "If he keeps his job, we will use it to
pay down our debt."