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The Avon Lady Needs a Makeover

Some multi-level marketing brands, where customers sell the products and recruit others into their "downlines," are struggling to grow. Here's how they are adapting their formula to the age of e-commerce and Sephora.
Multi-level marketing brands are adapting to the age of e-commerce | Source: Collage by BoF
  • Cheryl Wischhover

NEW YORK, United States — Karen Wolownik, a mother of three in her 40s, was recruited to sell Arbonne beauty products by a friend who drove a branded white Mercedes the company says it helps top earners purchase.

“It piqued my interest,” she said.

She was already a fan of Arbonne’s products, and decided to try selling them to earn some extra cash. After purchasing hundreds of dollars worth of products, she estimates she made about $300 to $400 a month by having coffees and in-home parties. She recruited six people into her “downline,” earning a commission off their sales.

Wolownik eventually found a higher paying job and stopped selling Arbonne, but continued to pay a yearly fee to be eligible for discounts. When the company changed that policy, she gave up on the brand: “I said, ‘Ah, screw it!’ and went back to Ulta.”

Arbonne, along with Mary Kay and Avon, is part of the old guard of multi-level marketing beauty companies that rely on their customers to sell their products. And though the "Avon lady" image feels like a relic of the 1970s, the model she represents is bigger than ever. Companies like Rodan + Fields, Monat and Beautycounter have updated the concept for a new generation, adapting parties and door-to-door sales to Facebook and Instagram, and tapping new trends, from prestige skin care to "clean" beauty.

The business itself remains essentially the same, however. Sellers, often called consultants, sign on to pitch products, spending anywhere from under $100 to thousands of dollars on starter kits, entry fees and inventory. They earn commissions on every sale, plus those from their downline. MLM networks can grow fast via these multi-generational downlines. Rodan + Fields sales reportedly topped $1.5 billion in 2017; Beautycounter's were an estimated $325 million in 2018.

But beauty MLMs aren’t moving products in the volumes that they used to, at least in the US. Direct sales of beauty and personal care products have had their ups and downs in recent years, slipping to $4.95 billion last year, from $4.99 billion in 2017, according to Euromonitor. In 2018, online sales of beauty and personal care products overtook direct sales globally for the first time, according to Euromonitor. Competition among beauty brands, the popularity of specialty retail and e-commerce, and ethical questions about MLM tactics have dogged brands that rely on the model.

In April, Cerberus Capital Management sold "New Avon," the brand's North American business, to South Korean firm LG for $125 million, $45 million less than it paid in 2015. (In May, Natura, a direct selling competitor, bought the rest of Avon, which was still a public company.) Coty sold its majority stake in Younique in August after just two years amid declining sales at the direct makeup seller.

Other direct sellers appear to be thriving, including Monat and Beautycounter. But even they are shaking up how they operate to reduce their reliance on consultants. Monat launched its own e-commerce site, allowing customers to buy hair products directly from the company for the first time. Beautycounter has direct e-commerce operations as well and sells its products through retailers like Goop and its own stores.

But it remains to be seen whether any of the latest crop of MLM beauty brands can escape the boom and bust cycle that has plagued the model since Avon took it mainstream almost a century ago.

“Younique, like all multi-level marketing businesses, [went] through a phase of classic hype,” Coty Chief Executive Pierre Laubies said in an earnings call earlier this year when the brand started to show signs of distress. “Unfortunately, we are in the de-hype phase.”

To a degree, beauty MLMs' problems are shared by their traditional competitors. The beauty market is crowded, makeup sales are sliding and specialty retailers like Sephora and Ulta have a hold on customers. Influencers on YouTube and Instagram flood the market with discounts and affiliate links. Companies like Glossier give superfans their own website where they can earn a small commission on sales, without any expectation that they recruit a downline.

The same network of consultants who turn MLMs into multi-billion-dollar businesses are also making it harder for these brands to steer through the downturn.

At MLMs, most of the revenue accrues to the company itself, and to a handful of sellers at the top of the ladder. Wolownik’s modest income made her one of the lucky ones; it’s not hard to find accounts from former consultants who went into debt or fell victim to hidden fees. Critics draw parallels to pyramid schemes, noting how often-byzantine compensation structures create incentives to put more energy into recruiting new members than selling skin cream or serums. Still, it’s those items that keep MLMs on the right side of the law: so long as they can show that real products are finding their way into the hands of real customers, the model is legal.

Beauty products sold via MLM tend to cost more than similar items found at Sephora, because their price reflects seller commissions on top of regular profit margins. Younique’s fiber mascara costs $29, the same price as luxury-tier mascara from YSL. Younique declined to comment.

“These companies can’t be disproportionately out of value with retail offerings,” said Stephanie Wissink, an analyst at Jefferies. “That’s something that’s always been a challenge for MLMs. In order to fund the commission, they have to drive pricing way up.”

Monat launched in 2014 selling anti-aging hair care, the first North American brand for parent company Alcora, which has a portfolio of direct-selling beauty labels in Latin America and its own manufacturing facilities in Miami. Sales jumped 39 percent in 2018, to $435 million, and the company recently launched a range of skin care. The company has about 200,000 consultants, which it calls “market partners,” and 1 million “VIP members” who sign up for an auto-subscription package in return for a small discount, said President Stuart Macmillan, a direct selling veteran who has worked with Arbonne. (Monat is also embroiled in lawsuits involving allegations that the products caused hair loss and scalp injury.)

Macmillan said Monat is “100 percent dedicated” to direct selling, but added that the company is in a “transition.” The company started offering e-commerce via its site in January, allowing consumers to buy directly from the brand for the first time. But at checkout, shoppers are required to choose a market partner from a list, who earns a commission from the transaction.

“We’re trying to figure out what’s the best way to not bypass our market partners, but not create hurdles to buying the product, particularly as we become more well known,” Macmillan said.

Then there are the ethical concerns.

The process of recruiting and retaining distributors is designed to keep people buying stuff for as long as possible.

The chief criticism of MLMs is that few consultants earn a significant income, with many - if not most - losing money. These brands report, via voluntary income disclosure statements, that the majority of their consultants earn little to no money.

Douglas Brooks, an attorney in Massachusetts who has represented former consultants in civil cases against companies like NuSkin, Herbalife and Amway, said that even though companies will claim it is against their rules, consultants often buy products to maintain certain commission levels.

“There’s no way for you to make money unless you try to meet those qualifications,” he said. “The process of recruiting and retaining distributors is designed to keep people buying stuff for as long as possible.”

Thanks to the popular podcast The Dream, John Oliver’s viral show on MLMs and Facebook groups and subreddits that recount direct seller horror stories, there is increasing consumer awareness about the model’s downsides.

Beautycounter has managed to sidestep many of these issues. The brand, founded in 2013 by Gregg Renfrew, is built around clean beauty, the idea that certain common ingredients used in cosmetics and skincare are harmful and must be avoided. Consultants are encouraged to help the company lobby for stricter laws governing beauty ingredients.

Consultants must purchase a $98 enrollment kit and pay a $50 annual renewal fee, with options to buy “starter sets” of products that cost upward of $700. Consultants receive their own website and orders are fulfilled directly by Beautycounter, rather than requiring sellers to buy inventory. The brand holds an annual conference that can cost hundreds of dollars to attend, a common practice among MLMs.

In an interview, Renfrew said Beautycounter is clear on its site that consultants are unlikely to strike it rich.

“Most people don’t earn a lot of money,” she said. “It’s something they’re very passionate about, and they’re doing it because they deeply care about removing toxic chemicals from personal care products and changing the laws. This isn’t necessarily about the income.”

Gone is the day when you have the option to dictate to the consumer how they shop your brand.

Renfrew said she intended to diversify her sales channels from the start. Beautycounter products can be found via retailers like Goop and Onda, and the brand has two stores, plus its own e-commerce site. She said more traditional expansion is coming.

“Gone is the day when you have the option to dictate to the consumer how they shop your brand,” she said. “[Retail] legitimized [the brand], it created testing opportunities, it also increased our reach significantly and continues to. We acquire new clients through multiple channels and that’s important to us as a brand.”

Outside the US, beauty MLMs are still booming. The model saw sales rise to $43.1 billion last year, from $41.3 billion in 2017, according to Euromonitor.

Monat entered Canada in 2015, the UK in 2018, and Ireland and Poland in September. Asia and other European countries are coming soon, Macmillan said.

Much of the deal activity involving beauty MLMs has been with an eye toward global growth. L’Occitane acquired US-based makeup brand LimeLife by Alcone in 2018, which it launched into the UK shortly afterwards. And Avon has plans to modernise its model under Natura. It has seen triple digit growth in its e-commerce business, which will expand worldwide, according to James Thomspon, Avon’s chief beauty and brand officer.

In Sao Paolo, the company is trialling one-hour delivery and giving reps a small commission on sales that come through the brand’s e-commerce directly. In Poland, the brand has 18,000 pick-up points. In some countries, including Brazil, the Philippines and China, Avon sells through stores, often run by consultants. Mostly, the company has to shore up its digital prowess.

MLMs like Rodan + Fields and Younique were early to the idea of using social media to sell products. Younique touts that it trains consultants in how to use digital strategies. Consultants message acquaintances via Instagram and Facebook, host online “parties” on these platforms and even have text parties, in which acquaintances are encouraged to pass on sales pitches, like a digital chain letter.

At Avon, consultants will have access to their own sites and digital business apps, as well as updated compensation plans. Avon established target levels of consultant earnings for each market, which it would not disclose.

“I think the criticism of all of this is best answered by giving them proper amounts of money to earn and that’s why we are making sure that our earnings proposition is competitive and is helpful,” Thompson said. “If we don’t look after their best interest, we have no business.”

While MLM sales growth in beauty has been steady globally, there too it is hitting snags. NuSkin, a Utah-based public company best known for its facial devices, and which does a large percentage of its business in China, has seen its revenue decline. Chinese law, which once banned MLMs outright, places limits on the number of levels of commissions a company can pay out. Nuskin didn’t respond to a request for comment.

Untangling oneself from an MLM can be challenging.

One former Younique presenter wrote into a TurboTax forum this June to ask a question about her business: “Since I started selling Younique I have had little luck selling to customers. Currently my business is at a loss. I have purchased approximately $4,000 worth of inventory and other business-related products that I have on hand to show perspective [sic] buyers. Can I deduct these expenses from my income tax?”

The answer is yes, in case Coty has the same question.

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