While the struggling economy and rising unemployment have driven more people to get involved in this type of business, the companies themselves are facing some setbacks, most notably from the strengthening dollar.
Look at Tupperware for example. Even though the company topped analyst estimates for the third quarter, it lowered expectations for its fourth quarter. In October, the company said it expects sales to fall between 4 percent and 6 percent, and operating earnings to be between 79 cents and 84 cents a share. That compares with a prior fourth-quarter forecast of 91 cents to 96 cents a share.
J.P. Morgan analyst Dara Mohsenian does not find this surprising given the negative currency trends and a hefty fourth-quarter tax rate of 28 percent.
But Tupperware raised its long-term forecast to annual local-currency sales gains of between 6 percent and 8 percent, up from a prior range of 5 percent to 7 percent growth.
“We view Tupperware’s 2009 guidance as too aggressive given it assumes a rebound in organic growth in developed markets to the 1-2 percent growth range versus a third quarter decline, despite a deteriorating economic outlook,” Mohsenian says. “Tupperware believes that higher unemployment typically leads to greater sales force recruitment trends…However, similar to what we have seen recently in developed market, we expect slowing consumer demand will more than offset greater recruitment.”
That's the balancing act.
Chief Executive Rick Goings insists Tupperware is counter cyclical, meaning its sales tend to go up when the economy is struggling. More people consider getting involved with direct selling as a way to bring in extra money, either to supplement their current income, which is suddenly not enough, or as a way to support themselves while unemployed.
“We are a good news story in a bad news time,” Goings says of his company’s recent success and recruitment surge.
But acknowledging that money is tight, and people are more conscientious about their spending, Tupperware has expanded their catalog over the years, understanding that in today’s world it is hard to justify spending $20 on containers for leftovers. By selling more diversified products, such as cookware and cutlery, with the same quality and durability, these purchases become more acceptable to the consumer, he says. Plus, with people eating at home more often these days, Tupperware’s new lineup of kitchen products is doing very well, according to the company.
“It’s a phenomenon of lifestyle,” says Goings, pointing out that as Tupperware products have been revamped, so have the Tupperware parties. They now give partygoers the feeling of a ‘girl’s night out,’ without spending a fortune on dinner and drinks. Some Tupperware parties, have themes such as the “Decadent and Delicious” party, which offers chocolate and Cosmopolitans, making it just as much a social gathering as a product demonstration.
Avon is seeing a similar boom in interest.
'Like Diets in January'
“People may not know an Avon lady, but they know the brand, they come in off the street and want to sign up” explains Amy Vincent, analyst at Avondale Partners, which tracks both Avon and Tupperware. She recently spoke with a regional director of Avon who claims walk-in traffic to her Avon recruitment center has gone up 25 percent in the last 30 to 45 days. Vincent attributes some of the credit for this spike to the holidays, joking that “like diets in January,” people flock to direct-selling this time of year.
Companies that utilize the direct-selling strategy offer a way not only to make, but also to save money.
“I would say that 30 to 40 percent of people who are representatives for companies like these do it for the discounts on products they are purchasing for themselves” says Vincent. Customers ordering products from these representatives benefit from these discounts too.
Avon attributes some of their success in tough times to the “lipstick effect,” which is when women who are struggling financially still want to look nice and say to themselves, “I can’t afford a new outfit, but I can get myself a new lipstick.” Smaller, more modestly priced beauty products are doing well as a result.
Larry Nusbaum, CEO of Ronco and Chairman/Interim CEO of Popular Club, explains that direct-sell companies provide a way for struggling families to get some extra income. A stay-at-home mom can participate in something like this, make extra money and not sacrifice a large amount of time spent with her children.
A credit crisis like the one we are in now is especially tough on the retail sector, Nusbaum says. “The average family in middle America cannot afford to stroll into Neiman Marcus, Macy’s or Bloomie’s and do their shopping. People turn to us because we offer brand name merchandise at competitive prices.”
Plus, Popular Club has a layaway option, which has become more popular among consumers facing either tight credit or who don't want to add debt to their credit cards.
“I believe that in a downed economy where hedge funds and credit have been crushed, there is a real opportunity for value brands that offer a unique in home experience. Value stands in any economy,” he says.
Taking all this into consideration, one would think that such companies would be smart additions to a stock portfolio. However many analysts would disagree. When asked about investing in these companies, Amy Vincent offered just two words: “Buyer beware!”
Much of this has to do with the currency situation. Both Avon and Tupperware have noted that since they operate on a worldwide scale, fluctuating currencies have had a negative impact on their profits.
Mohsenian sums up his concerns stating, “Given limited EPS visibility due to negative currency translation, as well as a deteriorating macro environment, we remain neutral.”