Few weeks ago, I analyzed here 14 public direct selling companies’ cost of sales (*) figures. To make one thing clear, the numbers we talk about here are derived from companies’ global figures and are not market-specific.
The comparative picture of costs was quite interesting. Some of these businesses like Avon, RBC Life Sciences and Youngevity were operating with very high costs. On the other hand, costs of goods sold were considerably low at others such as USANA, Herbalife and Nu Skin.
Whether high or low, these costs should have an impact on profitability, naturally. However, was there a strong inverse relationship between these two or were there other significant factors that might decrease the significance of this impact? Let’s see…
The profitability figures that are used in measuring an enterprise’s profit generating ability are various. All are important depending on the purpose they are used for. Here, I have chosen operating income to focus on. I would be more interested in knowing a firm’s operational success than knowing its profitability in activities unrelated to its core business (such as interest income or expense).
You will see on the above tables that those companies that have high costs of sales (i.e. Avon, RBC Life Sciences and Youngevity) all have lower operating income, too.
When we turn to those that have lower costs of sales like USANA, Herbalife and Nu Skin, we see a higher profitability there.
Among all these, there are few interesting cases that I think need special attention:
* Natura, Tupperware and Oriflame have all been operating at almost the same level of cost of sales. Natura and Tupperware have been able to generate quite high operating incomes, but this has not been the case with Oriflame. Oriflame seems to be spending a larger portion of its revenue when compared to these two companies.
*While RBC Life Sciences has been able to decrease its cost of sales considerably in time (from 52.8% to 43.5%), its operating income has come down significantly, too. This is mainly due to the sharp increase in company’s distributor commissions from 2014 onwards (11% in 2013, 17% in 2015, and 19% in the first half of 2015) .
* And lastly, Immunotec has succeeded to increase its operational profitability without having to decrease its cost of sales drastically.
Personally, I have found this brief comparative exercise interesting. I hope you find it useful, too.
(*) “Cost of sales” or “cost of goods sold“ is the total of the direct costs attributable to production of the goods at a company. It includes all costs of materials bought and used in the production process and also the direct labor costs. It does not include on the other hand, all other costs that are not directly linked to production such as distribution expenses or sales force commissions.
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