Comparing various direct selling companies’ figures gives a good picture of how they differ in their operations. It is possible to see the areas where one company is stronger than the others or the areas where another is placing more emphasis on.
This week we will take a brief look into the cost structures of 13 public global direct sellers as they reported at the end of the first nine months of 2015. We will see how the breakdown of costs varies from one another and also the implications on the profitability.
Cost of Sales (CGS)
On the product cost side, RBC, Youngevity and Avon have the highest figures. They are all at or above 40%. Being below 20%, USANA, Mannatech and Herbalife on the other hand, have the lowest cost of sales.
Distributor Commissions (DC)
Distributor commissions is another interesting area to look into. For one thing, it is a major expense item for all direct selling companies. But just as important as this, the compensation plan which is the engine generating this expense is a strategically important part of this business. From the chart, we see that NHT Global, USANA and Nu Skin are the three companies with the highest payout ratios. RBC’s commissions payout though, is way below than all others. This comparison as you see on the table is not complete because not all companies report their commissions expenses as a separate item (those marked as “n.a.”).
Other (OOE) and Total Operational Expenses (TOE= DC+OOE)
From the total operational expenses point of view, Reliv ranks the first place on the high end. Natura has the lowest total expense and the difference between these two is an impressive 28% (Reliv: 81.8%, Natura: 53.8%). NHT Global has a distinct stand here as it manages its business with extremely low operational expenses (12.9%). Youngevity’s figure is just as interesting (15.5%).
Operating Income
Among the 13 companies analyzed, all but two report operational profits. RBC and Reliv post losses here.
Net Income
Moving from here to net income that includes non-operational income and expenses (ex. interest gains or losses and taxes) as well, Avon and Youngevity join the above two that make losses.
Few final notes on this:
• Avon’s high net loss mainly originates from, as they report, “the negatively impacted effective tax rate by additional valuation allowances for deferred tax assets”.
• If both RBC and Reliv manage to run their business a little more efficiently in terms of lowering their other operational expenses, they can easily start generating profits.
• If Youngevity can lower its cost of sales, it seems it will post profits, too.
Great article thank you. Its interesting how many people prefer to believe in feelings than numbers.
Thanks, Dalibor! Appreciate it.
Hakki Ozmorali
The numbers that you post are interesting, but your analysis is almost meaningless. You continue to post these articles looking for insight, but you build a framework that completely misleads the reader.
The reason for the big swings are the differences in compensation plan payouts. Avon, for example, is more of a directs sales model and pays out very little comparatively because they expect their distributors to make money off of retail markup. Network marketing companies such as NuSkin and Usana have much higher commission payouts which reduces the COGS as a percentage of sales. Commissions paid should be stripped out of the equation because they completely skew the numbers.
For example, lets assume that I have a product that costs $4 to produce. Let’s also assume that all of the other costs incurred by the company in producing and selling this product (excluding any compensation or incentives for distributors) is approximately $6.
If I expect my distributors to make their commissions only from their markup, I will sell this product for $10, and my COGS are 40%.
If I claim to have a 50% payout, I will sell the product for $20, and my COGS will be 20%.
If I claim a 75% payout, I will sell the product for $40, and my COGS will be 10%.
Note that nothing changed except the price I was forced to charge because of the payouts I have assumed. The company profitability is exactly the same. This is why the analysis makes no sense without stripping out commissions. This is also why MLM companies typically have such a bad name. They charge exorbitant prices to captive audiences in order to pay for untenable commissions. In a retail environment, the product would sell for $10-17, depending on the layers of distribution.
Thank you, Gregg!
The whole idea behind this article was to enable the readers to see some striking differences between various direct sellers’ income statements.
There are three major sources of expenses here: Product costs, commissions, and other operational expenses. So, if a company pays a high percentage of commissions and cannot reflect this on its selling prices, obviously the other two items’ shares would be lower. And if that company retails its products to end-consumers as it is expected, it should not be so easy to play with the selling prices, too.
That being said, I tend not to agree with you that the commissions should be left outside of the equation and that this brief analysis is meaningless or misleading.
I appreciate you for taking the time to put your views forward.
Hakki Ozmorali