Avon calling! Direct-to-consumer sales, also designated as multilevel marketing (MLM) or network marketing businesses, have been around for ages. Does this distribution strategy—in particular, the circumvention of multibrand retailers—have positive or negative impacts on brand value? That’s the focus of a peer group analysis from MARKABLES that includes notable players such as Avon, Tupperware, and Weight Watchers.
Wide variety: The peer group includes 24 multilevel marketing businesses in six countries acquired between 2002 and 2015 with various product lines, including International Beauty (cosmetics), Rexair (vacuums), Silpada (jewelry), Herbalife (nutritional supplements), Ginza Stefany (cosmetics), and others. Revenues range from less than $1 million to over $1 billion.
Enterprise value multiples of these firms are rather low, with a median EV/sales multiple of 0.7x compared to 1.5x for nutraceutical or cosmetic businesses. As a result, the value of their intangibles assets is also lower. Average trademark royalty rates are 6.5% on net revenues for normal product distribution, versus 3.8% for distribution through multilevel marketing networks (see chart below). A plausible explanation is that customers often put more trust in the personal relationship with the distributor, while the trust in the brand name is less important. In general terms, a direct-to-consumer distribution system seems to have a higher total cost of distribution, although sales are made at higher-end consumer (retail) prices. Moreover, direct-to-consumer products seem to incorporate less technology, R&D, differentiation, and IP protection, making it more difficult to get approved and listed by major retailers. Long-term stock performance of corporations following a direct-to-consumer business model confirm these profitability issues.
MARKABLES, based in Switzerland, now has a database of over 8,200 trademark valuations published in financial reporting documents of listed companies from all over the world. The database reports value solely for the use of trademarks (not bundled with other rights).
Extra: MLMs face a special risk in that they can trigger regulatory scrutiny because of a business model that rewards participants for recruiting other sales reps. Under a recent federal settlement, Herbalife must pay $200 million and restructure its compensation structure to avoid being classified by the U.S. as a pyramid scheme.
