Why LuLaRoe can be a tough sell for its many salespeople

Multilevel marketer LuLaRoe, which is battling two federal lawsuits and complaints about the quality of its brightly colored leggings and other fashions, is proving to be a tough sell for the company’s 77,491 independent consultants.

According to internal LuLaRoe data shared with CBS MoneyWatch by two sources, more than 70 percent, or 55,571 LuLaRoe representatives, sold less than $5,000 worth of retail goods in February. About 3,700, or less than 5 percent, reported more than $10,000 in sales. In addition, 6,579, or 8 percent of representatives, sold nothing and ordered nothing.

“What we find over and over and over is that a negligible amount of retail sales are actually happening,” said Tracy Coenen, a forensic accountant and critic of the multilevel marketing (MLM) industry, who has raised questions about LuLaRoe’s business practices. “You don’t know if they profited,” she said, “or if these people [at LuLaRoe] put all of their so-called profits back into buying more inventory, which is what is encouraged.”

The sources’ information doesn’t indicate how many consultants are profitable, and a company spokesman declined to address the issue. Current and former LuLaRoe representatives have told CBS MoneyWatch it would be difficult to earn a return on $5,000 in sales and that $10,000 in revenue isn’t necessarily a sure-fire profit either, given operating expenses, inventory and taxes. They declined to be identified by name out of fear of reprisals by the company.

One area where LuLaRoe has excelled is recruiting new consultants. As of July 2016, the company had about 26,000 consultants, indicating their ranks have nearly tripled in less than a year. That development is proving to be problematic for some consultants, who say they’re losing sales to their new rivals. 

One consultant told CBS MoneyWatch her weekly sales have fallen from between 35 to 40 items to about 5 to 10 items. Such cannibalization is common at MLMs.

“Unlike traditional franchising or even traditional single-level direct selling, the MLM model is an all-against-all competition,” said William Keep, dean of the College of New Jersey’s College of Business, in an email. “That will likely result in either a decrease in the selling price to nondistributor customers (and, therefore lower margin for the distributor), or efforts by the company to limit competition (e.g., limit sales on eBay, use only company websites, etc.), or both.”

LuLaRoe declined to address the data obtained by CBS MoneyWatch, but it defended its business practices. A source close to the company argued that one month’s data doesn’t give a complete picture of its financial performance and that demand from consultants can fluctuate.

“LuLaRoe provides our Independent Retailers with the freedom and flexibility to run a business on their own terms and strengthen their families in the process,” LuLaRoe said in a statement. “The strong success of our business model is why the vast majority of Independent Retailers who have joined our community continue to sell LuLaRoe products, and why many more are in line to become new Independent Retailers.”

Critics of MLMs such as Amway, Herbalife (HLF) and Mary Kay Cosmetics have argued for years that most people don’t turn a profit on the investment opportunities that are being sold, which the industry has repeatedly denied. According to the Direct Selling Association, a trade group, more than 20 million people were involved in the industry in 2015 with “estimated retail sales” of $36.12 billion.  

LuLaRoe, founded at a kitchen table in 2012, is facing lawsuits for collecting sales tax in states that don’t charge such a levy for sales of clothing and for allegedly stealing a lion design used on one of its leggings. The Corona, California-based company has acknowledged the sales tax problem, which it blamed on a former vendor, but it hasn’t commented on the infringement case. 

Founder Deanne Stidham named the company after her three oldest grandchildren, Lucy, Lola, and Munroe. Her husband, Mark Stidham, is LuLaRoe CEO. 

Thanks to growth fueled by social media, LuLaRoe sales have soared 600 percent to around $1 billion as of 2016, according to details released as part of the suit regarding its tax practices. That would make the privately held firm one of the country’s largest MLMs. LuLaRoe has declined to comment on the figures in the suit.

An MLM “is not comparable to any other business,” said Robert FitzPatrick, president of Pyramid Scheme Alert, a critic of the industry, in an email. “It’s not retail-based. It’s not based on consumer demand. LuLaroe competitors aren’t department stores but rather only other MLMs. The heart and soul of this business are its pay plan and the masses of people enticed by the ‘endless chain’ income promise, which is illusory on its face.”

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.