Amway Quixtar Business Myths

AmQuix - The Economic "efficiency" Case

Many distributors promote Amway as the up-and-coming trend in the distribution of goods and services that revolutionizes the efficiency by which goods and services are distributed.

Paul Zane Pilzer, the noted economist and author, notes the terrible inefficiencies in the distribution of goods and services in his excellent tape "Economic Paradigms", and in his book "Unlimited Wealth". He notes the significant differences between the manufacturers sales price and the price it is finally sold to the end consumer. Paul states that a "$100 product, at a retailer, has a selling price from the manufacturer of $15". $85 of the price is associated with distribution. In my own industry, automotive components, the market price of a fuel injector from the manufacturer is around $8. The same injector can cost upwards of $65 at a dealer. A $125 Anti-lock brake hydraulic modulator costs $1000 as a repair part.

Paul notes many changes that have taken place in the marketplace and describes how businesses which, provide useful services to the "marketplace or economy", flourish and grow. Paul notes the recent success stories of businesses today that only work at increasing the efficiency of distribution. Businesses such as Wal-Mart, Federal Express, Electronic Data Systems are examples he sites.

Paul says that today "making things is no longer a key to success". "We have so lowered the cost of manufacturing products because of technology", that there are few gains to be made in trying to make the product cheaper. The area of opportunity is the distribution. Here is an example in my industry, with a fuel injector. It will be far easier to reduce the price of an injector by $3 by finding new efficiencies in distributing the injectors. There is $57 to work with over the factory cost ($65-$8) where there is only $8 in total factory cost. The manufacturer would have to reduce his costs 36%. The distribution system only needs to reduce costs by 6%, to reduce the price $3. The guy who is going to get rich is not the guy who can make a $5 injector, but the one who can buy a $8 injector and distribute it more efficiently and sell it for $40. The investment needed to make a $5 injector would be over $30 million, whereas little investment would be needed to get $3 out of the distribution chain.

Paul notes "one of the wealthiest men in the world, who recently passed away, made his whole living finding better ways distributing goods and services, Sam Walton of Wal-Mart".

Paul goes on to note retailing. "Previously retailers taught you about new products and services that will improve your life". Today, it is not uncommon for you to walk in a Wal-Mart or mass market store and find you know more about the products than the clerks do. Recently, I was in Office Depot looking at the computer accessories. The clerk said he had a customer who needed a modem for the computer, and asked me what he needed!

Paul notes that there is a need for an educational system to educate consumers about new products and services which will improve people's lives, but which are too technical for a Wal-Mart to distribute. Notice for example how long it took Wal-Mart to distribute computers. PC's were around for 10 years before Wal-Mart carried them. They were just too technical, and people had to have their hands held. Not so today, the customers know more than the clerks do. Paul notes that "there is one little company fighting to change the education in retailing it, but it is just too small, and that company is Amway".

Paul states that "the retail market in the America is $717 billion." "Little old Amway has gone from $3 last year to $4.5 billion this year". (Applause on the tape) Paul says "wait a minute, no applause, I will take it when you are $30 billion, which will be in several years. But, think how meaningless $30 billion is when shopping centers who don't educate the consumers can do $717 billion." Paul says "so I will take your applause when you are at $30 billion because it will tell me then you are on the right direction to dealing with the bottle neck we have in retailing, which is educating consumers." "You are the only ones doing it and that is why every manufacturer of new products and services is lined up in Ada Michigan saying, please take my product and service! "(Huge applause!) Paul states, "the problem is volume. But you really need to grow in a significant way".

Firstly, Paul, who is a noted economist, has not stated that Amway is a more efficient method of distribution! He only states that "Amway is the only company who is providing the education function about new goods and services". If he thought it were a more efficient system he would have surely said so. He would not have referenced Wal-Mart as the company that has brought retail prices so low that consumers have more money to buy "new goods and services" which are hitting the market. It is interesting to note that the only product Paul references, as being too complicated to market at Wal-Mart is Amovx. Amwox is the voice messaging and forwarding system used to communicate in multi-level-marketing environments. The general consumer has no real application for such technology. Couldn't Paul have picked a product which isn't "internally consumed" in running an Amway distributorship? If the real, economic value of an Amway distributor is to educate the consumer, isn't there one other product Paul could have picked that the Amway distributor could market to one of his retail customers?
Secondly, Paul flat-out states that the growth-rate and size of Amway is not where it should be! Since he is a paid spokesman for the distributors, he will not come out and say that the growth is not where it should be, because the market does not value the service it performs to the economy! Paul also does not elaborate on where the growth from $3 to 4.5 billion in sales came from. He compares the combined international and US sales of Amway to the domestic US market of $717B and that those numbers are tainted by Amway's 30% inflated sales numbers using "estimated retail". How much of that $1.5 B growth billion came in the USA? How much was from Japan, or from totally new international markets? Again, Paul is a numbers guy, and not to make his employers mad, he didn't come out and say most of that increase was overseas, in brand new markets!
Thirdly, Paul clearly states that the jury is still out on Amway. If Amway were $30 billion today he would be impressed! Amway has been in business over 40 years. Wal-Mart has grown in fewer years to be over 58 times that of Amway, using corporate sales to distributors in the US. Here I must point out that there are several times more self-consumption by Amway distributors than there is retail selling. Corporate sales to distributors, is a better number for sales comparisons. Paul is saying that based upon today's sales and growth rate that Amway is not the most efficient means of distribution. Amway is a niche player who can capitalize on the educational side of retailing.
Paul states that many manufacturers are lined up at Ada Michigan wanting them to distribute their products. It is not only because Amway may provide better consumer education, but it is also because they have a large captive audience in their distributors who, robot-like buy everything and anything from Amway to add to their points to try to make the next sales level. The manufacturer knows that he can probably sell his product at a higher margin to Amway than to Wal-Mart, since the Amway customers are less price conscience than Wal-Mart shoppers. The manufacturer can thus be assured that a portion of his output is being sold at attractive margins.
Fourthly, Amway could very well become the next trend, and "volume and growth will evidence it in a significant way". The data prove and Paul confirms that it is not the trend today! Reviewing Amway sales data, and distributor counts on a yearly basis could identify a change of trend. The same methods are used by businesses looking to enter new markets. See Amway the business case. You need to be in this business if the volume and growth were to increase in a significant way! IF growth really takes off, that means the marketplace and the economy have accepted the Amway method of distribution as a better method. They will be voting with their "economic dollar votes"! The potential for stealing market share from the $717 B existing market is a tremendous opportunity, when and if it is better method! Having accurate Amway sales data will allow you to see the change in trend and jump on board when the opportunity takes off.
Paul notes times in history where the revolutionary thought has been laughed at, and repressed. Galileo was almost burned at the stake for proposing his theory that the planets revolved around the sun. Henry Ford was laughed at for people not seeing the need of automobiles. Fred Smith received a C in business school on his proposal to have a delivery service that specializes in overnight delivery. Amway is laughed at too. Distributors point to these examples and say "see, they were laughed at too, but all the laughers were wrong. Just wait we will prove you wrong too". Galileo could prove his theory with numbers. Henry Ford proved his success via sales growth numbers. Fred Smith was correct as evidenced by sales growth at double-digit rates. Wal-Mart was proven right by its many years of 30%+ annual growth rate in sales. The difference with Amway is that they have been in business now for 40 years. The numbers already exist, and the growth in the USA is not spectacular considering that there have been significant contributions in sales from overseas operations.

So does it make sense to get in now to hope and wait that the economy and market will someday embrace the Amway method of distribution and make it the next Wal-Mart? That is a decision you will have to make. Certainly there are successful people in Amway today, but they make more from selling books, tapes and seminars than they do from Amway performance bonuses. Just because tremendous growth is not there, and there is no real efficiency added to the economy by it, doesn't mean some people aren't making a little money at it. You just need to weight the effort with the potential payoff. I would rather go with the flow rather than fight the tide. If one finds the Amway business hard to grow, maybe it is because the market hasn't seen an economic need for the "Amway business concept". If the business grew because it was such a great method and the "economy embraced it" as evidenced by quick growth, do you think so much effort and expense for motivation would be needed? Wouldn't the sheer growth, and solid profits be motivation enough to keep one going? Maybe books, tapes and seminars are the nutritional supplements for the Amway business concept as there are vitamins and mineral supplements for the food we eat today. We wouldn't need vitamin and mineral supplements if we ate the proper food groups, and the soils from which our food comes were not depleted (so I have been told). If the Amway business concept were loaded with advantages and efficiencies for the economy, all these "motivational supplements" would not be needed either.

I would personally play Amway like successful stock market company pickers. Companies have three phases: 1) infancy 2) growth 3) maturity. As many companies fail in infancy, it is very risky to place all your capital in these type companies. The second biggest money is made in the growth phase, and it is less risky as the market has excepted the product or service and is rewarding the company with exceptional sales growth. The third phase will be less profitable, but with lower risk. The best stock pickers pick the growth phase. You get on when the growth accelerates, and get off when it flattens out.

So where is Amway after 40 years? Is it still in infancy waiting to be discovered? Did it already have the fast growth in the USA and is already saturated, and now is reproducing itself overseas?

Why doesn't Amway publish detailed data on the business?

I don't know why they don't, other than guess they never want bad numbers to be used against them. They are of course a private corporation and they are not required too. Either their marketing department is totally clueless or they don't have great things to say about their growth and retention rates in the US. Let's say the sales data by country were available. One could calculate year-over-year percentage change in sales. If the latest US year-over-year percentage sales changes were say 15% one year, the next was 20%, the next 25%. You could quickly conclude that there is good growth and you could enter the business. You would expect to grow quickly with the market, since "all boats rise with the tide". Now if the Amway marketing department can't take advantage of information like this, and have it passed around so everyone can see, then they are total Buttheads and should be fired!

If on the other hand the year-over-year sales growth for the US market was 3-5%, then you can conclude that there is nothing-new going on here. The sales growth might be attributed to only inflation, and introduction of expanded product lines! With these level of "market excitement" about Amway you can expect it will be very tough to grow your Amway business or to even maintain it. Probably as many distributors are signing up as are quitting if sales are growing slowly. If sales are flat, and there are new Diamonds and Directs being "minted" every day, then it means that others are falling out of qualification from their previous status. Ask Amway for the number of requalifying Directs, Emeralds, and Diamonds. They will only tell you about how many new ones are being made, and not the total requalifying every year. If the Amway marketing department were to publish historical information showing flat sales, and high distributor turnover, then again they would be total Buttheads and should be fired!

The Amway business model is sold as having great advantages, low overhead, no employees, no inventory, large product selection, low risk, but this is of little use if the market and economy don't embrace the idea. It would be the same as buying products from Wal-Mart and trying to resell them on your own. What sense does that make?

Amway has had 40 years and millions of ex-distributors to try to prove their point. If Amway is so great, why have many more people quite Amway than are in today? What major thing do they probably lack as to why they are not a bigger part of our economy? In the end the market decides who is best by who is the most efficient.

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