Forbes Magazine - Cleaning up March 25, 1985

By Richard Behar

Patriotic and evangelical fervor helped Amway to the top in direct soap sales. But it isn't working now. There's a new message.

Something has been going wrong at Amway Corp. Amid clear signs of a serious sales slump - privately owned Amway won't give hard numbers - half the top executives have been fired or emoted or have quit in the past year. Some key distributors have sold out. Even Rich Devos co-owner and spiritual leader, has sounded worried about abuses and has brought in a former White House aide to clean things up.

Amway, based near Grand Rapids, Mich., is second only to Avon Products in direct sales and claims 1 million "distributors." but a former officer says corporate revenues which peaked in 1981 at $1.2 billion, are now below $800 million, including a barely profitable radio network (Mutual Broadcasting), a new and cash-draining Grand Rapids hotel and a money losing Caribbean island resort. Otto Stoltz, and Amway executive vice president says sales have dropped but are more than $800 million. (The Amway owners, DeVos and cofounder Jay VanAndel, wouldn't talk to Forbes.

More important, internal company reports imply that the domestic recruiting of distributors, the salesfolk who sell and also use the gods (mostly household cleaners and toiletries), is down from an average of 50,000 new applications per month in 1982 to about 16,000 a month recently.

On the legal side, last year the company pleaded guilty to customs fraud (undervaluing its goods) in Canada, paid $20 million in fines and still faces $80 million in civil penalties. But a bigger question is the pyramid issue. In a pyramid selling scheme, the real profits come not from selling products but from selling distributorships. That can be illegal.

Amway is not a pyramid, and FTC judge, ruled, in 1979. But some of its independent distributors apparently have turned their groups into pyramid-like operations. Known as "black hats," these middlemen push their recruits to consume Amway goods, skip the retailing and buy large amounts of non-Amway peripherals (tapes, books, suits, jewels, and even tickets to motivational rallies).

Dexter Yager, for example, a one-time beer salesman from Rome, N.Y., is a distributor whose "downliners"- distributors downstream, who generate commissions for him-account for perhaps a third of Amway's direct sales volume. He guesses his non-Amway tape-book-rally business brings two-thirds of his annual income-roughly $1.5 million. But, his being named, along with Amway and other defendants, in a lawsuit charging abusive sales practices, he insisted he has never coerced anyone into buying anything. "I'm just a free enterpriser who has built one of the largest organization in the country," he says.

But the non-Amway items count for a lot. Says Don Gregory, Van Andel's former speechwriter, "Recruits are brainwashed into spending a fortune on peripherals while consuming Amway products. They either lose their shirts or begin making money by getting enough people underneath to do the same."

A company official says that about 35% of its products are consumed by the sellers themselves. But Charlie Marsh, one of Amway's ten largest distributors says roughly 60% of his volume is consumed by his own sales force. And he thinks he's doing more actual retailing than anyone else.

Last year DeVos and Van Andel brought William Nicholson, former president Gerald Ford's appointments secretary, to reorganize Amway. Nicholson says the firm is cleansing the sales fore and there is a new approach, downplaying evangelism and cultism and emphasizing real sales training instead. Amway is also moving into higher-priced items - a $250 water filter kit is the latest - as well as contract manufacturing of name-brand goods for other companies (e.g. Topol toothpaste) to keep its factories working..

Meanwhile , some of the big distributors are unhappy enough to quit. Last September Robert Crisp of Tulsa sold his organization for about $600,000. Crisp said his downliners generated as much as $120 million in Amway sales, providing him with an income averaging $200,000, but the business had fallen over 30% from its peak 1980.

Robert Stonelake of Marina DelRey, Calif, a 20 year Amway veteran who served 6 years on the companies distributors association, says he sold his operation, with nearly $90 million a year in sales, in January for $325,000. he claims his income dropped 40% from the $175,000 peak in 1981.

Critics of the operation say DeVos and VanAndel failed to crack down hard enough on the black hats and that now they have trouble controlling them because they account for maybe half of the business.

"A distributors shakeout years ago would have helped Amway, " says Noel Black, 1 14 year executive who recently left as head of international public affairs. "But they have yet to throw out any major distributor who is violating the rules".

Will Amway clean house? There are signs that it may. "I do not wish to control your actions, your day-to-day work, but I don't want anybody else out in the field controlling them for you either, "DeVos has told distributors. "I need your help, folks. We must clean it up." Will a different Amway make the same old profits? Ah, that is even less clear.

 

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