Made to Measure: J.Hilburn Gives Direct Selling Some Style
Most start-ups begin with a product idea, and the business model follows--in the case of tech start-ups, sometimes years and millions of users later. J.Hilburn is the opposite.
In a story that's now enshrined in the company mythology, Hil Davis was reading The Warren Buffett Way on a plane about six years ago when he came upon a passage in which the legendary investor said that his best investment ever, dollar for dollar, was not Coca-Cola or American Express or Geico but the direct-sales kitchen-equipment company The Pampered Chef. In fact, Davis learned, Buffett owns several other direct-sales companies, under the umbrella group Scott Fetzer Companies.
"My first thought was, That makes no sense. Direct sales? That's a dirty word," Davis remembers. But Buffett was his hero, and Davis found himself preoccupied with figuring out what he had missed about the model. Davis, who talks in a high-speed mashup of business jargon and good-ol'-boy charm, was 33 at the time and working in investment banking as an equity researcher, a job that paid him the very handsome salary of $1.4 million. "I loved equity research," he says. "I loved the chess game, the math behind it." Partly, his deciding to examine direct sales in depth was just a way to channel his excess business geekery. It was a puzzle that demanded solving. But he was also restless.
"I was traveling about 150,000 miles a year," he says, "and I thought, Is this really how I want to spend the next 20 years?" He had long thought that he might want to be an entrepreneur one day, and he wondered if Buffett's enthusiasm for direct sales might signal an opportunity. He read a book by the founder of The Pampered Chef, Doris Christopher, and started making a list of the pros and cons of direct sales.
The cons were that direct-sales companies typically end up selling low-end products, which forces the sales reps to chase high volume and be pushy and forces the companies to pay high commissions. "And the culture is just recruit, recruit, recruit," Davis says. Direct-sales companies are notorious for churning through salespeople, who in the worst-case scenario end up with closets full of unsold goods that they had to buy up front.
The most obvious pro was low capital expenditures--you're not building physical stores or restaurants, and you don't have to pay for customer acquisition up front. Less obvious, but intriguing, was direct contact with customers. That could work well in a luxury-product category that requires high-touch service, Davis reasoned. With a higher price point, he could pay lower commissions and deliver greater value to customers, while his reps could nonetheless make more money.
Davis had covered the retail and restaurant industries as an equity researcher, and that experience led him to two other critical insights. First, he recognized some of the same dynamics in direct sales that he had seen in restaurant chains. This is just franchising on steroids, he thought. What if you could bring to direct sales the things that good franchise businesses do well--build great processes and training and efficient systems and a strong brand identity?
