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Lularoe, Other Multi-Level Marketing Companies, and Bankruptcy Filings

posted by Pamela Foohey

Several days ago, Stephanie McNeal at BuzzFeed News published a short piece on Lularoe's intersection with consumer bankruptcy filings. I've blogged about multi-level marketing (MLM) companies' potential role in bankruptcy filings a couple times. So when BuzzFeed sent me a list of twenty-four chapter 7 and chapter 13 bankruptcy filings from the past two years in which the debtor listed Lularoe as a part of its DBA or FDBA, I was intrigued. Much of what I could glean from the sample of those petitions and schedules I reviewed is in the short piece. The debtors' reports of past years' income from their Lularoe businesses show a precipitous decline in income, some schedules include unsecured loans from online lenders (seemingly to fund purchases of inventory), and most schedules include a large amount of credit card debt. The debtors also are overwhelmingly married with children, and the couples together owe quite a bit in student debt (over $50,000 on average).

Of course, as the story notes, there likely are many more filings stemming, in part, from Lularoe businesses, and these cases very likely are not representative of all the cases. But it was interesting to review them nonetheless. Lularoe reminds me very much of Rodan + Fields and Herbalife, two other well-known MLMs. Which led me to run the same search that BuzzFeed ran for Rodan + Fields and Herbalife. 

Some background on why I thought I might find something similar in recent bankruptcy filings. Rodan + Fields is similar to Lularoe in that it targets women--and from what I can tell, particularly women with children--to become "consultants" who buy product for resale to clients. Herbalife has operated longer, and recruits men and women to sell its line of nutrition supplements. Lularoe currently is embattled in two class action suits, one alleging that it is a pyramid scheme, and the other alleging that LuLaRoe sold its "independent fashion consultants" subpar products that ripped like "wet toilet paper." Herbalife too has been called a pyramid scheme, and entered into a settlement with the FTC in July 2016 which required it to change its business model.

My findings, in short, are that there are significantly less filings identifiable by searching debtors' names, and thus much, much less of note discernable from the filings. I found six cases in which Herbalife was listed as a DBA or FDBA, and four cases in which Rodan + Fields was listed as such. As with the Lularoe cases, some debtors list inventory among their assets and have loans outstanding to online lenders (such as Lending Club) combined with large amounts of credit card debt. There are less married couples among the debtors, fewer homes owned, and less student loan debt. All of which, ultimately, does not reveal much. One might conjecture that Lularoe's MLM business model includes greater encouragement of its consultants to refer to themselves as businesses, which would increase the number of petitions found via BuzzFeed's method of searching. Or one might conjecture that there is something to the two class actions alleging lightning-fast market oversaturation and unsellable products.   

Comments

I have a particular interest in this topic since my wife is a consultant for Rodan + Fields. One angle by which MLM businesses could be analyzed as to their relationship, if any, to a debtor's bankruptcy is the issue of investment in inventory.

From what my wife has told me, LuLaRoe consultants are required to purchase inventory for resale as your post states. This inventory is often several thousand dollars. I believe Herbalife has a similar requirement that consultants act as retailers. Rodan + Fields is different in that it doesn't require its consultants to purchase and resell product. Instead, consultants either directly take orders or have customers place orders online. The company processes the orders, packages, and ships the goods directly to the customer. It also handles returns and refunds. This significantly reduces the burden on a consultant to participate in the business.

Having come from a wholesale and retail operations background, I am familiar with the burden inventory, and especially slow inventory, places on cash flow. The burden of tying up cash or credit in inventory may be a more fruitful avenue of analysis as to why MLMs may be connected to bankruptcies rather than the simple fact of a debtor participating in one.

I hope you will continue this interesting area of study and look forward to your findings.

MLMs just don't load up their forces with inventory. They also burden them with a sign up fee, monthly online access fees, marketing/training material fees, and seminars, conference and convention fees. Those are in addition to creating clients of the reps themselves, where buying their own products or services is encouraged as a sign of loyalty.

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