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Out of the Box

Malibu entrepreneur Diane Prince Johnston wants to be the next Mary Kay Ash, the late founder of the Mary Kay Cosmetics empire.

Taking the in-home, multilevel sales model pioneered at Mary Kay, Johnston, founder of apparel company Winnie & Kat LLC, has spent the last few months recruiting salespeople – or stylists, as she calls them. They host home “trunk shows,” named for the trunks vendors traditionally hauled to carry their wares. Now, in a contemporary twist to the business model, she’s rolling out an e-commerce program to enlist a bevy of fashion bloggers to help her pump up interest in the clothing line.

The effort, she said, is not solely about sales but also about Internet influence.

“I believe the core of this business is in the person-to-person sale at the home trunk shows,” she said, “but social media is a great way to solidify the sales relationship and get the word out.”

A multilevel marketing business, Winnie & Kat pays its independent sales force by commission and encourages stylists to build sales teams of their own for further compensation. The e-commerce program will afford fashion bloggers, several of whom participated in a mock trunk show at her Malibu home last week, the same opportunity virtually.

Sales staff in multilevel sales programs are expected to sell their products direct to consumers, generally through personal relationships. The salespeople, who pay a fee for the right to represent the brand, are also compensated for recruiting other salespeople. This has led to criticism that the structure encourages recruitment over actual product sales. Perhaps the most successful example of multilevel marketing is downtown L.A. nutritional supplement company Herbalife Inc., which has lately been fending off accusations from a hedge fund manager that it is essentially running a Ponzi scheme.

Johnston said she’d heard the criticism of the business model and was initially skeptical, but warmed to it after learning that direct-sales concepts like hers had recently garnered significant investment interest.

Menlo Park venture capital firm Sequoia Capital, for example, invested $37 million in San Bruno jewelry company Stella & Dot LLC in 2011 for a 10 percent share of the company. New York investment firm Irving Place Capital, along with New Canaan, Conn.’s J.H. Whitney & Co., invested in Rancho Dominquez fashion company Carol Anderson by Invitation LLC.

Thus far, however, she is financing the business herself with proceeds from the 2011 sale of Workway Inc., a temporary staffing company in Glendale she took over in 2009.

“I started to realize how much direct selling had changed,” she said. “The more I learned about it, the more I realized there’s so many people who love it and who are open to the opportunity.”

But running a successful direct-sales business – particularly one that sells trendy clothing – requires more than overcoming the stigma associated with the industry.

Paul Zaffaroni, a director at Newport Beach investment bank Roth Capital Partners LLC, said direct sales is a nice alternative to department stores for an emerging clothing brand, but the strategy can be risky. Unlike a wellness product that’s consumed daily – like those sold by Herbalife – clothing can be a tougher proposition.

“What’s nice about nutritional products or cosmetics is they’re consumables. You like it, you use it up, you need some more,” he said. “With fashion, you need to keep coming up with something new. Maybe your customers liked last month’s collection, but you run the risk that they don’t like this one. It’s a lot easier to build loyalty with a direct selling model if you have something people consume regularly.”

Entrepreneurial power

A newly divorced mother of three, Johnston got into the direct-sales business in 2011 because she wanted a flexible work environment that allowed her time with her daughters. She also was looking for an opportunity to empower self-motivated women.

“I love direct sales because it allows me to create a business and feed my love for entrepreneurism while mentoring women through fun and fashion,” she said.

She named the clothing company for her mother and cousin who both died of cancer.

Winnie & Kat sells knitwear ranging from T-shirts to cocktail dresses for moderate prices, from $29 to $139 a piece. It’s one of a few clothing companies to join the $31.6 billion U.S. direct-sales industry in recent years. The industry is dominated by companies selling wellness products, home goods and – increasingly – services. Still, apparel and accessories have slowly been gaining market share. The Direct Selling Association in Washington estimated that apparel and accessories last year made up about 12 percent of industry sales, up from 10 percent in 2008. Wellness products, the largest direct-sales category, accounted for about 27 percent of industry sales last year.

Winnie & Kat’s products are designed in-house and manufactured both in downtown Los Angeles and Hong Kong and, like any fashion house, the company will have two major collections a year with transitional items between. To join the sales force, stylists pay a $199 membership fee and receive a business kit that includes clothing samples, order forms and marketing materials. The membership comes with an individualized e-commerce website as well as online training and coaching. They also participate in weekly conference calls.

Members of the sales team don’t carry any inventory, just samples they purchase at a discount each fashion season. The stylists take orders, addresses and payment information from customers at sales parties then input it all in an online system. Johnston and her three employees process the orders and ship the clothing, usually within three days. Still in its infancy, the company is storing its goods in Johnston’s garage, but she said she has a contract with a warehouse company in Ontario that she’ll use once orders scale up.

At this stage, Johnston places small orders for each item of clothing – usually between 150 and 300 units – and determines its retail price based on manufacturing costs.

The courtship of fashion bloggers, who have the ability to reach many more potential customers than a simple word-of-mouth approach, is another key component of Johnston’s plan. She’s giving bloggers the opportunity to join the sales force for a lower membership fee of $79. They don’t get samples, order forms or marketing materials, but get the same digital support that the other stylists do. The bloggers are then compensated with a percentage of the proceeds from their online sales.

Johnston said stylists are paid up to 30 percent of the sales price of each piece they sell and for sales that each member of their team makes.

Johnston, who just wrapped the company’s second season, would not say how much revenue the company has generated so far or how many units it has moved. She did say that she expected to be profitable by the end of the year.

The company launched with 14 stylists and now has 47 in 16 states, including recent additions in Michigan, Virginia and New Jersey. Still, the company has a long way to go. Just short of 1,000 “likes” on Facebook as of last week after six months of operation, Winnie & Kat needs to keep pumping the social media side of the business.

Social selling, Johnston said, will be the key to the success of the business.

“One of the benefits of this type of shopping is that you’re shopping from your best friend’s living room,” she said. “It’s a girls’ night out; it’s social selling. That really, to me, is the core of what makes this business so special.”

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