Pyramid or no, this one's a moneymaker

James and Loren Ridinger of Miami Beach have become multimillionaires through their international direct sales company, Market America.

The Miami Herald/February 15, 2004
By Christina Hoag

More than 17,000 people from as far away as Australia poured into AmericanAirlines Arena this weekend, spending about $1,000 each to be fired up with James H. Ridinger's passion -- and formula -- for making money.

But Ridinger is largely a stranger to his South Florida neighbors, who know little about him except that he lives in a sumptuous $6.7 million Miami Beach palazzo and cruises in a $3.6 million yacht. ''People wonder what we do,'' said Ridinger's wife, Loren, 34.

The Ridingers, who unabashedly display a penchant for multicarat diamond jewelry, head Market America, a direct sales company with about 100,000 representatives peddling thousands of products in the United States, Canada, Australia -- and soon Taiwan. The company's 2003 wholesale sales totaled $191 million, retail sales $280 million.

''We're expecting 20 percent growth this year,'' said James Ridinger, the 52-year-old salesman turned multimillionaire who founded the company in 1992 in Greensboro, N.C., where it's still based. ``We thrive when the economy is unstable because people are looking for Plan B.''

The Ridingers -- James, known as ''JR,'' is president and chief executive, while Loren is senior vice president -- oversee the 300-employee company from the North Bay Road estate, called a ''training center'' in the company's annual report.

Market America's exponential expansion hinges on a controversial business model known as ''multilevel marketing'' where each sales rep is required to recruit others. In some cases, the system becomes a ''pyramid scheme'' when sales are largely based on self-consumption by new recruits, who must recruit others to in turn buy the products.

Ridinger takes pains to distance Market America from multilevel marketers. Yet he knows that the company is technically considered one.

''We live with this stigma of having evolved from multilevel marketing,'' he said. ``But our model is based on accumulating customers.''

The company's 500,000 ''preferred customers'' are a key element of Ridinger's strategy. Besides placing monthly orders for products, these clients take umpteen surveys about products. Market America mines the data to come up with new merchandise that has a ready client base.

Example: After surveying whether pet owners would buy animal vitamins, Market America developed an anti-oxidant pet formula. It's now a top seller.

Market America plugs a wide array of items -- auto lubricant, long-distance phone plans, water filtration systems, flowers, gourmet coffee -- but doesn't make any.

Its star sellers by far are nutritional supplements. Another hit is anti-aging products. Seeing demand, Market America contacted the American Academy of Anti-Aging Medicine in Chicago, a top researcher in the field, to develop an exclusive line.

Robert Goldman, academy co-founder, said he chose Market America out of many offers because the products lend themselves to direct sales, where a saleswoman can explain the science behind the product.

''This is something that the more people learn about it, the more they want it,'' he said. ``You put it on a shelf in a store and no one's going to explain it to them.''

Distributors of the anti-aging line are required to buy Goldman's book (five for $25) to give away to customers, according to company literature.

Ridinger is honing his strategy into what he calls ''mass customization.'' That means tailoring products -- clothing, vitamins, websites, cosmetics -- to the individual.

''Customized products have huge potential, and I think we're starting a paradigm shift. In 20 years, one-to-one marketing will become the main thing,'' Ridinger said enthusiastically.

A high school athlete from a middle-class New Jersey family, Ridinger has spent his career in direct sales. He was studying for a graduate degree in biology when he signed up as a salesman for one of the biggest -- and most criticized -- multilevel marketers, Amway.

He went on to become a direct-sales consultant. According to the North Carolina attorney general's office, he was involved with running American Gold Eagle, a Greensboro-based multilevel marketer that sold gold and silver coins.

Authorities in several states shut down the company in 1990-91. No one was charged, but company founders David and Martha Crowe went on to found a gold-based scam that landed them in prison for fraud after they were arrested in Key Largo.

In 1992, Ridinger, his wife and her brother, Marc Ashley, 33, now chief operating officer, launched Market America in their Greensboro basement.

'High-Quality'

The company now operates out of a $7 million headquarters and high-tech warehouse in Greensboro. University of North Carolina-Greensboro marketing Professor Lew Brown described the facility as ``a high-quality distribution center.''

Loren Ridinger recalled their first product line -- jewelry -- didn't work. ''We quickly found out it wasn't consumable,'' she said.

The company moved into personal-care and other products and mushroomed, thanks to the tiered recruitment system.

In 1994, Ridinger took the company public through a reverse acquisition in which he bought a shell company as a vehicle to trade Market America's stock and started selling shares without disclosing his interest in the company.

Four years later, the Securities and Exchange Commission fined him more than $400,000.

''I was naive,'' Ridinger said. ``We didn't want to put a lot of money into an IPO, and an IPO normally becomes the company's focus for a year. [The reverse merger] seemed like an easy shortcut.''

On top of that misstep, Wall Street wasn't interested despite the company's soaring cash flow. The stock price largely languished between $3 and $4.

Multilevel marketing ''is a bizarre business,'' said Mario Cibelli, managing member of Marathon Partners, a New York investment firm that bought a 15 percent stake.

''It's not necessarily the most sustainable business model. Eventually, they'll be challenged for growth,'' he says.

Risk Remains

In its proxy statement, the company noted its risk as possible changes in regulations that could cause the company to be considered a pyramid scheme.

Despite that, Cibelli said he liked Market America. ''They were a well-run business, a cash machine,'' he said. Ridinger ''seemed pretty solid and honest.'' In 2002, the company posted $23.4 million in net income and had $64.8 million banked in cash.

Fed up with pressure to pump up the stock price, Ridinger spent $30.2 million in 2002 to buy back the outstanding 18 percent of stock, offering $8 per share.

Detractors of multilevel marketing say the model means Market America will eventually collapse and leave a lot of starry-eyed people in the lurch.

Robert FitzPatrick, president of consumer awareness group Pyramid Scheme Alert, calculated the company has run through at least 236,000 recruits since 1998, using figures in the company's 2000 annual report and the 30 percent average drop-out rate.

''This could not go on forever,'' he said.

He also disputed the company's website claim that distributors can achieve ''financial independence.'' FitzPatrick calculated the average sales per seller as $1,671 in 2000, or an average gross profit per seller of $835 if they mark up each item 50 percent. (Ridinger said the suggested mark-up is 45 percent.)

''How do you really make money, then? By recruiting a down line of sales reps in pyramid fashion,'' he said.

Ridinger said the company's growth is unlimited because it continually adds new products that can be sold to existing and new customers.

Market America is not a full-time job for the vast majority of sales reps, Ashley said. About 70 percent are women who do it to earn a couple hundred dollars, he said.

Franchising

The earnings maximum from one franchise with the two required recruits is $3,600 a week, Ashley said, although sellers can have multiple franchises. The company paid out $99.3 million in commissions last year, Ridinger said.

Jacquelyn Keeley of Boca Raton has been selling for Market America for almost four years and has four ''unfranchises,'' as the company calls them. Keeley, a program specialist with Palm Beach Community College, said she earns ''thousands'' of dollars a year, now more from down-line commissions than from her own sales.

But she still sells. ''I have three orders in my car waiting for delivery,'' she said. ``This is not based on recruiting.''

Keeley said she has worked for several multilevel marketers. ''They were a joke,'' she said. ``With their pay plan, you have to be a superhero. It was all about getting bodies in.''

Ridinger is different, Keeley says. ``He's empowering the average person.''

In Miami Beach, the Ridingers call their mansion ''Casa de Sueños'' -- House of Dreams in Spanish. Ridinger's dream? To build Market America into a Fortune 500 company.