THE CHALLENGE To expand its business beyond direct sales without alienating the direct-sales representatives who helped build the company.
THE BACKGROUND Hil Davis and Veeral Rathod started J. Hilburn in 2007 after Mr. Davis had a midair epiphany. While flying to Los Angeles from Chicago, where he worked for a hedge fund, he was shocked to read in Robert G. Hagstrom’s “The Warren Buffett Way” that Mr. Buffett considered his investment in the direct-sales cooking products company Pampered Chef one of his best — despite the dodgy reputation of direct sales and multilevel marketing.
“Here’s one of the smartest investors of all time and he’s long direct sales while other investors are like, ‘Why would you touch that?’ ” Mr. Davis said.
Mr. Davis, 39, who lived in Dallas, joined Mr. Rathod, 32, a fellow banker based in Dallas who had been looking for a change, and the two settled on men’s custom clothing.
Men do not like to shop for clothes in stores, they reasoned. A network of representatives who make house calls would solve that problem and also allow the pair to cut costs: without brick-and-mortar stores or tailor shops, they could offer custom-fit clothing for something like rack prices.
“We sell a value proposition, personalized fit and luxury products,” Mr. Davis said. “We can sell everything for half the price of Nordstrom and Neiman Marcus or for 85 percent of the price at Brooks Brothers.”
Still, Mr. Davis and Mr. Rathod knew nothing about the clothing industry. Armed with $650,000 from friends and family, the two opened with the help of four direct-sales representatives whom Mr. Davis’s wife had known. While the first representatives found customers, the inexperience of the founders showed.
They chose their first factory, in China, because it had produced two high-quality samples and assured them it could produce more. But after J. Hilburn started ordering in quantity, things did not go so well, a problem worsened by time and language differences.
“We let two shirts be the proof of concept when one of us should have been over there,” Mr. Davis said. “Our first 400 shirts came back wrong because we were the idiots who didn’t get on a plane to watch over the factory.”
They did visit their second factory before selecting it, only to have it fall behind on complicated orders. Each day, they later learned, the needle workers put the most difficult shirts back on the bottom of their pile, delaying delivery. After the partners announced that customers would get a free shirt for every four days an order was late, they received a standing ovation one day in a Dallas restaurant from customers who called them the “free-shirt guys.”
They had fabric-buying problems as well; Italian mills were not accustomed to selling quantities as small as of 100 meters.
Mr. Rathod and Mr. Davis had to retrain their entire supply chain in an industry they did not know. Had they known then what they know now, Mr. Davis said, “we could have started this business for 40 cents on the dollar.”
But they learned. Sales rose from $1 million in 2008 to $3.25 million in 2009 and $8 million in 2010, a year in which they sold 60,000 shirts (which start at $89). And they built their squad of style advisers to about 1,000 today from the original four.
J. Hilburn representatives make a 15 to 30 percent commission on sales, plus 2 to 4 percent on what is sold by the style advisers they have recruited (and those recruited by their recruits). J. Hilburn limits each rep to five recruits, something that, according to Mr. Davis, has kept annual turnover around 14 percent, compared with the industry norm of 56 percent.
“Most direct-sales companies fail their reps by telling them to ask everyone they can to join teams and we’ll see what sticks,” Mr. Davis said. “But most people are not prepared to be business owners. That’s why direct sales has such a bad reputation.”
Most of J. Hilburn’s representatives are college-educated, stay-at-home mothers, from their mid-30s to mid-50s, Mr. Rathod said. While the top three earn more than $200,000 a year, the average style adviser works three or four hours a week and makes $7,500 a year.
As they built J. Hilburn, Mr. Rathod and Mr. Davis started considering how to expand the business online.
Article source: http://feeds.nytimes.com/click.phdo?i=dfad0266727badca8fd0a7639d520c13