LuLaRoe describes its multi-level marketing business as, “a place where lives are being blessed and dreams achieved through love, purpose, confidence, trust, and growth.” But many of their independent retailers say the brand has only helped them achieve a mountain of debt.
After months of criticism from sellers, many of them moms running their own business by selling the clothing line through Facebook, there’s now a $1 billion LulaRoe lawsuit that claims the company is running a pyramid scheme.
The suit alleges that the Corona, Calif.-based brand encouraged sellers to run up credit card debt and even sell breast milk in order to buy more merchandise that it knew they wouldn’t be able to sell.
Though this $1 billion LulaRoe lawsuit is the largest to be filed so far, it’s just the latest in a line of legal dealings with customers and consultants.
In February, a lawsuit in Pennsylvania alleged the company collected sales tax from customers in states that actually don’t have a sales tax. In March, after concerns about the quality of the brand’s apparel resulted in thousands of complaints on its Facebook and Twitter pages and inquiries with various municipal business bureaus, two LuLaRoe customers in California filed a class action lawsuit over the damaged goods.
How Does LuLaRoe Work?
The company sells its clothing line — modestly cut dresses, tops, skirts, and wildly popular leggings in a variety of prints — through independent “consultants” who often pay around $6,000 to get started. Then each consultant operates as an individual business owner, managing their own inventory and sales.
There have been reports that LuLaRoe has started taking a long time to get inventory to new representatives. Some sellers told Racked that they know women who have waited as long as three months after paying the initial $6,000 to receive clothing they could sell.
Consultants mostly sell goods through their social media network, auctioning off pieces in Facebook groups, or through Tupperware-style parties.
Team leaders offer advice to consultants and, in exchange, some percentage of their team’s sales trickle up to them.
DeAnne Stidham says she founded the company with a vision of providing some economic freedom to women who want to support their families, naming LuLaRoe after her three grandchildren.
CEO Mark Stidham, the husband of founder DeAnne, rarely seems too concerned about the representatives or various allegations against the company.
In an internal email to representatives in April regarding the damaged merchandise he wrote, “The time and effort it takes to collect, send in and receive your refund could be invested in finding different ways to strengthen your business and develop ideas on how to sell your damaged items.”
Racked reported about consultant complaints in May, finding that the CEO’s response to the company’s representatives continued to be condescending following a wave of complaints about products and policies.
“No, you’re stale. Your customers are stale. Get out and find new customers. If you bring a new customer in, then your inventory isn’t stale. The problem is, you try to sell to the same group of people day after day after day,” he said in a now-deleted video of LuLaRoe’s weekly webinar broadcast to its 80,000 consultants.
Is LuLaRoe a pyramid scheme?
Russell Winer, a marketing professor at New York University’s Stern School of Business, told CBS that the company is not a pyramid scheme if products are actually being sold to customers.
The LuLaRoe business model does make it very difficult for lower-tier consultants to make any money, though.
A study of multi-level marketing schemes by the Federal Trade Commission found that 99% of people who join these type of companies lose money. Herbalife, which runs on a business model similar to LuLaRoe’s, has been struggling to make money after the FTC ordered the company to clean up its act.
LuLaRoe tells new representatives they should expect to invest between $5,000 and $7,500 in inventory. But internal data the company shared with CBS MoneyWatch in February shows that more than 70% of consultants sold less than $5,000 worth of retail goods during that month. Less than 5% of the company’s representatives reported more than $10,000 in sales.
LuLaRoe denies the claims and says it will vigorously defend against the allegations.