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January 01, 2011

Company Focus

J. Hilburn: Leveraging Direct Selling: To Become the ‘Amazon of Apparel’

by Norbert Brown

(From left to right) Veeral Rathod, co-founder of J.Hilburn, and Hil Davis, company founder

Anyone who’s ever worked in communications for a public company will tell you stories about how they’ve spent weeks preparing for an all-important visit from Wall Street analysts. Then, when the analysts finally arrive in the lobby, they are shockingly young and inexperienced: It was less like entertaining captains of industry, and more like hosting a tour group from a business fraternity.

Which suggests that most analysts move on to bigger and better things within a few years of their 30th birthdays. And that raises the question: Where do all these young Wall Street types go?

Of course, many of them no doubt move into higher management roles in Wall Street companies, but at least a few certainly take the lessons they’ve learned as they’ve picked over endless business strategies, and come up with innovative entrepreneurial ideas of their own.

One such case is Hil Davis, Co-Founder of J. Hilburn in Dallas, Texas. Davis and his partner, Veeral Rathod, are both young veterans of Wall Street companies. So it may seem counterintuitive at first that they’d start a direct selling company specializing in custom apparel for men. But when you spend a little time talking to Davis, you find that there was nothing random or capricious about the decision.

“I did a lot of equity research about luxury brands,” Davis says. “While I was doing that, I was reading about Warren Buffett.” Davis was intrigued to discover that Buffett considered his acquisition of direct seller Pampered Chef in 2002 to be one of the best investments he’d ever made. Then he learned that Buffett owned a stake in not one but seven direct selling companies. “That was a big red flag,” he says.

Even so, Davis wasn’t looking to clone any existing direct selling business plan. There were aspects of other business models—including ecommerce and traditional retail—that spoke to him, yet each seemed to him to be in some way “broken.”

Delivering Customized Service

Davis saw what Amazon had done for books—stripping out extra markup in the supply chain and in distribution. He’d also seen that similar ecommerce models were more challenging for selling apparel and soft goods. “People want to see it, touch it, feel it” he says. How could you achieve the kind of cost savings that Amazon does, while offering Nieman-Marcus quality apparel to consumers?

Davis and Rathod answered that question by crafting their own kind of direct selling business model. “Like traditional direct selling,” Davis says, “J. Hilburn is a direct-to-consumer, person-to-person business.”

While many direct selling companies encourage their independent distributors to become a “product of the product,” J. Hilburn takes a distinctly different approach. “Our end user is separate from the partner” Davis says. About 95 percent of their style advisors—whom he frequently refers to as “partners”—are women, while the vast majority of customers are men. The core of J. Hilburn’s product line is custom-made shirts. Typically, a style advisor will visit a customer at his home or office, get his measurements, and show him fabric samples and a catalog. The customer places an order, and within a couple of weeks receives a custom-made dress shirt at a cost he would expect to pay for off-the-rack apparel in a department store.

The personal rapport that develops between a direct selling professional and a customer is a valuable asset, he says, but companies must leverage it sufficiently, because that customer may only order two or three more times from the company. “We wrap the trust that the personal style advisor builds around a quality product at a good price. That’s a compelling customer value proposition.”

How compelling? Customers spend, on average $400 to $500 a year with the company. A recent email that the company sent out to all customers on the style advisors’ behalf had an astonishing 50 percent open rate—almost unheard of in the world of mass commercial email marketing campaigns. And J. Hilburn has an impressive 93 percent reorder rate.

That 93 percent reorder rate is one reason J. Hilburn’s style advisors are successful. The company supports them with a strong commitment to technology, communications and individual support. In the coming months, J. Hilburn will augment this support with a highly capable e-commerce backbone that will allows a customer to place an order at any time, and the style advisor they’ve built a relationship will receive full commission.

Custom-Made Code

Another success factor for J. Hilburn is its unique approach to managing the geography of distribution. While the company does not establish territories per se, “we don’t allow ZIP codes to get oversaturated,” Davis says.

Davis explains that the company sees their target consumer as a man with a household income of $75,000 or more per year. Of the households with that annual income in any given ZIP code, they project that they can capture 10 percent as customers. Once they reach a number of style advisors that can service that market, they don’t add any more advisors in that ZIP code.

It’s a concept they’ve borrowed from the franchising industry, and restaurant franchises in particular. “That industry has professionalized restaurants,” Davis says. “They’ve replaced uncontrolled, unbridled growth more slowly by adding quality partners.”

For J. Hilburn, the strategy has proven a winner. They’ve closed a total of 20 ZIP codes so far, and in those areas, they’ve doubled their expected market penetration, reaching 20 percent of households. As demand rises, Davis says, they may reopen those ZIP codes, but only when the assigned style advisors are no longer able to keep up with the demand.

The Customizable Product

On the product side, custom-made dress shirts are a launchpad, not the endgame. “We use the shirts as sort of a loss leader. They’re profitable, but just barely,” Davis says. But once you get a custom shirt, he says, “it’s hard to go back to off-the-rack.”

Since its 2007 founding, the company has been slowly building its product offerings, and that increase is ramping up. Davis says that shirts made up about 95 percent of the company’s 2009 sales, but this year they’ll only represent about 50 percent. Other offerings include trousers, sweaters, outerwear and accessories, and Davis says that the company plans to expand into “multiple closet spaces,” including some clothing for women (they already offer a men’s cashmere sweater that women love-that Davis says “sells out in a week”) and home fashions.

J. Hilburn’s products are designed by veterans of the highest-profile design houses and crafted of the same quality imported fabrics as Ralph Lauren, Armani and other premium brands. You’ll find many of those same brands in the Asian factories where J. Hilburn’s shirts and other apparel are sewn as well. A custom made shirt from J. Hilburn—the usual entry-level purchase—costs from $79 to $150.

It’s appealing to customers and an outstanding opportunity for entrepreneurs who choose to become J. Hilburn style advisors. On average, Davis says, each of their “partners” has 35 to 40 customers, spending up to $500 a year. Commissions currently range up to 25 percent but can be increased as the advisor recruits others to his team. There again, though, J. Hilburn functions a little differently than most direct selling companies, and limits the number of directly sponsored business legs each advisor can have.

“Studies that have looked at great organizations show that one manager can only successfully manage five to six direct reports,” Davis says. So style advisors are limited to five direct recruits—until they provethemselves successful with that group size. Then they can expand.

“It’s not about putting handcuffs on anyone,” he says. “It’s about managing growth successfully.”

Custom Growth Plan

Right now, the company has about 675 style advisors. That number is currently doubling every six to nine months. As impressive as that is, the number of customers is growing even faster.

Between the company’s unique approach to building a direct selling business model and its rapid growth, J. Hilburn has attracted the attention of a number of venture capital firms. Davis says that the company’s determination to cross-pollinate the best from different types of businesses is one reason they’ve been able to secure the capital to grow. He says that venture capitalists see the potential of the direct selling model and see J. Hilburn as a company that is “professionalizing” the industry. In fact, the vast majority of J. Hilburn’s style advisors sign on with no previous direct selling experience.

As for where the company is going from here, Davis envisions growth on several different fronts: an increase in per-customer sales—from the current $400 to $500 per year to a figure closer to $1,000 per year; adding more customers, and a revised compensation plan that will raise direct commissions to around 30 percent; continuing to build the ecommerce structure to make the style advisors more successful. Plus, he points out, the relationship between style advisors and their customers puts them in a perfect position to help the customer build their wardrobe effectively.

“When you walk into a department store, they have no idea of who you are or what you bought before,” he says. “The J. Hilburn style advisor knows your taste, your style and your previous purchases, so you can get value from every dollar you spend.

“If you build a product where the customer is always demanding it, the partners will always be successful,” Davis says. “We want to be the Amazon of apparel, and we’re doing it with a ‘partner’ culture—we put the partners on a pedestal, and the partner puts the customer on a pedestal.”