Why Rodan + Fields’ Founders Lost Their Billionaire Status

^Dermatologists Katie Rodan and Kathy Fields had hit the jackpot with their skincare firm Rodan + Fields. Two years ago, private equity firm TPG bought a minority stake that valued the multi-level marketing company at a whopping $4 billion, turning each of these flawless-skinned entrepreneurs into billionaires.

But since then, the sheen has come off Rodan + Fields, which relies on an army of more than 300,000 independent “consultants” to sell sets of scrubs and creams that cost $200 or more for a two-month supply. Revenue has fallen to $1.3 billion, from $1.6 billion in 2018, according to Moody’s, which downgraded the credit rating on Rodan + Fields’ $600 million of debt in April this year. The credit rating firm said it expects revenues to fall further due to a drop in enrollment of new independent sales consultants.

The weaker revenue and lower public market values for the skincare sector led Forbes to drop our estimate of the net worths of Katie Rodan and Kathy Fields to $800 million each on the 2020 list of America’s Richest Self-Made Women, down from $1.5 billion apiece on last year’s list. 

The success of multi-level marketing businesses like Rodan + Fields—also referred to as direct selling—relies on the constant recruitment of ever more new consultants. More consultants generally means more sales. But according to Moody’s and public disclosures made by Rodan + Fields over the previous three years, the company has struggled to retain its consultants. In 2017, Rodan + Fields reported roughly 397,000 consultants. By 2018, that number had grown 4%, to about 411,000. But in 2019, the total number of consultants fell to 362,000, a 12% drop . In January, Rodan + Fields laid off 86 employees in its corporate office. And that was before the pandemic.

In response to Forbes’ request for insight into its decline in consultants, a Rodan + Fields spokesperson said: “We are proud of the large number of people who are part of the R+F community and represent and share our brand.”

Moody’s, in two reports issued in April, cited the coronavirus pandemic as a further threat to Rodan + Fields, which will “need to navigate social distancing practices,” a public health necessity at odds with their direct selling business model. The company’s revenues and earnings “were already declining meaningfully heading into 2020,” the credit rating firm added, while weak economic growth worldwide adds to operating pressures.

Not that some consultants haven’t tried to capitalize on the health crisis. Rodan + Fields was one of 16 multi-level marketing companies to receive a warning letter from the Federal Trade Commission earlier this year. The FTC said in an April letter to the skincare firm that consultants were making misleading earnings claims on social media tied to the coronavirus. “RODAN and FIELDS is always open for business even during quarantine! I’ve been working from home for over 3 years now and still making money when other people aren’t!” crowed one of the misleading posts. “During an uncertain time like this, one thing I am grateful for is residual income from my home based business,” squawks another, adding, “If you want to make an extra $200, $500, or $1,000 a month, message me!” The FTC concluded the letter by reminding Rodan + Fields that earnings claims “must be truthful and non-misleading to avoid being deceptive” and advised that the coronavirus-related claims cease immediately. The truth, as spelled out in a company disclosure, is that the majority of consultants—67%—made an average of $306 last year.  “Rodan + Fields takes seriously the importance of adhering to and ensuring our Consultant Community follows FTC guidelines and best practices,” a company spokesperson told Forbes, and “does not tolerate non-compliant or misleading income or product claims.”

All of this has left Fields and Rodan in a much different place than when the aspiring dermatologists first met in 1984 at Stanford University. By 1989, Rodan, searching for new acne treatments to prescribe, decided to formulate her own with Fields. Their efforts culminated in the creation of Proactiv, which they licensed to infomercial firm Guthy-Renker in 1995, with the duo getting an estimated 15% in royalties from Proactiv sales. By 2015 the acne treatment had generated reported annual revenues of $1 billion, aided by celebrity endorsements from the likes of Justin Bieber and Vanessa Williams. In 2016, the founders sold their remaining rights to the brand to Nestle. In exchange, Forbes estimates they received a $50 million lump sum.

Meanwhile, the two dermatologists had devised another product line. After hearing complaints from younger women about wrinkles, Fields and Rodan created an anti-aging regimen under the brand Rodan + Fields, which launched in 2002 in department stores. Cosmetics colossus Estée Lauder purchased the brand the following year for an undisclosed sum. But the brand didn’t get the kind of marketing push that Fields and Rodan had hoped for. So they had a Rodan + Fields party, much like the Tupperware parties of yesteryear. It was a hit—and the duo bought back their brand in August 2007.

Since then, Rodan + Fields has operated through multi-level marketing, with independent consultants doing all the selling. Most companies of this type pay consultants (often referred to as distributors) commission based on the amount of product they sell and the number of new consultants they enroll in the opportunity. Some, like Rodan + Fields, say income can’t be made from recruiting new consultants, but the company does pay commission based on sales of new recruits. The model helped supercharge revenues, which grew from $24 million in 2010 to $627 million in 2015, then nearly doubled to $1.2 billion the following year. 

It’s notoriously difficult to succeed as a multi-level marketing distributor. In 2019, only half of Rodan + Fields’ consultants were paid $466 or more annually, according to its income disclosure. Even more stunning is how few become truly successful: just 70 consultants earned an average of $1.2 million last year, per the disclosure.

Looking ahead, Moody’s forecasts a further drop in revenues over the 12 to 18 months from April to between $700 million and $1 billion, a significant decline from the $1.3 billion in revenues the ratings firm says Rodan + Fields generates. It added that, “weak earnings are pushing financial leverage higher to a point where the capital structure is becoming unsustainable without a meaningful operational turnaround.”

Could the financial picture improve for Rodan + Fields? Possibly. The Direct Selling Association, a lobbying group in Washington, D.C., reported in August that 61% of industry respondents saw a positive impact on their business during the pandemic. So some multi-level marketing firms are doing better than before. 

These days it’s always sunny on Rodan + Fields’ Facebook and Instagram accounts. Brightly lit product shots are interspersed with portraits of consultants beaming from behind laptops. “Now that I can’t be in my classroom and do what I love, I am living my plan B,” one consultant is quoted as saying in a company-sponsored Instagram post. Another chimes in, “Creating community and having empowering conversations with complete strangers is sort of my JAM!” Perhaps focusing on the positive may help lure customers. As Katie Rodan told Forbes in 2016, “You have to be able to stand on your own two feet.”