MERRILLVILLE | Mike Bornhorst, a seasoned corporate executive who bootstrapped his way up from selling ADT security systems door to door to becoming the de facto North American chief operating officer of Culligan International, couldn't believe what he just heard.
Bornhorst had just been offered the CEO position at DirectBuy, a Merrilllville-based buying club that offers customers straight-from-the-manufacturer prices for fees that can run about $4,000 for a standard three-year membership, though the exact amount varies from store to store. He never had even heard of the company before, so he toured the closest showroom.
What surprised him more than the wholesale prices on home furnishings that could have saved him on a recent renovation project — historically DirectBuy's biggest selling point — was the ultimatum the salesperson issued. Bornhorst could sign up for a membership right then and there, or be barred from DirectBuy for seven years.
"I chuckled that they still did that," he said. "That had to change."
That high-pressure sales tactic — often involving the threat of a longtime ban from the buying club — had triggered scathing online reviews and condemnation from consumer advocates, including Consumer Reports magazine. It was labeled a deceptive practice in a class-action lawsuit over pricing that DirectBuy settled with the New York State attorney general's office for $500,000 last year.
It also was an outdated throwback to another era. Shoppers now routinely do their homework before ever setting foot in a store and compare competitors' prices on their smartphones. Many businesses, including car dealerships, have had to adjust to more sophisticated consumers who can find real-time market information with a quick Internet search, said DirectBuy Chief Marketing Officer Kurt Hilliard.
"Think about how buying a car has changed," Hilliard said. "You used to get tackled in the parking lot by a car salesman who'd tell you how great a model was. Now car buyers have what they want printed out and know what prices they should pay. There's so much more knowledge, and consumers are so much more educated."
DirectBuy has been overhauling its sales techniques as part of a broader, comprehensive reinvention of a company whose reputation was bruised by nasty RipoffReport.com posts and whose brand — based mainly for the past 40-plus years on cutting out "hidden" retail markups — was arguably a little fusty in an age where every e-commerce site and big-box store is trumpeting low prices. It can be hard to sell savings when everyone else is making the exact same pitch.
The new executive team has been working to implement sweeping "transformative change," both of the brand and the company's business practices. A flurry of new initiatives have taken place at DirectBuy over the past 16 months, including the establishment of a help line that now receives 500 calls a day, more frequent customer satisfaction surveys, the creation of an executive position responsible for keeping members happy, a bulked-up online presence, increased pricing transparency, 30-day free trial memberships, and a plea to former customers: Come back, really we've changed.
Over the past year, DirectBuy has recaptured 11,000 lapsed members with its new emphasis on customer satisfaction. The company resolves 80 percent of the issues raised on calls to its help line right away, and the other 20 percent within 24 hours.
"There have been so many different changes, but one thing that's big is how we look at satisfaction," Bornhorst said. "We're laser-focused on customers satisfaction at all the different touch points, right down to the employee at the franchise. When a member gives us negative feedback, we respond."
Evolving with consumers
Several market tests are underway. DirectBuy plans to grow revenue by offering additional services and new types of memberships, which typically can be renewed for a few hundred dollars each year after the initial three-year term. The buying club is looking into offering more high-end watches and other luxury products, as well as services such as lawn care, pest control and home security. New membership levels could be created for less affluent customers, families and young professionals who might live in condos and not spend as much on home renovations as more traditional DirectBuy members.
"We're testing new things," Bornhorst said. "Consumers are changing quickly, and we're evolving with it."
The company has diversified into offering its well-to-do members travel deals. It has used its leverage as a source of $400 million in annual merchandise sales to get vendors to lower prices, and it dumped those who wouldn't. DirectBuy widened its product selection to include more everyday goods like luggage and soccer gear that give customers a reason to renew their membership after they already installed new cabinets in their kitchen.
Daily deals are being offered on exercise machines, golf balls and other high-end items. The newly launched DirectBuy Travel program, which is currently available to platinum members in the United States, offers discounts on cruises, resorts, hotels, spas and golf courses. Last-minute deals on unbooked hotel rooms also are available, but the company is not trying to compete head to head with established travel discount sites, such as Priceline and Expedia.
The broader focus is reflected in new television commercials, which DirectBuy recently started airing for the first time in four years. The ads carry a new message of service, selection and value, not just the previous promise of an end-around the middleman.
Previously, the longstanding slogan was "The No. 1 way to buy direct for your home." Now the tagline is "Together, we can do amazing things."
A new direction
DirectBuy was founded in 1971 by Highland resident Jim Gagan, a Chicago-born Army veteran who founded the Penn Oil and Gas Co., made charitable donations to many of the big charities in Northwest Indiana, and developed the Big Horn Country Club, one of California's premier golf courses.
At its height, more than a million members joined Gagan's buying club, which once had more than 160 showrooms in the United States and Canada. He sold the business for $550 million to private equity firm Trivest Partners in 2007.
The new owners encountered some troubles. A few franchisees who have filed suit say DirectBuy forced them out of business by spending seven times more than agreed upon on a national advertising campaign that got them junk leads that wouldn't even have yielded a new set of steak knives. DirectBuy said the stores fell victim to the Great Recession, when cash-strapped consumers weren't spending a whole lot on new kitchen cabinets or anything else.
Whatever the reason, the number of showrooms has dwindled to about 100. Standard & Poors downgraded the company's credit rating to a CC and then a D in 2012, after it did not make an interest payment on $335 million in debt. Auditors questioned whether DirectBuy could even remain a going concern. On top of all that, the company has been named as a party in more than 100 lawsuits in federal courts in recent years, according to a search of the Public Access to Court Electronic Records database.
Enter the new management team, which has been making big changes over the past 16 months.
"When I came on board, I didn’t know about the mistakes the company had made," Bornhorst said. "We made changes in the direction and culture."
DirectBuy also has been adjusting its retail approach, shrinking the footprint of its remaining stores from 20,000-square-feet to about 12,000-square-feet as leases expire to offer a more modern shopping experience in an e-commerce age. The company hopes to grow its number of franchised locations again in 2015 or 2016.
Company leaders already have identified 27 potential markets with demographics desirable enough to support one or more stores, including Louisville and Lexington in Kentucky.
But new stores will not be added until the company's internal transformation is complete, Bornhorst said.
"It would be irresponsible to focus on growth until we've made the changes we need to," he said.
Critics long had chided DirectBuy for being secretive, saying customers did not know what its prices really were before they signed up and had no way to calculate if they could even come out ahead in the end. DirectBuy spent $1.9 million last year to settle another class-action lawsuit that claimed the company did not divulge its true prices to prospective club members. About 49,000 members filed claims to participate, and another 83,000 defaulted members had late payment fees waived.
Now DirectBuy puts pricing out on display, listing cost comparisons on its website and offering 30-day trial memberships. Secret shoppers make sure franchise owners aren't using the old sales tactics that came under so much fire in recent years. The corporate office is going so far as to shut down stores that franchisees have run for decades, if they don't change how they do business.
"We're hoping to repair a lot of reputation issues that linger out there," General Counsel C. Joseph Yast said. "The Internet has changed the way we do things. For decades if someone had a bad experience, he might tell his family and neighbors and reach five or six people. Now you can reach thousands of people by going on the Internet and posting a negative review or comment somewhere. In the modern era, you can reach 500 people with the stroke of a few lines on your Facebook page."
Employees at the Merrillville corporate headquarters, where about 400 people work, have been asking why all his wasn't done years ago.
"I would characterize this as transformative change of a well-known brand," Hilliard said. "As we celebrate 43 years of heritage, we're making a business transition to more contemporary marketing and more transparency. Mike brought in a whole new management team. It's an end-to-end transformation. This isn't a light refresh of a brand. It’s a significant and thoughtful differentiation."