WSJ piece on how Warren Buffett's Berkshire Hathaway's Kirby Vacuum Cleaner unit has helped to ruin some peoples' lives.
(This is just another item in a long list of why I am so sick of hearing how "great" Warren Buffett is).
(I once (when I was about 18 or 19 years old) was "lured in" (by a very misleading ad, of course) to a sales pitch for a summer job that turned out to be Kirby Vacuum cleaner sales. I was appalled and disgusted by what I saw and heard, and thought (even as just a teenager) : "These people should be shut down.")
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October 4, 1999
How Kirby Persuades Consumers
To Shell Out $1,500 for Vacuum
By JOSEPH B. CAHILL
Staff Reporter of THE WALL STREET JOURNAL
In the world of home appliances, Kirby Co. likes to consider its product the
Porsche of vacuum cleaners.
The sweeper features a die-cast aluminum base and handle and wooden
brushrollers, rather than the plastic parts found in competitors' models. Its
motor is so powerful that it can suck up a bucket of dirt dumped on a thick
shag rug, leaving barely a speck behind. Assorted attachments convert it into a
leaf blower and even a spray painter.
With a price tag of around $1,500, it also costs more than four times what
other top-of-the-line vacuum cleaners do. "Why does a Porsche cost more than
a Chevy?" asks Ralph Schey, chief executive officer of Kirby parent Scott
Fetzer Co., a unit of Berkshire Hathaway Inc., which is controlled by billionaire
Warren Buffett.
It's worth noting that luxury-car dealers don't make house calls in trailer parks.
But Kirby dealers do. After 64 years, the Kirby (there is only one model,
updated periodically) continues to be marketed exclusively door-to-door --
often to people who can ill afford a $1,500 gadget but succumb to the sales
pitch nonetheless. That has led consumer-protection agencies to question the
company's tactics.
A Knock at the Door
In March of last year, 68-year-old Henrietta Taylor and her husband, Dennis,
79, answered a knock on the door of their mobile home in Fort Meade, Fla., to
find two Kirby salesmen standing on the stoop.
The Taylors didn't need a vacuum cleaner; their old Electrolux was working
fine. But the salesmen persisted with an hour-and-a-half demonstration that
included dumping dirt on the carpet to show off the Kirby's cleaning power.
"They were the pushiest people I ever saw," Mrs. Taylor says.
The Taylors agreed to buy the machine for $1,749. That far exceeded the value
of their only carpet, a 12-foot by 18-foot living-room rug. It also exceeded
their monthly income of $1,100 in Social Security. To finance the purchase,
the salesmen arranged for a loan -- with a 21.19% annual interest rate -- that
brought the total in payments to $2,553.06.
The next day, Mrs. Taylor called the Kirby distributor to cancel the deal, but
was told the sale was final. Only after enlisting an attorney from the local
legal-aid service was she able to get the distributor to rescind the transaction.
The distributor, Tim Walsh of Sunshine Distributing in Lady Lake, Fla., refuses
to comment beyond confirming that the salesman who ultimately closed the
Taylor sale was later dismissed because of customer complaints.
The Taylors are hardly alone in their experience with the Kirby sales force. One
class-action suit has been filed against Kirby over the sales practices of some
of its distributors. And of 22 state consumer-protection agencies queried, 15
have received a total of more than 600 complaints in recent years about Kirby
distributors and their sales techniques. Most handle the complaints on an
individual basis.
The Wisconsin Department of Agriculture, Trade and Consumer Protection,
which has received 50 complaints against Kirby dealers since 1996, conducted
an investigation and concluded that the company, through its distributors,
engaged in a "statewide pattern of trade practices" that violate
consumer-protection laws. The agency wants Kirby to compensate consumers
and exercise more control over its sales force. Kirby says it is in compliance
with the law. The two sides are to meet this week to try to hammer out some
sort of remedial action, without a formal enforcement action by the state.
"We hold Kirby responsible for these violations, as well as the dealers," says
William Oemichen, the Wisconsin Consumer Protection Administrator.
Ethical complaints aren't common among companies run by Berkshire
Hathaway's Mr. Buffett, who declined to comment for this story. But in
general, Kirby says it isn't responsible for the behavior of its independent sales
force. They are self-employed distributors, and Kirby prides itself on giving
them the opportunity to build their own businesses. "This is the most
entrepreneurial business I've ever been involved with," says Mr. Schey, the
Scott Fetzer CEO.
Kirby does lay down some rules. Its "Distributor Code of Ethics" sets out 12
principles, including "observe the highest standards of character, honesty and
integrity in dealings with my customers, fellow Distributors and other members
of the Kirby profession." The company also schools distributors in direct-sales
laws. Distributors must try to resolve all customer complaints within 24 hours,
and those who get too many complaints can be terminated, says Ken
Semelsberger, president of Scott Fetzer. He says there have been some
terminations, but won't specify how many. He adds, however, that complaints
represent only a tiny fraction of total sales.
Of course, many Kirby customers say they couldn't be happier with their
purchases. "I've noticed a difference in my carpet," says Melinda Nielsen, 31,
of Fremont, Neb. "The carpet feels softer and fluffier." She also has praise for
the Kirby salesmen who recently sold her the machine for $1,440, saying they
"were very relaxed and didn't push me at all."
Berkshire doesn't provide Kirby sales numbers, but Gene Windfeldt, who was
CEO of Kirby from 1988 to 1997 and is now a private businessman, estimates
that Kirby distributors sell about $1.1 billion of vacuum cleaners each year. Mr.
Windfeldt says Kirby sells the machines to distributors for about one-third of
the ultimate price to consumers. After buying the machines from Kirby,
distributors are free to set their own retail prices.
While declining to break out Kirby results, Berkshire said in its 1997 annual
report that its home-cleaning-systems business segment, which includes Kirby
and two smaller businesses, had sales of $253.5 million. Operating profits for
the business were a healthy $66.5 million.
The Kirby complaints often involve older customers who lack the will to stand
up to grueling sales pitches. One evening in May 1996, Stephen and Wilma
Tucker were sitting down to dinner when three Kirby salesmen showed up at
their Springfield, Vt., home and spent five hours, despite protests from the
60-year-old Mr. Tucker that he was disabled, unemployed and incapable of
buying so expensive a vacuum cleaner. One salesman even helped himself to
some fried chicken, the Tuckers say.
Finally, "more or less just to get them out of there, we agreed to it," Mr.
Tucker says.
The Kirby distributor later agreed to cancel the sale, after receiving an inquiry
from Vermont consumer-protection authorities on behalf of the Tuckers. Jamie
Hood, owner of the distributorship, says he didn't own it at the time the
Tuckers were sold their machine, and doesn't know the whereabouts of the
man who did.
'Golden-Ager Policy'
Mr. Windfeldt says Kirby a decade ago adopted a "Golden-Ager policy,"
requiring distributors to agree to cancel sales to customers over the age of 65,
up to a year after the transaction, with no questions asked.
But the Golden-Ager policy didn't help Thorhild Christopher. Ms. Christopher,
who died in December 1996 at age 76, lived alone in a mobile home in
Hernando, Fla., scraping by on about $1,000 a month in Social Security
payments and money from her late husband's U.S. Coast Guard pension. When
she died, she owned two Kirby vacuum cleaners, the last one sold to her in
September 1995 by a Kirby distributor in Spring Hill, Fla.
Ms. Christopher's niece, Gail Bosworth, says her aunt was suffering from
Alzheimer's disease by the time she paid $1,747.94 for the second Kirby. After
discovering the two machines in the spring of 1996, Ms. Bosworth contacted
both the distributor and Kirby and asked to have the sale canceled. Kirby
referred the complaint back to the distributor, who refused to cancel the sale,
even though less than a year had elapsed since the transaction. Gerald Yoerg,
the Spring Hill distributor, says he was unaware of the Golden-Ager policy in
1996. Kirby says it lets distributors resolve disputes as they see fit. Ms.
Bosworth never got the money back.
High Financing
About 70% of Kirbys are financed through distributors, with 20%-plus interest
rates driving the total cost well above $2,000. In the Southeast, some
distributors for a while were financing sales on credit cards issued expressly to
fund the Kirby, a practice that prompted a class-action lawsuit charging a
violation of truth-in-lending laws. Typically, equipment purchases are financed
through installment loans that require more disclosure than open-ended
credit-card financing. The suit, filed in state court in Perry County, Ala., is still
pending. Kirby declines to discuss it.
In a Vermont case, a pair of salesmen last year concocted a creative trade-in in
lieu of a loan. After Jean Taran, 49, a disabled woman, said she didn't have
$1,495, the salesmen pocketed the $800 she had in the house from her recently
cashed income-tax refund check, grabbed her old vacuum cleaner and a new
recliner she had just won in a contest, and drove off in their pickup, she says.
It took the help of the state consumer-protection agency for her to cancel the
deal and reclaim her money and goods. The distributor in that case didn't return
repeated phone calls seeking comment.
Door-to-door has been the company's sales method ever since James Kirby
invented the "Vacuette" around 1920. At that time, Kirby salesmen stood
among many others at the American door. Retail stores were few, and in-home
demonstrations proved an effective means of introducing consumers to an
array of new household appliances. But as retail outlets proliferated and
consumers became familiar with devices such as vacuum cleaners, most
appliance manufacturers disbanded direct-sales forces and started selling in
stores.
Bad Reputation
By that time, in-home sales had gotten a bad reputation. Many states adopted
special laws giving consumers the right to cancel an in-home sale within three
days and get a full refund. In 1974, the Federal Trade Commission followed
suit. The problem, says Stephen Brobeck, executive director of the Consumer
Federation of America, is that "a skillful salesperson will make the consumer
believe they will have to make a purchase in order for the salesperson to leave
the home."
Long after rivals such as Maytag Corp.'s Hoover unit abandoned direct sales,
Kirby has stayed with the strategy. That is because in-home demonstrations are
the only way to show people just how superior the Kirby really is, says Scott
Fetzer's Mr. Schey. "People wouldn't recognize the value just looking at it on a
department-store floor," he says.
To Kirby's advantage, in-home sales pitches don't allow the consumer much
room for comparison shopping. In appliance stores, customers can weigh the
price of Eurekas against Bissells, or try out the $350 Hoover that Consumer
Reports last year ranked first in quality, ahead of No. 2-ranked Kirby. But in
their own living rooms, people submitting to Kirby sales pitches face pressure
to make a decision on the spot.
To see Kirby distributors in action, just follow Duane Linder on a sales call.
Mr. Linder, 41, has been selling Kirbys for 22 years, ever since he left the
Minnesota farm where he grew up poor. With 50 employees, he guesses he is
in the top 25% of Kirby's more than 1,000 world-wide distributors.
'Is Your Carpet Home?'
"I've got an appointment to shampoo your carpet," Mr. Linder announces
jovially as he arrives at the small suburban Cleveland home of Kurt and Katie
Horvath, a middle-aged couple who have accepted a telemarketer's offer of a
free carpet shampoo. "Is your carpet home?"
Both the Horvaths suffered brain injuries in accidents years ago, so their
responses are a bit slow. But it is soon clear to Mr. Horvath that Mr. Linder
isn't here merely to shampoo the carpet. "This isn't so much a service," Mr.
Horvath asks, as a sales call in which "you can buy one?"
Three hours later, Mr. Linder isn't finished. He has vacuumed and shampooed
the living-room carpet, pausing frequently to pull out attachments for cleaning
upholstery and removing dirt from crevices. Mr. Linder extols the Kirby's
aluminum base, its powerful motor, even its high- and low-beam headlight. He
displays for the Horvaths mounds of dirt the Kirby sucked from their carpet, to
drive home the inadequacy of their current cleaner.
Sweating in his dress shirt and tie, Mr. Linder periodically asks the Horvaths if
they would like to own a Kirby. He acknowledges that the sticker price of
$1,570 is steep. But he offers a financing plan requiring no down payment and
monthly payments of "$30 or $40" a month. He tells them the Kirby is "the best
you can buy ... designed to last you the rest of your life."
But the Horvaths, unemployed and weighed down by credit-card debt, can't
afford the Porsche of vacuum cleaners.
Still smiling, Mr. Linder packs up the Kirby and leaves, but not before securing
the names and phone numbers of three of the Horvaths' friends for future sales
calls.
Since Berkshire Hathaway bought Kirby parent Scott Fetzer for $315 million in
1986, Berkshire's Mr. Buffett -- who is known for preaching the importance of
managing with integrity -- has said little about the company, outside of the
occasional praise for its earnings growth.
Scott Fetzer's Mr. Schey says Mr. Buffett's only instruction to him was: "I just
want you to run an honest business."
Copyright ¸ 1999 Dow Jones & Company, Inc. All Rights Reserved.
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