Cutco: Schemers or Success Story?
Jack Smul, Dartmouth Business Journal
Today, it is not surprising to see household drawers filled with forks, spoons, spatulas and other utensils. But a different utensil might just be filling up drawers quickest in the near future: Cutco knives.
Beginning in 1949, Alcoa and Case Cutlery (Alcas) has manufactured mass amounts of kitchen knives, sporting knives, shears and flatware out of its headquarters in Olean, New York. Olean is a small, suburban town of about 15,000 residents in the southeastern corner of the Big Apple. After growing steadily for most of its existence, Alcas ownership was shaken up in 1982 when the management purchased the company. At this point, there were hundreds of small, independent sellers of the products, including a company called Vector Marketing Corporation, which led all sales of these products. Thus in 1985, the new ownership acquired Vector Marketing Corporation in hopes to replicate its success and business model elsewhere.
Vector Marketing Corporation is a single-level direct sales group that sells only Alcas, or Cutco as it has been called since the company’s name change in 2009. It grows its workforce through advertisement via word of mouth, direct marketing, media, newspapers and posted advertisements. Their main selling point revolves around the idea of “student work” where they employ high school and college students as salespeople for the company. These eager students will pitch Cutco knives to friends and family in one on one presentations first, branching out from there.
Over the years, Cutco has come under fire for its use of Vector Marketing, which is seen as a scam. Sales representatives must pay for their starter kit, their own travel expenses, and are offered $15 per hour without realizing that payment only comes from sales. While the pay appears reasonable, a poor salesman could pour hundreds of dollars from his own pocket into the company without ever earning it back.
Companies with similar sales models have often been equally criticized. One such example is Vemma Nutrition, an energy drink company that sold a drink called Verve. The Federal Trade Commission (FTC) shut down the company in August 2015 after alleging that Vemma was a pyramid scheme, which is an illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, or so-called returns, that is then given to the earlier investors/recruits above them. 53-year-old founder BK Boreyko, the winner of the American Business Awards “Executive of the Year” award in 2014, disagrees, claiming that there was no malicious intent in the operation of the company. The FTC furthered its opposition by holding strong that Vemma did not focus on selling products but instead, according to the New York Post, used false promises of high income potential to convince consumers to pay money to join their organization.
This is where the difference comes in. While Cutco and Vector Marketing might share similarities with diabolical pyramid schemes like Vemma Nutrition, like employing students as sales representatives, the company does have a distinct purpose: to sell Cutco knives and increase profit margins.
Because this purpose is surrounded by some grey area, Cutco announced major reforms in 2011 to further distance themselves from shady businesses like Vemma and towards a more professional fair practice. The most significant of these reforms: Cutco representatives were no longer required to make initial deposits into sample kits. This reform dissolved any last strands of suspicion that Cutco was operating as a pyramid scheme. Furthermore, Cutco released their plans to grow revenues at least $500 million over the next five years which included investment in recruiting strategies, investment in brand recognition, expansion into international markets, and entry into more sales channels like retail.
Since then, Cutco has continued to progress, turning in relatively large profit margins. According to PrivCo, a New York-based financial-data provider, over the past three years, Cutco’s Revenue Growth Rate has been 6.3 percent and for the past year, has been 7.3 percent. Employee growth rates, on the other hand, have been 1.8 percent and 2.3 percent over the past 3 years and past year, respectively. These numbers are particularly important because for a company that was criticized as a pyramid scheme, Cutco is able to illustrate how significantly large growth is achieved through only minor employment increases and not the other way around.
Moreover, Cutco’s recent success seems sustainable. The company has few large-scale competitors, with only a handful based in the United States. Of its competitors, Henckels, Wusthof and Messermeister are German cutlery companies and Global, MAC and Shun are Japanese cutlery companies. While all of which maintain their brands online, none seem to have major United States retail operations or a unique system like Vector Marketing that goes door to door to sell its products. In Japan, it is unlikely that such a model like Vector Marketing would work as Japanese people typically spend less time at home than their American counterparts. Nonetheless, Cutco’s personal touch seems to be a driving factor of their success in the United States that is unlikely to be overshadowed by foreign online competitors. Growth, however, is likely to stagnate outside the United States regardless of Cutco’s newfound ambition to expand internationally as the six cutlery companies aforementioned all have larger brands globally.
Despite early negative accusations against it, Cutco has reformed, expanded and seems to have found success. They are able to use high school and college-aged students as sales representatives, which offers great rewards and are able to do so while maintaining their true purpose — to sell knives. The future looks bright for this cutlery company regardless of the success of future global expansion as it sees few high quality American knife companies.