DirectBuy complaints mount, but company says its big fee is worth it

DirectButy logo, refunds, unhappy customersWhat would you say to the following offer?
Join our shopping club and we'll promise you below-retail prices on thousands of brand-name products – but we can't let you compare our prices with competitors until you join. You'll shop for most items through a catalog, but once you place your order, you can't cancel or return your purchase. Our membership fee is several thousand dollars, usually non-refundable. Finally, if you refuse our offer, we'll never make it again.
More than 400,000 consumers in the U.S. and Canada have said "yes" to a similar pitch by DirectBuy, including a 72-year-old retiree who visited a showroom in Hauppauge, N.Y., sat through a two-hour presentation, and despite an "inner voice" warning her not to do it, paid the $5,900 membership fee.When the woman (who we'll call Shirley due to her desire to remain anonymous) returned home, she started Googling DirectBuy and didn't like what she found: several class-action lawsuits and hundreds of complaints from dissatisfied DirectBuy members who said the company's guaranteed lowest prices weren't any cheaper than retail outlets. Several stressful days later, Shirley asked for a refund, which was denied because her three-day cancellation period had expired.

"Once you sign up and pay the dues, there is very little you can do to get your money back," Shirley told Consumer Ally. "Even if you die, there is no refund, but you can leave the membership to someone else in your estate."

Shirley left multiple messages for the Direct Buy store manager, contacted the Better Business Bureau, her local consumer advocate and an attorney, all of whom told her there was little they could do, and advised her to contact the Attorney General's office. "I called several times and my calls were never returned," she said. "I went back in person and was told (the manager) was too busy to speak to me."

Shirley's son got involved at that point and contacted Consumer Ally, filed a complaint with the New York State Attorney General's Office and started leaving messages for the store manager as well. After six months of phone calls, e-mails, threats and a letter from the Attorney General's office, DirectBuy finally agreed to refund Shirley's $5,900 in September – minus a $100 "administrative fee."

"I truly regret being taken in by the beautiful sales presentation, and not listening to my inner voice telling me to get out of there and go home," Shirley said. "To this day, I'm still embarrassed that I could be influenced into doing something that was so wrong for me."

DirectBuy, which operates 150 franchises in the U.S. and Canada, bills itself as an insider's buyers' club where members can purchase brand-name goods directly from manufacturers and suppliers, sidestepping retail markups and saving as much as 50% or more on brand-name merchandise. Membership fees vary from location to location, ranging from $3,000 to $7,000. Although DirectBuy spokesman Mike Georgeff declined to answer a question about the company's revenue, the privately-held, company reportedly generates more than $500 million in revenue each year.

Because each DirectBuy franchise is independently owned and operated, said Georgeff, the corporate offices in Merrillville, Ind. don't know what percentage of new members decide to cancel – or how many experience ordeals similar to Shirley's. He did note that more than 75% DirectBuy customers renewed their memberships in 2009, which he added was "an extraordinary percentage when compared to other membership organizations."

But unlike other buying clubs like B.J.'s or Costco, DirectBuy members cannot return items or cancel orders, which are also subject to shipping and handling fees. Although DirectBuy does reveal products and prices during its "now or never" sales pitches, prospective members are forbidden from using them to comparison shop elsewhere before joining. According to a DirectBuy FAQ: "This policy is in place out of respect for our members, manufacturers and the retail industry. It prevents consumers from asking traditional retailers to match DirectBuy prices."

As for DirectBuy's "insider prices," a consumer magazine said its reporters found a flat-screen TV at DirectBuy selling for almost $500 less elsewhere, while a Kohler bath faucet was also $300 less on a kitchen-and-bath website. However, the magazine did report steep discounts on high-end furniture. While DirectBuy can't monitor the price of the more than one million products available to members at every retailer, Georgeff said, the company regularly conducts retail price comparisons to make sure members get the savings they expect.

"Ninety-nine percent of all orders placed through DirectBuy have no identified pricing issue. In the unlikely event a member does find an identical product from an authorized retailer at a price lower than at DirectBuy, we ask the member to make us aware through our Pricing Promise," he said. " Upon confirming a valid comparison, we'll work with the manufacturer to obtain the best possible price as quickly as possible," which he said resolves more than 95% (3,800) of member complaints. Since 1% of 400,000 is 4,000, and 95% of 4,000 is 3,800, by that math, there must only be about 200 dissatisfied DirectBuy members at any one time.

According to one popular estimate, at an average savings of 25% on each purchase, you'd need to spend more than $20,000 to break even with Direct Buy's membership fee. Georgeff disputes that assessment, saying many members join to take advantage of huge savings on home furnishings, which he said average 40%. "This means a member would recoup their membership fees on approximately $7,500 in purchases at DirectBuy, representing an estimated $12,500 retail price, or two to three rooms of furniture," Georgeff said.

Cancellation policies vary from state to state, and consumers in states with no mandatory cancellation period aren't eligible for refunds. After receiving numerous complaints from consumers in 2007, Ohio Attorney General Marc Dann looked into allegations of strong-arm sales tactics and a failure to disclose upfront certain terms and conditions of DirectBuy memberships. In February 2008, DirectBuy agreed to settle with the state of Ohio and offer consumers three days to cancel new memberships.

DirectBuy has also faced a number of class-action lawsuits over allegations of failing to pass all savings to directly customers.

An October 2009 lawsuit filed in Indiana District Court alleges that DirectBuy pressures people into paying a $5,000 membership fee and charges exorbitant mark-ups, excessive shipping fees and withholds millions in annual manufacturer rebates. Similar allegations were made in an April 2009 class-action suit filed in Connecticut District Court, which claims DirectBuy pockets tens of million in of dollars in kickbacks from manufacturers and suppliers by charging consumers more than the "direct prices" they pay for items.

"We show members the cost of an item, freight, and any applicable costs up front for every member purchase, all of which are fully disclosed to both members and franchisees," Georgeff said, while acknowledging DirectBuy does receive certain incentives from suppliers.

"Our Membership Agreement specifically informs prospective members that DirectBuy's Corporate Headquarters and franchisees reserve the right to accept prompt payment discounts and other incentives from suppliers, so long as pricing available to members is not adversely affected," he added.

A September 2009 class-action filed in New York District Court accused DirectBuy of keeping millions of dollars in "kickbacks" from manufacturers, as well as overcharging members for shipping and taxes in order to pocket the difference. The suit also claims DirectBuy delays placing orders for prepaid items an average of two months in order to earn interest on orders that total some $1 billion annually.

"Any such allegations are false," Georgeff said.

Although Shirley the shopper in Hauppauge is now $100 poorer and ashamed she gave in to a hard sell, she got off lightly compared to other frustrated DirectBuy customers who weren't able to wrangle a membership refund.

Despite healthy renewal rates, quite a few members have been airing grievances online, and various complaint boards are full of stories claiming to be from rueful DirectBuy members warning others not to join, sporting headlines such as: "Rip Off," "Scam," "Misleading/Hard Sell," "We are very sorry we ever joined them."

One thread on the ComplaintWire site contains 98 pages of complaints from DirectBuy members, dating June 2007 until September of this year. Here's a typical post, titled "Don't make our mistake." Polly Globe, 21 Jun 2007:
We attended their presentation and after some calculation decided to pay for the membership which was $4990. . . A month later we started planning our purchases and realized we were about to pay more by buying through them than we would otherwise. What they don't tell you on their presentation is that while you save about 10% on furniture they add 8% handling charge in addition to 7% tax, and that doesn't include shipping. I am now trying to get our membership money back. Do not become a member! Buy from other stores.
Although DirectBuy obviously enjoys substantial numbers of satisfied members, it's clearly not for everyone.

"It is a company that might be good for some people who are planning to spend a lot of money on remodeling their home or who like to spend money on luxuries for themselves or others," said Shirley. "If you are planning on spending less than $10,000 to 15,000, it isn't worth it, because the membership fees are so expensive."
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