VarTec Shows Excel the Door

As it reorganizes under bankruptcy, VarTec Telecom Inc. is abandoning a vast marketing channel it has used to sell communications services to consumers and small businesses.

The Dallas phone company is severing ties with a network of 130,000 independent sales representatives working on behalf of Excel, the business it acquired in 2002 from Teleglobe in a deal that drew both parties into litigation. Excel representatives tell PHONE+ they were shocked to learn VarTec was abandoning business that booked more than $1 billion in revenue in 2000 when it was part of Bell Canada Enterprises Inc.

“We were very profitable. So it really came as a shock,” says Chuck Hoover, one of the first individuals to represent Excel beginning in 1989. Hoover says his organization, Telstar Inc., has comprised approximately 60 percent of Excel’s base of independent sales reps, with more than 800,000 agents cycling through parts of the organization over the last 15 years. Excel agents have earned commissions and bonuses based on their sales and the success of reps they have recruited.

In a letter distributed to Excel reps the day of the bankruptcy filing, VarTec Chief Restructuring Officer David Walsh stated VarTec “could not continue to support Excel’s marketing model” and was collaborating with the Shaklee Corp., the network marketing company formed in 1956, to provide an alternative for agents. Shaklee uses a network of independent distributors to sell nutritional supplements, home water treatment and air purification systems, among other products.

During an interview in late November, Hoover said he and 1,165 reps had moved over to Shaklee, whose new chairman and chief executive is billionaire Roger Barnett. Other agents had joined telecom marketing organizations. “I wasn’t interested in staying in the telecom battle,” Hoover says of his choice to move on.

Founded in 1989 by Joe and Connie Mitchell, along with their friend Ray Atkinson, VarTec helped pioneer the dial-around longdistance business - allowing customers to get discounted longdistance rates on calls by dialing 10-10 plus an access code. But the popularity of cell phones and steep decline in long-distance rates has hammered margins and wounded the dial-around business. Another setback: Hoover says Joe Mitchell told him people were not opening direct mail - a primary means of solicitation for VarTec’s services - following the Sept. 11, 2001 attacks and subsequent anthrax mailings that created a nationwide scare.

With 2003 revenue of $1.26 billion and projected 2004 revenue of approximately $900 million, VarTec reported that thinning margins and customer attrition are among the factors that have made it difficult for the company to maintain its historic level of revenue and profitability.

“The industry changes have been almost revolutionary, and our businesses have not been able to generate sufficient cash flow and liquidity to continue operations without protection from the bankruptcy court,” Walsh said in the letter to Excel reps. “Other factors that affected our decision include the company’s debt level, the regulatory climate and the competitive pressures in our reseller business.”

Hoover expressed empathy for agents who have counted on Excel to make ends meet. Frank Varon is one of those reps. Varon, who has represented Excel for six years, says he earned $175,000 annually through Excel. “We had known for a while there [were] some challenges with Excel,” but “we just didn’t expect the changes to be as drastic as they were,” Varon says.

Tim Basa, vice president of business development with sales agency Telegration Inc., says he was spending more than $1,000 a month in online advertising to sell VarTec residential services before he learned the company had filed for bankruptcy and stopped accepting orders online. One of his checks bounced, and his agent manager was let go. “They won’t give me any definitive answer on when they will start accepting new orders,” Basa says. “Maybe they never will.”

One bright note: Basa says VarTec has pledged to cut a new check and pay him on sold accounts.

Hoover contends VarTec is partly to blame for woes at Excel. He says VarTec made a variety of mistakes, such as not enforcing the policy and procedure manual and seeking to hire people to put flyers on doors. In short, he says VarTec did not understand the network marketing business.

Hoover says relationships are the root of the success of multilevel network marketing. His brother Jimmy has been an Excel customer since Hoover began representing the firm. “There is one way to make network marketing work. Network marketers know that,” Hoover says.

VarTec Vice President of Marketing Chris Chambless tells PHONE+ the Excel channel hamstrung VarTec from pursuing additional sales opportunities in the residential market. “Over the last few years, [the Excel sales channel] has become less productive and less profitable,” Chambless says. “The level of sophistication required of a sales person has become more complex.”

Chambless emphasized VarTec is committed to its relationships with independent sales reps booking commercial accounts. He declined to reveal how much VarTec pays its agents each month.

“We value our master agents and the commercial business and we are going to continue to support that business,” Chambless says. “If we have agents who are producing sales and have produced valuable accounts for us, we are absolutely going to continue to make them a part of our future.”

Doug Boyce, vice president of sales with Spring Valley Marketing Group, which has been representing eMeritus, VarTec’s commercial arm for three years, says VarTec is continuing to pay commissions. “We are cautiously keeping them in our portfolio at this time,” Boyce says.

Says John Ruby, president of Global Communications Networks Systems Inc., an agency representing VarTec: “The commissions are still coming in. They’re timely and they said the Emeritus/VarTec commercial division was one of the only profitable divisions they had.”

Global Communications Networks Systems is processing orders for existing accounts, but is taking a wait-and-see approach before seeking to expand business on behalf of VarTec. Ruby says customers purchasing VarTec’s services have not panicked upon learning the company is reorganizing under bankruptcy. “They are not as shocked or scared because other carriers have done this in the past,” he says, citing the highprofile reorganizations of Global Crossing Ltd. and MCI Inc.