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Beauty Inc issue 12/12/2008

As news from the financial front becomes ever more grim, even once immune categories such as hair salons are starting to feel the pinch.

This story first appeared in the December 12, 2008 issue of WWD. Subscribe Today.

In bad economic times, there are plenty of reasons not to walk into a salon. And, according to recent data, women are indeed honing their at-home hair skills.

In an online salon industry survey conducted in June by the National Cosmetology Association, slightly more than 70 percent of 700 responders [including salon owners] reported that service sales are off this year, and 80 percent reported that retail sales are off.

“It has been the mantra of the industry that we are recession-proof, but people are viewing this recession as different from the past,” says executive director Gordon Miller. “We’re seeing a severe downturn.”

Confirming this data is an October Web survey by industry resource Behind the Chair, which suggests that salons’ economic woes have worsened as the year progressed. Roughly three-quarters of some 1,100 owners, stylists, managers, technicians and other salon employees who answered a question about service sales disclosed that they were down, with 25 percent of the total experiencing a service sales drop of greater than 15 percent.

“The economic situation is moving faster than anybody anticipated that it would,” says Mary Rector-Gable, founder of Behind the Chair. “In the car business and the electronics business, we knew it would happen quickly, but I don’t think anybody anticipated the quick movement into salons.”

The Professional Beauty Association, a trade organization that represents 2,000 wholesale distributors, product manufacturers and spa and salon owners, forecasts that business will slump modestly or remain flat this year. “Things are slowing down,” says Steve Sleeper, the association’s executive director. “Historically, the industry is pretty resilient in recessionary times, but obviously, there is an impact.”

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The salon industry’s vulnerability to the current economic crisis speaks to the gravity of the situation and to changes in the industry that have caused it to become increasingly susceptible to consumer shifts.

The estimated $60 billion U.S. salon industry (which includes spa services) contains 370,215 salons—one for every 813 Americans. While there are pockets of relative strength—value-oriented salons, for instance, are outperforming the market—no sector has escaped the malaise.

 “I’ve never seen anything like this. This is not a typical recession,” says Paul Finkelstein, chairman and chief executive officer of Regis Corp., the $3 billion salon behemoth that operates under the Regis, Supercuts, Carlton, MasterCuts, Trade Secret, SmartStyle, Cost Cutters and Sassoon trade names, among others. “We don’t know how long it is going to be and how deep it is going to be.”

The ripple of the economic meltdown throughout the salon industry seems to have caught professionals off guard. Haircuts and color services were long considered the food and shelter of the beauty world. Hair grows and grays regardless of government policy or the unemployment rate. People, even if their wallets are lighter than the day before, still get their hair cut and colored. Not as much as they used to, though. A common result of the economic slide is that salon customers space out appointments, lengthening the time between appointments from four to six weeks to six to eight weeks.

The consequences of the added time between visits are hardly trivial. Rector-Gable explains: If 300 clients visit a salon every five weeks, or 10 times a year, at an average ticket of $50, the potential sale is $150,000. If those same clients visit every eight weeks, or six times a year, the potential sale is $90,000. The $60,000 difference can be made up by new clients—200 of them, a seemingly insurmountable number given the difficult climate and competition.

“If our customers go from six weeks to eight weeks, it cuts us by 12 percent. We have to make that up,” says Kenneth Anders, owner of Kenneth’s Hair Salons and Day Spas Inc., a nine-unit chain based in Columbus, Ohio. So far, the salon has been able to compensate for appointment gaps by drawing 400 new haircuts a week and has notched a year-over-year service sales bump of 5 percent.

The basic services that keep most salons occupied through booms and busts have not been the driving forces of growth in recent years, however. The growth mantle has been ceded to color and spa services, the latter being the least obligatory in bust cycles. From 2006 to 2007, salon hair color services swelled by 5.3 percent from $12.54 billion to $13.2 billion. In contrast, total services, including cutting, styling, perming, coloring and relaxing, edged upward by 3.3 percent, according to data compiled by Diagonal Reports.

The Green Book, a salon directory and data report published by Questex, shows that color services range on average from $39.42 to $67.52. Although it makes up only a fraction of the service mix at affordable chains (18 percent at Regis-owned salons, for example), color can account for as much as 50 percent of the business at high-end locations. On average, women pay $21.08 to $29.23 for cuts at small salons, and between $30.93 and $47.80 at larger salons. Across the board, the average cut for men and women costs about $25.

The reliance on color for growth exposes salons to economic cycles in a fashion unheard of in the family barbershop era. “You have seen an evolution of service in the past 20 years, especially with hair color. The majority of growth in the last 20 years has been hair color related. Now, with recessionary pressures, we are seeing hair coloring hit a wall,” says Miller.

Meanwhile, salon retail has been beaten to a pulp. Stories of current retailing success are hard to come by. In the Behind the Chair survey, 83.5 percent of responders reported that their retail sales were down this year, with 32.2 percent of responders reporting that retail sales were significantly off by more than 15 percent.

“I’m very bullish about our service business—it will be fine. Our product business has its challenges,” says Regis’ Finkelstein. “P&G has done some research that people are trading down from superpremium to mass lines.” In the first quarter ended September 30, Regis experienced a 6.6 percent same-store product sales decline and an overall same-store sales decline of 1.6 percent.

Salon manufacturers, such as Procter & Gamble and John Paul Mitchell Systems, agree that times are tough, but value brands such as the ones they manage are faring well.

According to Nina Kovner, senior vice president of sales at JPMS, some salons with which she does business in Middle America have “felt no impact whatsoever,” but then there are salons in Las Vegas, which rely heavily on tourism, “that are seeing a big downturn.” The brand’s value positioning at $8 on average for shampoo remains appealing during these times. Kovner says she and other JPMS executives have been eyeing the downturn for the past year, and they suggest to salons that the best way to make up for fewer client visits “is to create an experience when they do come into the salon and make it count. We’re all feeling a little bit of pressure, but overall, our business has stayed strong and that is a direct response of salon purchases,” she says. “As a company, a ‘dramatic downturn’ is not consistent as to where we are at all.”

Kevin Otero, general manager of P&G Professional Care North America, which makes the Sebastian brand, is seeing some vendors with slower sales at retail, but he expects the category will grow even through tough times.

“We’re trying to make sure we are coming up with ideas with how [stylists] recommend certain products for when [the client] goes home. An insight says that 78 percent of people are very likely to buy a product if a stylist recommends it,” says Otero.

At Lord’s & Lady’s, a Boston-based chain of around 20 salons, service sales have held steady and even jumped, but product sales have taken a dive. “Mall traffic is so down,” says director of operations Jessica Barsamian, describing why sales of hair care and styling products—often impulse purchases by walk-ins—have been sliding.

As a general rule in the distressed marketplace, cheaper salon services and products are in comparatively high demand. Salons that market their value proposition and charge $25 or less for services are uniquely situated to cater to budget-conscious clientele. That affordable segment is 29 percent of the salon industry. Salons with ticket prices from $26 to $74 constitute 64 percent of the industry, and those with ticket prices of $75 or more account for the remaining 7 percent.

At Regis, same-store results in the first quarter were strongly correlated with average ticket prices. The company’s strip center concepts, namely Supercuts, Cost Cutters, Promenade, First Choice Haircutters, Magicuts and Pro-Cuts, where average tickets are in the $15 to $18 range, saw a 2 percent bump. SmartStyle salons at Wal-Mart, where the average ticket price is $19, reached a same-store sales gain of 1.3 percent. At MasterCuts, where the average ticket is $18, same-store sales ticked upward 1.2 percent. But at Regis salon concepts, where the ticket average is $39, and Trade Secret salons, where it’s $26, same-store sales fell 4.6 percent and 14.9 percent, respectively.

“We’ve been through a lot of recessions in the past and there hasn’t been a decline in visitation patterns, nor has there been any evidence of people trading down. Today, there is a change,” says Finkelstein. “We’re fortunate in that 90 percent of our salons are in the affordable arena—Supercuts, Wal-Mart—as opposed to Regis and Sassoon.…Those salons have been hit far more than our affordable salons because people are trading down.”

Like Regis, value chains such as Fantastic Sams, Great Clips and Hair Cuttery argue that they stand to benefit from consumers shying away from their pricier competitors. Traditionally a haven for male clientele, many of these chains aim to capture women who, under normal economic conditions, frequented salons with more expensive services.

“Customers previously going to more upscale salons and moderate salons are now going into Hair Cuttery for the first time,” says Susan Gustafson, president of Vienna, Va.-based Ratner Cos., owner of salon brands that cross the price spectrum, including Color Works, Bubbles, Salon Cielo and Hair Cuttery, a 750-unit chain with an average price for a haircut with shampoo and conditioner of $16.

Fantastic Sams, which has 1,350 locations, and Great Clips, which has nearly 2,710, tell similar stories. Great Clips’ vice president of franchise development, Rob Goggins, says, “I’m hearing that women in particular are dropping out of that higher price category and giving us a shot. Before, the wife would run into a store—Target or Wal-Mart—and the husband and kids went to get their hair cut and she went somewhere else. Now, instead of going somewhere else, she is coming in.”

Rector-Gable is not convinced that women accustomed to high-end salons, especially in key urban markets, will make the leap to cheaper salons longterm. “I don’t think we’re going to see a huge influx of those women who go to A and B salons going to C and D salons,” she contends. “I’ve talked to a lot of the old-timers in the business, and they still maintain those clients. It is nonnegotiable.”

Within salons, though, there’s evidence that people are opting for cheaper services. At nine-unit Tucson, Ariz.–based Gadabout SalonSpas, where cuts run from $29 to $100, director of marketing Megan Davis says, “The people that are newer on the floor and aren’t charging $50 are busy. The veteran people get booked closer to [appointments]. People are calling in for a service that is affordable.”

As with other brick-and-mortar sectors, the middle tier of the industry is getting walloped. Studio H, an 1,800-square-foot salon in an affluent suburb of Los Angeles, reports that customer traffic has dropped and the parking lot is emptier than in years past. “The numbers are down. We’ve taken a hit, there’s no doubt about it,” says manager Rosemary Haas. “Although people want to be beautiful and maintain their look, they feel that they’re getting enough just with a haircut and maintaining it with the products they can find.”

The upper tier, long considered immune to the whims of the cost-aware consumer, is feeling the pain, but is squeaking by. “I am hearing 10 to 12 percent are saying that they’re down. The rest are up or are even,” says Miller of the upper tier.

Business at Philip Pelusi, a 15-unit chain with an average ticket of $230 at its New York locations and $89 at its Pennsylvania locations, is running flat to up 2 percent this year. “It’s really difficult because it’s not just the fact that you’ve got the possibility of your business flattening, but the pressure of cost is increasing,” says Pelusi. “We’re all going to have to raise our prices somewhat.” Pelusi has hiked product prices 8 percent and service prices 5 percent.

Unfortunately for salons, there’s minimal overhead to target for cost savings. Salon companies, already obsessive about product wastage, are becoming fanatical. “All the products that we use are very expensive, and I tell my staff an ounce is equal to a dollar,” says Anders.

Rents may be an area where salons can realize real savings, and landlords have been receptive to renegotiating leases. “We take advantage of every opportunity to go in and work with our landlord partners. Nobody wants to lose a good tenant,” says Scott Colabuono, ceo of Fantastic Sams.

Drastic staff reductions are rare, but many salons are slashing receptionist hours and chains are moving stylists away from underproductive salons. Companies also are seeing that the pool of labor is getting larger, and stylists are willing to budge on wages. “I don’t know of any franchises that are necessarily lowering the wages, but when you’re hiring new people, the rates are softening a little, but not dramatically,” says Colabuono. According to the National Accrediting Commission for Cosmetology Arts and Sciences, there were 1.4 million salon employees in the U.S. in 2007; stylists earn an average of nearly $40,000 annually.

However, most executives don’t foresee that the economy will radically transform the industry. “The salon industry is a very strong space,” says Janet Denyer, ceo of Gene Juarez Salons, based in Bellevue, Wash., with 11 locations, including two cosmetology schools. “People are very fussy about their appearance, and they need small indulgences to deal with day-today living. I am guardedly optimistic.”

Finkelstein agrees. “Changes in this industry are glacial,” he says. “There will be some trading down on product, but I don’t think our basic service business will change.”

Jacqueline Clarke, a research director at Diagonal Reports, points to one societal development since previous downturns that could help salons: Women now view hair coloring as almost a necessity to fit in. “Women are no longer coloring their hair just for personal pleasure, but they do it to look younger and be competitive in the workplace,” she says. “You can put your hands into your pocket and not get your nails done, but you can’t put your head into a pocket.”

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