Regis Corp.'s Paul Finkelstein.

As diversion of salon brands accelerates in the mass market, at least one specialty retail chain has decided to update its current business model to make it...

As diversion of salon brands accelerates in the mass market, at least one specialty retail chain has decided to update its current business model to make it more competitive.

This story first appeared in the December 14, 2007 issue of WWD. Subscribe Today.

Trade Secret, the 630-unit business owned by Minneapolis-based Regis Corp., was designed to be a destination for those craving a plethora of professional hair care brands. Today, these products — which once offered up a recipe for unique positioning — are now sold in a range of retailers, from Sephora to Ulta to the neighborhood drugstore, the latter of which has become the biggest thorn in Trade Secret’s side, and to the salon industry overall. The result has taken a toll: Trade Secret this year posted a 4 percent sales dip, the first decline since Regis bought it in 1992.

In an effort to fix the chain, several characteristics about Trade Secret’s DNA were uncovered, surprising even executives: Shoppers are more affluent than had been thought, and they are also older. In what the chain hopes will tantalize this particular shopper in the future, this February the $253 million division plans to roll out a new format complete with skin care, cosmetics and bath and body brands.

“There are a million customers in Trade Secret’s loyalty program. Of that about 25 percent have a family income of over $125,000,” said Paul Finkelstein, president and chief executive officer of Regis.

Trade Secret, which has most of its locations in shopping malls and more recently in strip centers, is testing out new brands in several locations to appeal to this savvy shopper, who spends about $53 per visit, double the average ticket of the everyday customer. New items by Z. Bigatti, Freeze 24/7, Murad, Zeno, Thymes, Archipelago, Mineral Fusion and Simply Organic have replaced lower-performing hair and nail care brands, said a Trade Secret spokesperson, who would not reveal which brands have been deleted.

The move shows just how saturated the category has become. Professional hair care has exploded in the past 15 years, from $1 billion to $5 billion in retail sales, according to industry watchers. Demand for brands such as Matrix, TIGI, Sebastian, Frédéric Fekkai and Joico have even brought nontraditional hair care beauty retailers such as Victoria’s Secret and Bath & Body Works into the mix while also making true beauty emporiums more of a threat. And demand is fueling diversion in the mass market, Finkelstein said.

“In retailing, once you have a hot category everyone gets into it,” he said. “L’Oréal has been the worst offender because they could control it if they wished. The trust has been abused by so many manufacturers who are allowing their products to be diverted. As a result, our universe has shrunk.”

David Craggs, president of L’Oréal Professional Products Division, which makes the Matrix, Redken, L’Oréal Professionnel, Kérastase and PureOlogy professional hair care brands, emphatically defended its fight against diversion.

“We disagree completely with Paul Finkelstein’s assertions that L’Oréal is not doing enough to counter diversion. [Our] investing $1 billion a year to buy our distributors is living proof.” Craggs was apparently implying that the acquisitions are aimed at giving L’Oréal greater control and therefore more effectiveness in combating problems like diversion.

While Finkelstein said Regis holds a 15 percent share of all professional hair care products sold in the U.S. (its various banners include Regis Salons, Supercuts and Jean Louis David), the heated competition has led it to gobble up its rivals, such as when Regis became an equity partner in Pure Beauty in the past 12 months, a beauty retailer positioned to go straight up against Trade Secret.

“The answer to our issue is we have to expand our universe because everyone is getting into professional hair care. We had to make it better,” Finkelstein said.

At the heart of the revamp, new stores will have displays, gondolas and light fixtures that aim for a “salon boutique” feel. Price points all around will rise, the quality of the merchandise mix will go up several notches and sales, as a result, are expected to increase. For example, stores that now generate sales from $400 to $430 a square foot are expected to generate higher figures, said Norma Knudsen, chief operating officer, Trade Secret.

The new product mix will also change how much hair care contributes to overall sales. Currently, professional hair care accounts for 70 percent of sales, with nail care and appliances bringing in about 12 percent. The balance of sales comes from skin care and beauty accessories. After the revamp, Trade Secret anticipates sales of skin care and cosmetics products to reach 8 percent within the first year; bath and body will represent approximately 4 percent, and beauty accessories will account for between 4 and 5 percent. Nail care and appliances will be about 10 percent of sales, with hair care dropping to 55 percent of overall business. The new assortment of brands has not yet been selected, said Lynn Hempe, senior vice president of merchandising and chief merchandising officer, but brands will include those sold at specialty beauty stores and department stores. The company to date continues to court potential partners, sending custom-made folders outlining the new Trade Secret, Hempe said. Executives are still “in the process of putting together the stores, what lines will stay and what lines will go away. We are still working with vendors on what we want to get,” added Knudsen.

Trade Secret is also revamping its in-store salons — the component that allows Trade Secret to sell professional products legitimately. Salons offer cutting, coloring and styling services and are scheduled to get a more open floor plan. Currently, salon services account for about 12 percent of overall sales, according to Regis’ Annual Report, and executives are looking into adding skin care and cosmetics services with a licensed aesthetician on staff.

Justin Hott, a Bear Stearns analyst, said that while the revamp aims to update an antiquated model, he still thinks there is an enormous risk in proposing such a shift.

“There’s the question of whether it will be executed well. This [chain] already has huge inventory. Now they are adding more? They haven’t proven they can grow hair care and now they are getting into other categories, especially a crowded, very tough category. It’s a throwing in of the towel. If you can’t get it done in a category where you dominate, how can you get it done where you don’t?”

Rick Goldberg, a manufacturer of salon products and a former Aveda distributor, has a different view on Trade Secret’s plans.

“I think it’s really smart. With diversion as rampant as it is, their primary value proposition is now everywhere. By offering a different mix they can re-attract that same consumer. They can do direct mailings and advertising to create awareness of the new concept,” Goldberg said.

Goldberg, a Minneapolis resident who often visits Trade Secret stores, added that the chain’s visual presentation has gotten stronger over the past three years and that it has been highly successful in getting into the newer categories of hair extensions and appliances.

The first Trade Secret bearing the format will open at the end of February in the Mall of America in Bloomington, Minn., and will roll out to units throughout the year.