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For chains, these are great hair days

BY MYA FRAZIER

A McDonald’s cheeseburger in Austin, Texas, tastes the same as one in Alexandria, Va. That’s the kind of consistency Great Clips wants to bring to a haircut at any of its 2,315 units. And that, some say, is a key factor behind the explosive growth of haircutting chains overall.

How explosive? Well, in just the past 10 years, the 800-pound gorilla among them, Regis Corp., has grown from 1,479 stores to about 10,200. Great Clips, which opens an average of five units a week, has added more than 880 units since 2000.

In aiming to bring convenience and consistency, the chains are rapidly consolidating a fragmented category and challenging one of the founding principles of the roughly $60 billion industry: that consumers are loyal to stylists, not salons. Citing their growth as proof, the chains insist that customers are not nearly as likely to be tied to an individual hairstylist as to a familiar salon.

“That’s the bridge we gapped,” said Dean Wieber, executive vice president of development and real estate at Minneapolis-based Great Clips.

Only a decade ago, not a single hair salon chain had surpassed 2,000 stores. But by selling an experience and a brand, hair salon chains have been rapidly stealing share from mom-and-pop salons.

Uneasy the head
The independents still dominate, but they are not invulnerable. Of the estimated 313,000 salons in the U.S., roughly 100,000 post more than $100,000 in annual revenue, according to a report by the National Accrediting Commission of Cosmetology Arts & Sciences. Of those, only about 16 percent belong to a chain of five salons or more, but they are in rapid-growth mode. In fact, the average chain salon does business at 10 times the rate of the average independent, says a survey by Multi-Sponsor Surveys, a Princeton, N.J., private research firm.

Leveraging their financial heft and growing brand recognition, the national players — Regis, Great Clips, Fantastic Sams and Hair Cuttery — will continue to shake up a fragmented industry analysts say is ready for consolidation.

So this is where the mom-and-pops start a-trembling, right? Well, it’s not that simple, says retail analyst Sharon Zackfia of William Blair & Co., an investment bank based in Chicago. Consolidation has its limits, after all, in this category as in any other. She sees a parallel situation in restaurants, for instance.

“Back 15 to 20 years ago, casual dining wasn’t very chained at all,” Zackfia said. Now such chains as Applebee’s seem ubiquitous, and yet the top 10 chains combined control only about 20 percent of the market.

There are tests on the real estate front too. Even if chains bring more to the table than independents — the ability to sign multiple leases, a proven track record of sales, brand awareness — it seems that does not necessarily mean they are always the first choice, especially in lifestyle centers.

‘Something special’
Robert Luleff, president of City Commercial Realty, a Dallas-based brokerage firm, says that when he signs tenants at lifestyle centers, he checks out the local options before the chain operators the “wet-cutters,” as they are called.

“You wait until later in the leasing process,” Luleff said. “There’s nothing wrong with the wet-cutter, it just doesn’t help you get a lot of other tenants.”

At Mockingbird Station, for instance, a 200,000-square-foot lifestyle center that opened in Dallas in 2000, Luleff entertained several inquiries from national chains, but held out for an independent operator with local clout and cachet. “The developer said, ‘No, you’ve got to get something special; hold out until you get it,’ ” Luleff recalls. And he found that local something special in the well-known Michael Raymond Salon; the 1,900-square-foot Mockingbird Station unit was the salon’s second.

Depending on a development’s size, chains and independents can coexist, says Rene F. Daniel, CLS, president of The Daniel Group, a Baltimore-based consulting firm. Daniel, a leasing agent for landlords, prefers to put two or three salon operators, including at least one chain unit, in a development.

At the Town Mall of Westminster (Md.), for instance, a 500,000-square-foot traditional mall revitalized three years ago, Daniel signed a Regis salon, a Regis brand called Trade Secret, and a Hair Cuttery. But none of this did any harm to the mall’s independent player, Freestyle Hair & Body Spa, a longtime tenant. In fact, Freestyle positively blossomed. As part of the revitalization, Freestyle had expanded from 1,200 square feet to 3,000 square feet, and it put the additional space to good use, now offering massages, facials and other spa services.

“They quadrupled their business,” said Daniel. “By adding spa services, they have the ability to do something no one else [there] does. The chains don’t offer spa services, and so they are meeting the needs of a different customer.”

The power to buy
Regis is four times larger than its nearest competitor. But to give an idea of its growth potential, it still controls only 4 percent of the domestic market. Accordingly, the chain continues to expand through acquisitions and new stores, and it plans to add 1,000 units this year.

To be sure, size gives the chains a marked advantage over the independents. With its healthy 10 percent slice of the salon-product sales market, Regis enjoys tremendous buying power on the acquisition front, according to Kevin Foll, a retail analyst at Chicago-based Next Generation Equity Research. Regis’ size also gives it a de facto right of first refusal among independents seeking to sell.

“They turn down three out of four deals presented to them,” said Foll. “They pick and choose among the best opportunities.”

Immediately after acquiring an independent, Regis adds 30 percent in savings on product costs to the bottom line.

The retailer offers developers a diversity of concepts — 57 in all, from the ultrachic Vidal Sassoon salons to the value-driven SmartStyle created exclusively for Wal-Mart.

“We have a price point and a salon that meet virtually every real estate configuration and consumer need,” said Melissa Boughton, Regis senior vice president of real estate. “It’s a pleasant perch to be on. We can truly take the best of everything.”

This real estate dominance gives Regis the edge in nabbing both the overall sites and the best spaces at the newest retail developments. That bodes well for its future.

“It’s like someone trying to compete with Microsoft,” said Foll. “It will be hard for another competitor to catch up.”

Keeping it simple
But there is more than one way to compete. Unlike Regis, Great Clips isn’t aiming to be everything to everyone. Instead, it is building only one national brand, entirely through its franchise program. In terms of that single brand, Great Clips has more U.S. stores than any other salon name. Combined, Regis’ SmartStyle and Cost Cutter concepts total about 1,500 stores, some 700 shy of the Great Clips units.

Pouring more than $30 million into a national advertising campaign, Great Clips is betting on the value-minded customer, particularly men, who make up 62 percent of the customer base.

This customer target influences site selection, of course. Grocery-anchored centers in areas with young, upwardly mobile families, mostly in the outer suburbs, remain the preferred locations, says Wieber. “There aren’t independent salons on the fringes,” he said. “There’s not a lot of competition, and the population is relatively thin.” But that thin population can get thick very fast, he says, once a highway exit opens, a power center goes up or a few subdivisions get built, so getting there first is in Great Clips’ interest.

“If you are out on the ring, you have a long commute, and time becomes more important to you,” Wieber said. “We are selling convenience.”

Heel-nipping hair clippers
Meanwhile, two second-tier players, Fantastic Sams and Hair Cuttery, are getting bigger too. Things look better for Beverly, Mass.-based Fantastic Sams, which was founded in 1974, since a franchise group within the chain bought it out of bankruptcy in August 2003. Fantastic Sams has been successful in California and Florida but has struggled in other markets.

“With our management skills, we can make a difference and make it grow again,” said Anne Comstock Halvorsen, a co-owner and senior vice president of strategic projects and partners. “The beauty sector is a huge industry. This is still highly fragmented, and there is tremendous opportunity for well-run chain operators.”

Halvorsen says the chain plans to open more than 600 stores within five years to approach the 2,000-store mark. The new owners have opened 110 units since the acquisition. “As with any retailer, the availability of good sites is always a challenge,” said Halvorsen, who prefers grocery-anchored power and open-air centers in strong locations. “We’d love more sites.”

The Vienna, Va.-based Ratner Cos., whose flagship brand is Hair Cuttery, has more than doubled its units in 10 years, to 861. Its other brands include Bubbles, an upscale salon with 28 stores; and Salon Cielo and Spa, a full-service minispa with 10 stores.

This year Ratner plans to open 50 stores under its flagship and 20 under the newer concepts, says Les Mardiks, vice president of real estate. In October it launched a franchise program for Hair Cuttery in new markets.

“We want to move west with the concept,” Mardiks said. “This way we can grow quicker. We feel that we are at a point where most of the major markets are consolidating in our industry, and if we are not there to open salons in the good real estate, we won’t get the good sites.”

The real estate strategy for the Hair Cuttery brand aims at grocery- or drugstore-anchored shopping centers and anchored open-air centers in urban environments. “What we like to do is be very competitive in any given market —and saturate the market,” he said. “We don’t go in unless we can open a sufficient number of stores.”

Indeed, competition is fierce. And not just from top players, but from a host of strong, upstart regional chains too. Consider HCX Salons International, based in Fort Lauderdale, Fla., with its Hair Color Experts. The chain’s 55 stores are mostly in open-air centers in Arizona, Colorado, Florida, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, North Carolina and Washington, D.C.

HCX recently sold the franchise rights to a Canadian development group that plans to open 265 units over the next 10 years in that country. Domestically, HCX’s aggressive growth plans include operating 5,000 salons in the United States by 2012. Even with startup costs in the range of $250,000 to $350,000, HCX has sold 145 additional franchise licenses set for U.S. openings over the next 12 to 36 months.

“We hit a niche,” said Joseph Wasch, vice president and general counsel, who oversees the real estate department. “That is why we are rushing to the market.”

Notwithstanding such upstarts as HCX and the continued growth among leading chains, some argue that independents will probably always dominate most of the market.

“Even Regis is never going to have a 50 percent share of the market — it’s just too fragmented,” said Foll. “But they are going to have the largest market share for a single operator.”