PRINT THIS STORY:

CHANGE TEXT SIZE:

REGIS HITCHES RIDE WITH WAL-MART FOR NEXT PHASE OF GROWTH

Regis, a hair salon chain that grew rapidly by riding the wave of mall expansion, is growing even more by specifically riding Wal-Mart’s.

Indeed, Regis and Wal-Mart are quite the couple. Each dominates its respective retail category, and each continues to expand by grabbing market share from independent operators. So perhaps it should come as no surprise that the two have formed a partnership that comprises about 1,500 salons inside U.S. Wal-Mart stores.

Observers consider the relationship, which is strictly landlord-tenant in structure, to be highly symbiotic. Wal-Mart gets more traffic. And some analysts suspect that Wal-Mart, like mall landlords, earns a percentage of salon sales through a fluctuating rent structure, though neither company would disclose financial details. Regis, for its part, receives great site selection and access to prime real estate.

Established as a mom-and-pop in Minneapolis in 1922, Regis started opening units in practically every mall in the country in the mid-1980s. The chain hitched up with Wal-Mart eight years ago, after acquiring National Hair Care, a 157-unit regional chain. Regis recreated the chain as SmartStyle Family Hair Salons to target Wal-Mart’s value-conscious consumer base. In 1999 the company acquired The Barbers, Hairstyling for Men & Women chain and then franchised about half its nearly 1,000 salons as Cost Cutters inside Wal-Mart stores.

Today there are only about 175 Wal-Mart Cost Cutters, all of them franchises. Going forward, Regis plans to open only SmartStyles, though franchisees may open additional Cost Cutters under existing agreements.

Wal-Mart offers growth potential, says Melissa Boughton, senior vice president of real estate at Regis. “It’s totally driven by Wal-Mart and where they choose to go,” she said. Indeed, during a conference call on first-quarter earnings for fiscal 2005 (which began in July), Regis CEO Paul Finkelstein said the chain will probably open about 200 SmartStyle units during the year. “We’ll have our biggest year in SmartStyle, in terms of growth.”

Wal-Mart has said it would open about 250 Supercenters in the fiscal year that begins in February.

If SmartStyle’s fate gets joined to Wal-Mart’s, the concept could eventually eclipse even Regis’ largest corporate brand, the 1,839-strong Supercuts. Wal-Mart is going everywhere, as evidenced by the aggressive national and international expansion of its Supercenters, and that’s where the majority of SmartStyle salons can be found. That expansion will continue to pay off handsomely for Regis, according to analysts.

“It’s among one of their best-returning concepts and one of their best returns on capital,” said Sharon Zackfia, a retail analyst who covers Regis for William Blair & Co., an investment bank based in Chicago. Those premium returns on capital come from a higher percentage of product sales — about 38 percent, compared with the mid-teens-to-20s for its other concepts.

Because hair-styling products provide higher-profit returns than salon services, keeping that ratio high is important.

Zackfia says she doubts that Wal-Mart is seeing any cannibalization of in-store hair-product sales, even though Procter & Gamble and other companies have launched products of their own. “Wal-Mart probably recognizes there is demand for the product they cannot sell, and the salon business brings in repeat traffic they might not have gotten,” Zackfia said.

So not even this appears to threaten the two companies’ marital bliss.

— MF