Monday, October 6, 2003

Cutting In
Chain salons increasingly competing for clients with independents

By Andrea Jares
Star-Telegram Staff Writer

Joe Malin opened a hair salon in Arlington more than four decades ago, a time when the industry pretty much consisted of small operators specializing in either inexpensive, no-frills cuts or expensive hairstyling. Today, he faces new competition, not just from other small businesses but from large chains like Regis Corp., which is driving consolidation in what has been a highly fragmented industry.
Minneapolis-based Regis has been aggressively acquiring smaller chains -- including Hurst-based Pro-Cuts this year. The Pro-Cuts chain had more than 200 salons. "I would say it was one of the three significant acquisitions in 2003," said Jack Nielsen, investor relations analyst at Regis.

In the past decade, publicly listed Regis has made 255 acquisitions to add more than 7,000 salons, or an average of almost two salons every day. Nationwide, almost one in 10 hair salons is owned by a chain. Regis is by far the largest, owning brands such as Supercuts, Vidal Sassoon, MasterCuts, SmartStyle and Mia & Maxx Hair Studios. But even with revenues estimated to exceed $1.8 billion this year, it controls less than 5 percent of the market, analysts say.

The corporation benefits from economies of scale, national name recognition and carefully chosen locations. Many of the other chains focus on a specific niche in the market, but Regis has sprawled across many price and type categories.

The independents also fill a niche, saying that consistency, familiarity and service are their strongest selling points.

"We're a mom-and-pop shop. We're down-home, and that's about it," said Ruby Browne, Malin's partner of 21 years at Finest Touch Hair Design at 1126 S. Bowen Road in Arlington. "You can still get your hair wet and cut for $10," Browne said.

Some of the independents say the haircut industry is dividing into two markets, with the chains and the independents serving customers with different needs.

"As a whole, I don't notice that they hurt our business because we don't compete with them on price," said salon owner Shelton Ogle. "They don't do what we do. They don't even try." Others worry about the growing size of the chains and their ability to pare costs because of their size.
"The independents either think of the chains as a threat to their business, or they ignore them completely because they are a different dynamic," said Heather Slater, editor of Salon Business Strategies magazine.

Richard Walker, a Pro-Cuts franchisee with seven locations that are now part of the Regis chain, considers himself to be competing with the independents. And if the chain draws customers away from their competition, so be it. "I don't feel real good about that, but that's life in the fast lane," Walker said. "You do it, or somebody else will."

Adding to the pressure in what has traditionally been a steady industry is the continued economic downturn. People still get their hair cut, but they often wait longer between visits, salon owners said. "I think a poor economy affects every business," said Ogle, who has three Shelton's salon locations and four Ogle School of Hair Design locations. "The secret or challenge in whatever you're selling is: How bad is it needed and how does the person view it in perspective to where they are in life?"

The chains and the independents are generally dealing with the competitive pressures in different ways. Some locally owned salons, like Ogle's brand of full-service salons and day spas, are focusing more on customer service and retaining long-term customers. Ogle said classes at his schools, which he started to provide qualified employees for his salons, have always included a customer service element. But he has been stepping up that emphasis.

Recently, he began filming training videos to make service a larger part of the curriculum. That is especially important as people have less and less human contact and lead increasingly hurried lives, he said. Ogle said his hairdressers "are not doing a $15, nine-minute haircut."

Chain salons have taken a more pragmatic approach, focusing on the bottom line and market penetration and competing on price, convenience and location."Everything I've ever read about Regis is they have no plans to slow down," Slater said. "They can absorb anything in the industry. They are that big."

Regis' aggressive economies of scale allow the chain to trim the cost of buying hairstyling products, snap up better retail locations, conduct sophisticated training programs and gain bigger advertising exposure.
Regis is also able to monitor inventory precisely and whittle costs to the bone by using sophisticated point-of-sale software to track product sales. By contrast, locally owned salons might question whether to get a computer at all, Slater said. These financial and technological resources are elements they can add to their acquisitions. "That will add to their expertise and whole retail product and add value to their salons immediately," said Christopher Krueger, stock analyst for Miller Johnson Steichen Kinnard.

The Pro-Cuts acquisition offers Regis a strong foothold in North Texas and nearby states. "If I looked at a map, I would suspect that that was a place they had less of a presence," Krueger said. "They could get more of a foothold in a shorter amount of time."

Walker said the company is already providing Pro-Cuts' staff with training, support and new ideas on making the franchise model easier to replicate. Besides the independents, Pro-Cuts has been competing with similarly priced salons such as Supercuts, now a sister Regis company, and Great Clips.

Great Clips, another Minneapolis-based chain and the largest single-branded salon company, also has its eye on rapid expansion in the Metroplex, said Michael Chitwood, the company's real estate manager in Irving. The franchise now has 55 locations in North Texas with plans for 150 or more. The Dallas-Fort Worth market offers a lot of opportunities, he said.

But the franchise business has also grown because of the downturn in the stock market, which has led some people to pull their equity out of Wall Street and put it into franchises such as Great Clips, Chitwood said.

Georgetown-based Sport Clips, which has identified itself as a hair salon aimed at men, is also expanding. The company has 120 locations across the country and $25 million in annual revenue. It plans to add at least 100 stores in the next 12 months.

As more competitors enter the market, the battle for customers will continue to be fought in each neighborhood, with customers evaluating the cost, the location and the relationship they have established with their salon.

Browne insists that there is not much difference between a haircut that costs $60 and one that costs $10. "You can only cut it so many ways," Browne said. "I don't care if you cut it with scissors, a razor or glass."

Andrea Jares, (817) 685-3851 ajares@star-telegram.com

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