Sally Beauty Holdings (SBH) reported their latest quarterly results last week. The results were dismal enough to send the stock to a 52-week low. Is SBH a victim of the pro beauty industry, Amazon, terrible business plan or a combination of all three?
I recall vividly back in 1991 CND cut us off because full-service distributors didn’t like us shipping into their territory. Same thing occurred in 1997 with OPI. Back in the day full-service distributors ruled the world with exclusive distribution agreements that made them financially secure for life. Competition was non-existent.
During this time, Sally was buying OTC beauty suppliers . Sally grew quickly through acquisitions and became the dominant beauty retailer well before Ulta opened its first store. While Sally was creating a monopoly in its niche, the then CEO decided to start a new division that would eventually dominate the pro beauty side by acquiring as many as full service distributors as possible. Hence the creation of BSG/Cosmoprof. (L’Oreal got into the game late as it didn’t want BSG to control its brands so it started Salon Centric to compete and bought as many full service distributors as possible as well).
Fast forward to today and what to do we have? While Sally has more than 3000 stores, Sally’s business is declining. BSG/Cosmoprof is flat and that is with its monopoly on key hair care brands. In what used to be equal number of stores to DSC’s, stores are now more than 2/3 of the mix. Meanwhile virtually every distributor has been bought so growth is not an option through acquisitions.
Some say Amazon will buy SBH to get a foothold into the beauty business. Then again, anything is possible as Amazon ponders getting into medical/dental distribution, auto parts, fresh food and just about any business that has margin it can eat. Perhaps a more intriguing question to ponder is the fate of SBH the fate of the pro beauty business? One clue: The demise of DSC’s.
One thing is certain, SBH is in survival mode. Look no further than their email blasts advertising new lower prices, BOGO’s, 25% off everything and a deal of the day that makes one ponder what their pricing strategy really is. And here is the thing about today’s economy: No one cares if SBH survives or not, their products will always be available somewhere else with free shipping and two day delivery, sooner or later.
Thanksgiving is tomorrow and my favorite holiday of the year. Plenty of great food, family fun, sports on TV and the Turkey Trot. But what about Black Friday this year? Never before have so many retailers advertised weeks in advance their Black Friday deals. Add to the fact that there are no must have gifts this year, it’s going to be a shootout on the OK Corral. Who is going to win? Walmart for sure, the rest, we will see. Cyber Monday? Who else but Amazon? We are more conditioned to buy from Amazon than at any other time even with the economy firing on all cylinders. 2018 will certainly be a watershed year for many retailers. And as far as football goes, does Detroit have a chance against Minnesota?
I just got done watching Big Little Lies on HBO. The story focuses on parents in Monterey, CA that have first-graders. Who knew how much drama could come from six-year olds. No wonder stress and high blood pressure is at an all-time high.
And yes just in case you were wondering, pumpkin pie is still my favorite Thanksgiving dessert, candied sweet potatoes favorite side and a little dark and white turkey with a touch of gravy makes the perfect plate.
One of the great things of being an Entrepreneur for more than 40 years is that you get to watch public companies walk the talk and then see if their results match up to expectations. You can also take advantage of missed opportunities they seem too trivial to pursue.
Best yet, public companies must inform their shareholders quarterly of their financial results, and what analysts want to hear most, future expectations. Based on the current quarter of earning releases to date, one must question the state of the pro beauty business.
Since you are reading this blog, you know my thoughts all along on where the pro beauty business is heading. My two favorite companies in the space, Amazon and Ulta continue to take market share while the traditional companies are struggling more than ever. Listen if Sears Holding is going broke, J.C. Penney is treading water and a Canadian retailer is looking to take over Macy’s which is ten times their size, you know the entire retail picture is changing quickly.
You know salons shrunk by 7% last year and my thoughts are that we will see a similar scenario in 2017. In a classic dilemma of what came first, the chicken or the egg, we have to ask ourselves if salons are closing where are people getting their haircuts? In classic Uber fashion, the industry has always been filled with overcapacity, hence the reason for so many part-time hairdressers and the evolution of booth renters. Walk into just about any salon today and you will see there is still too much capacity so we have a ways to go.
In the meantime you have companies such as Regis reporting negative sales growth and huge drops at retail. Yes innovation has been lacking but consumers are flocking to Ulta to buy their pro hair care items instead of the mall. Sally also reported negative growth with their stock getting slammed. The CEO announced a total restructuring with plans to eliminate up to 150 field managers, cut operational costs and somehow squeeze more margin from their suppliers. But again with beauty schools shutting down along with salons, where will the growth come from when many of the same items are available at THE INDUSTRY SOURCE and Amazon at far cheaper prices.
Bottom line: We are going to see more hair care brands move to alternate distribution as they can no longer rely on traditional methods. And really, how many years has diversion of these brands taken place anyway?
Speaking of the hair business, new items we recently launched that I am very excited about include:
Hair Bobbles are half the price other brands and flying out.
Why spend up to $49.95 for a digital scale when you buy the ForPro model for only $12.99?
I am also loving the new XHI X-Steam Pro Flat Iron & Straightener. It truly is a magical tool for straightening hair in half the time without damage.
As I have stated before, innovation and excitement is alive and well at TNG and to further this statement, I just announced one of our biggest product launches in company history today. More to come on this next blog.
“Welcome to Gina Franklin, Larry! So nice to see you. Matt will be with you shortly. Can I get you some coffee, soda or perhaps a glass of wine?”
As I walk past the receptionist I head over to the coffee station where there are fresh pastries, bagels, assorted beverages, comfy chairs and current magazines. The salon is buzzing with women getting hair cuts, hair color, makeup applications and it’s like everyone knows each other.
Matt comes and gets me, wonders if I need a manicure and hands me a copy of the WSJ. After a long haircut and hot towel face treatment, I’m back to the receptionist to book my next appointment and be sold on the latest hair care items. Of course she knows I’m in the business and most likely we sold her those products but that’s her job. $60 later I head out.
The rise and fall of the independent hair salon business has been remarkably quick spanning only 30 years. Oh there are plenty of other industries that have come and gone much quicker, i.e. the video rental business (Blockbuster was an amazing story). The tanning salon business is 25 years old and struggling to stay alive. In the past five years alone, tanning salons have declined by a third to less than 13,000.
I’ve mentioned the historical part of the rise of the independent hair salon business in the past and only Paul DeJoria is left to relish those memories. Everything else has gone down the drain. There are many reasons for the decline and one only wonders what the next 10-20 years is going to bring. After all, everyone still needs to get their hair cut. From what I can see, the usual suspects are at work over the decline of the industry:
- Entrepreneurs came, sold, and were never replaced. The likes of Arnie Miller and Jheri Redding weren’t just about products, they were about inspiration for a new generation of guys who never envisioned themselves being hairdressers. Suddenly in the 80’s and 90’s it was cool to be a hairdresser. Then the entrepreneurs sold out to the likes of L’Oreal, P&G, and Henkel and that began the first transitional wave down. Guys no longer see this as a cool industry and beauty schools have been turning out 99.5% female hairdressers for the last decade.
- Competition ceased and public companies took advantage. L’Oreal not only was the first hair color company in the world, they were astute enough to buy the best companies such as Matrix, Redken, Pureology, and ARTec (OK, that one they screwed up). In the meantime they had the retail consumer to support their expansion with brands such as Maybelline, Kiehl’s and L’Oreal. P&G got into the game too late with their acquisition of Wella, Sebastian, Nioxin, Clairol and Graham Webb (oops, that was a nightmare and too bad). Now P&G is unloading all these brands (Fekkai they paid $450 million is now worth $50 million) and even L’Oreal stated they are not interested in any of them. OK Henkel will come to the rescue but too little and too late. Unilever who bought TIGI, also has no interest in a larger footprint in this industry.
- Competition among distributors went public too. Sally bought BSG and BSG bought the best of the best of the independent distributors. Today BSG operates more than 1200 stores and has nearly 1000 DSC’s. Salon Centric owned by L’Oreal bought the rest and this year will most likely buy the remaining Redken distributors. They have about half the presence of BSG. Combined however, they own the market and leaves companies such as TNG to focus on innovative products that they can’t match or get involved with.
- The death of the independent salon. My story to start this blog is true. It was all about the salon experience. Booth rental was an infant industry that took root in California and Texas and then Florida. The Midwest and East coast were anti-booth rental. But hairdressers are an interesting group. History has always dictated that the salon owner made out like bandits offering only 40% to 50% commission. The rise of male hairdressers moved the needle to 60% and even 70% commission to retain the best. And even that didn’t work. Salon walk-outs became as common as salons closed on Monday. Eventually salon owners had enough and booth rental gained traction. Chain accounts with their franchisees saw a new opportunity at the same time with the proliferation of beauty schools churning out hairdressers with no where to go. It’s no wonder that the life expectancy of a new graduate that stays in the industry is at the lowest point in history.
- Retailers such as Sephora and Ulta enter and offer a superior experience for consumers to buy hair care products. Today Ulta is marching toward 1000 locations and its salon business has never been stronger. And factor in Amazon that has virtually every hair care brand on earth priced well below retail.
While all this is going on, what are our industry leaders (such as PBA) doing about it? You guessed correctly. They still flock to the trade shows and trumpet the virtues of education while the only ones attending are rushing to the flea markets in the back of the show with their empty roller bags. They still honor someone at the City of Hope dinner at Cosmoprof just like those diners on the Titanic who were raising their champagne glasses before the tragic accident.
The true winners in all this are L’Oreal, Sally/BSG and Ulta. I always applaud winners (unless they wear maize and blue). And I see them keeping on winning with no one to stop them.
For us, life is good. When you have $50 billion in sales between the winners, it only takes a few crumbs to make me happy. Over the past few years those crumbs turned into cookies, then cakes and suddenly we have a bakery. Our assortment has never been better and our customers love us for what we do for them. But when it comes to the hair care business, we need to keep the independent salon owner alive. One hint for them: Support independent distributors and manufacturers.
After more than 27 years with Sally Beauty, a.k.a. Sally Beauty Holdings (SBH), Gary is hanging it up within the year to enjoy life. As the CEO, President and Chairman of the Board, one can only wonder the responsibilities Gary has had to tackle including those dreaded quarterly conference calls in which analysts ask questions they shouldn’t be asking.
I’ve had lunch with Gary and he has always been an affable type of guy that enjoyed running the business. Although SBH is one of our biggest competitors, Gary always had the vision that the beauty business is like all others and the bottom line is the most important. It’s all about numbers and basis points.
From a 30,000 foot view, this is the perfect time for Gary to exit. He already oversaw the acquisitions of many independent distributors to create Beauty Systems Group and Cosmoprof, now with more than 1000 stores and nearly as many DSC’s. Sally itself has ventured overseas but its been the USA business that has kept the machine running. With the low hanging fruit wiped out, the next CEO is going to have to spend his life in airplanes to grow the business. And I am certain that is not Gary’s desire.
With Gary’s announcement of retirement, he also announced his successor, Christian Brinkman. What is telling about this hire is that Brinkman is from outside the industry and was most recently a VP at Kimberly Clark (known for Huggies and Kleenex) on the international side. No doubt his hire was to grow the Sally business overseas. The press release stated that Gary would “train” Brinkman for up to one year. For sure Brinkman will need to learn the difference between nail polish and gel polish which could take at least a couple months. My biggest take-away from this hire is that Sally no longer needs a merchant to run its business, the days of merchants are over (and that is another commentary), and the focus must be on new growth. And the only place to grow is international.
Love him or hate him, Winterhalter and before him, Michael Renzulli (photo below in 1972), got their nails dirty in the business.
On one hand, I am thrilled for Gary to leave on a high note. On the other hand, it’s another tipping point for the pro beauty industry as the industry continues to evolve into the retail community. For us, it’s good news because no matter how much Winterhalter mentors Brinkman, Brinkman’s focus will never replace Winterhalter’s. Looking forward, salon professionals top 3 choices for buying products include:
- SBH focused on international expansion and run by an ex-Kimberly Clark VP
- L’Oreal (owns Salon Centric, Kerastase, Maybelline and a slew of brands), a $28 billion French empire
- THE INDUSTRY SOURCE, independent and family owned since 1985 still focused on the customer and being a merchant.
So long Gary and enjoy retirement (although you still have a few more years to offer your valued insight). Perhaps you can have lunch with George, Bill, Max, Essie and a few others one day. I wonder who would buy.