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New strategies help some salons survive: Traditionalists say booth rental will remain the norm

April 30, 2007

Americans spend billions every year on professional primping and pampering, but independent salons still are among the riskiest of small-business ventures-with a failure rate second only to restaurants.

Hoping to buck that trend, some salon owners are trying different business models, breaking away from traditional booth-space rentals and engaging stylists as employees with a stake in the shop's success.

Large chains like Great Clips broke the mold decades ago, paying employees an hourly wage to cut patrons' hair. Now local shops are taking it a step further, investing in innovations such as a computer system that helps even out the wild swings that make a commission-based system difficult.

The salon industry-which includes beauty salons, nail salons and barbershops-generated $33.2 billion in revenue in 2004 and the numbers are only increasing, according to the Salon Association, a national trade group.

Even so, salons are risky businesses.

"It's really hard for a [small] salon to make it and provide the benefits that a [full-service] salon provides, such as a receptionist, bookkeepers, cleaning crews, fresh magazines," said Honors Beauty College owner John Halal.

Traditional cut

Most salons start with a single e m p l oy e e - t h e owner. To bring in extra income, owners may rent chairs to other stylists, who work as independent contractors.

That means each stylist books his own appointments, orders supplies, sets rates and figures out his own taxes. The only interaction with-or obligation to-the salon owner is a weekly booth rental fee that averages between $100 and $200.

Nearly 90 percent of salons do not have employees on the payroll, according to the Salon Association.

"Salons still tend to be mom-and-pop organizations," Halal said.

But the success of that business model hangs on stylists filling the chairs with a loyal client base. And for those just starting out, that can be nearly impossible.

Indeed, making it in the industry often takes years of experience and more drive than some stylists have. More than 75 percent of beauty school graduates are no longer in the field three years after they leave school, Halal said.

So keeping those chairs filled-and staffed-can be a major problem.

"That has been the biggest challenge in my industry - dealing with the labor force," said Robert Pence, owner of Robert's Salon & Day Spa in Greenwood.

New graduates still need significant mentoring and training, but when salon owners provide it, they're often left in the lurch once stylists get enough experience to go out on their own.

Owners that use a salaried or commission system try to make the case that stylists are better off staying put, where the salon management takes care of details like ordering products and scheduling appointments.

And beauty schools are trying to address training needs by giving students more business-based classes in customer retention and how to sell shampoos and add-ons. Halal's school, for example, worked business classes into its curriculum early on.

"It's important that students learn more than how to pass a licensing exam if they're serious about working long-term in the industry," Halal said.

A different look

What really began to transform the industry is when large chains, like Great Clips, broke onto the scene about 25 years ago. The companies worked at finding a niche and specializing in it. For Great Clips, it was focusing on the hair cut alone, not coloring or nails.

"Now you see nail salons, shops just focusing on color, you've got an industry that's becoming segmented," said Keith Niehaus, who owns 46 Great Clips stores in Indiana.

With the model also came a more structured work environment. Great Clips employees are paid an hourly wage of $8 to $10 an hour, Niehaus said. On top of that, stylists can earn a bonus based on how many customers they see. They also keep their tips. All and all, Neihaus said the hourly wage ends up being about half the stylist's income. Plus stylists can opt into health care and a 401(k) plan.

"Great Clips was one of the companies helping to change the industry," Neihaus said, adding that stylists can build seniority, their hourly pay, commissions and retirement savings by sticking with Great Clips.

Other salons have taken on a purely commission-based system, in which the salon collects all the money and then gives about 40 percent to 50 percent back to stylists after paying for overhead.

While it encourages more of a team approach, the commission system still exposes stylists to the vagaries of drastic swings in pay.

That's why Pence, who has run his large south-side salon and spa for 25 years, set out to find a better way. Pence wrote a computer program that accounts for all sales-shampoos and hair products-and calculates an average. The stylist is paid for an entire 13-week cycle based on the previous quarter's performance. Pence instituted the system about two years ago.

"It gives a stylist the security that commissioned employees do not have" by taking out big swings in pay, Pence said.

The program also tracks and reports tips and helped the salon pass an Internal Revenue Service audit in 2005 with flying colors. In fact, Pence said the audit found the salon had overpaid taxes.

Under the new system, employee retention is running between 85 percent and 90 percent, and the salon has swelled to 75 stylists. Pence also credits the shop's focus on mentoring and benefits, including a 401(k) plan and cafeteria health plan, for the retention.

At about $3.5 million in annual revenue, Pence believes the Greenwood location can grow to $5 million. He also is considering opening additional shops.

Booth rental here to stay

Despite the apparent advantages of different compensation systems, some in the industry say the traditional model works best for the most talented stylists.

Joe Moore's Meridian Design Group offers stylists at its Carmel and downtown salons a choice between booth rental and commission. He said most choose booth rental because they're established stylists with a strong client base.

They pay Moore a weekly fee and can keep all income, minus supplies and taxes that they take care of themselves.

"It's a little easier for us as owners to manage," said Moore, who has about 50 stylists at the two locations. But he said the commission option also appeals to some.

"We have some artistic people who don't like to mess with taking care of taxes," he said.

Still, the payoff from that customer loyalty likely means the booth-rental system will continue to be the norm, said Sharon O'Donoghue, director of the Central Indiana Women's Business Center, which counsels entrepreneurs who want to start micro-enterprises.

"It follows the doctor-patient model more than the personal consumer-goods model," she said. "People are loyal to a stylist, not a salon. People will follow the stylist. That's what makes and breaks the booth-rental model."

She said the advent of large chains, such as Great Clips or SuperCuts, has chipped away at that model, but not tackled it completely.

If one of her clients wanted to open a salon, she would encourage her to rent out extra booth space instead of setting up a commission-based system.

"Often the owner-operators themselves [have] another day job," O'Donoghue said. "They can't track all the bookings and appointments. They just come around to collect the rents."
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