State Of The Industry Report ‘07

Welcome to the annual State Of The Industry Report. Here you will find an examination of the overall wellbeing of the U.S. indoor tanning industry, as well as a comprehensive analysis of the past season, with regard to how it will affect the upcoming season.

Last year’s report, titled “An Industry At A Crossroads, Where Is The Tanning Industry Heading?”, outlined why the 2007 season would be pivotal for everyone in the industry—from salon owners to manufacturers, distributors to allied companies—and by all accounts, that forecast was right on target.

Just as in 2006, constant variables like the economy, weather, war and gas prices will continue to influence the direction of the industry in 2007. However, this year’s report zeroes in on two other important variables we began to notice a few years ago—consolidation within the indoor tanning industry and increased anti-tanning legislation aimed at hurting the welfare of this business.

Of particular interest is the changing face of the indoor tanning industry. For years, we have predicted industry consolidation, mergers, buyouts and closures, which are common occurrences in a maturing market.

Last year’s issue, forecasting increased merger and consolidation activity, was barely in the hands of salon owners when the predictions started becoming reality.

The “thinning of the herd” trend that started in 2006 continued in 2007, touching salons, distributors, suppliers, manufacturers and allied sectors. Decreased margins and intense competition made this season difficult across the board.

Some industry veterans closed their doors or sold out, while others are mapping out a plan for survival. Just like last year, even the seemingly unshakeable large manufacturers and full-service distributors were affected; however, they held their market share thanks to solid salon relationships and enhanced customer service, financing and Web-based initiatives.

Traditionally, industry experts have agreed that tanning salons have a 20- percent annual attrition rate. However, continued economic woes have increased that number to approximately 30 percent. This year, many independent salons also were acquired or simply took down their shingles. Sadly, a number of veteran salon owners who helped define and grow this industry either sold, closed shop or set out on new journeys.

The trend of franchising and large chains continued in 2007. Franchising has taken on a larger role in the industry, mostly due to solid marketing plans and sound financial resources to help franchisees. On the other hand, a majority of independent salons reported average growth and some are in the middle of expanding existing salons or opening more locations.

Consolidation and acquisitions really started to heat up last summer; therefore, it is important to mention some of the transactions that occurred.

In August 2006, industry pioneers Trevor and Edna Gray announced they had sold their interests in Sunshine Holdings, Inc., the umbrella company of ETS, Australian Gold and Helios, to its current sales executives and local area investor MH Equity. The new company, New Sunshine LLC, is led by CEO and President Steve Hilbert and other board members. Day-to-day operations of Australian Gold and ETS remain in the hands of the industry veterans who were instrumental in building the powerful brands.

Just four months later, on Dec. 18, 2006, Indianapolis-based Australian Gold announced the acquisition of Los Angeles-based California Tan. This acquisition effectively joined the No. 1 and No. 2 indoor tanning lotion manufacturers into one powerhouse.

On the franchising side, Palm Beach Tan, Inc. announced its Jan. 5, 2007 acquisition of the Desert Sun Tanning Salons franchise. Desert Sun became a wholly-owned subsidiary of Palm Beach Tan and continues to operate under the Desert Sun brand. Additionally, Entrepreneur Magazine’s 28th Annual Franchise 500® issue ranked four indoor tanning franchises on its list: Hollywood Tans, Palm Beach Tan, Planet Beach Franchising Corp. and The Tan Company, respectively.

This past spring, U.K.-based light therapy manufacturer Photo Therapeutics, Inc., manufacturer of Omnilux Light Therapy, acquired Carlsbad, Calif.-based Lumiére Light Thérapie and Tanology. Tony Case remains as president of the Lumiére Light Thérapie and Tanology brands.

In June, Suntan Supply of Avon, Ohio acquired St. Cloud, Minn.-based T.W. Tan. Suntan Supply operates from its new 38,050-square-foot facility in Avon, Ohio and T.W. Tan continues to operate from St. Cloud under the management of Jamie Carlson.

In July, Four Seasons Sales & Service, Inc. of Paris, Tenn. announced the acquisition of National Tanning Supply in Springfield, Ill. National Tanning Supply continues to operate from Springfield under the direction and management of co-founders Dave and Annette Orlikowski.

In July, Klafsun, Inc. of Gastonia, N.C. purchased the assets of Sontegra, including the inventory of beds as parts and the registered trademark, Sontegra®.

Just as we were going to press, PC Marketing, based in Ridgefield, N.J., acquired Chicago-based Tanning Supply Outlet, which expands PC Marketing’s national market.

A number of companies that were instrumental in the early growth of the U.S. tanning market also exited the industry this season, including equipment manufacturers SonnenBraune and Puretan. The industry also saw many small- to mid-size distributors fall by the wayside as well as an overall reduction in lotion suppliers.

The face of the U.S. tanning industry has changed dramatically since last season, but with change comes a host of new leaders that are ready to take the industry to the next level.

The addition or revision of tanning rules at the state and local levels has become an all-too-common trend across the country. What does this mean for the indoor tanning industry? Quite simply, we must join together as proponents of the industry and become more active in anticipating, monitoring and fighting these tanning restrictions.

The Indoor Tanning Association (ITA) spent much of its time fighting anti-tanning legislation at the state level; however, many local municipalities also introduced anti-tanning referendums. This is extremely troublesome since what was once a state issue also has become a local and county issue.

Although each state has the authority to draft and execute rules as its sees fit, most local authorities have stayed fairly consistent over the years in regard to mandated salon operations. In addition to licensing and registration requirements, operational areas typically covered by state and local regulations pertain to warning signs, protective eyewear, recordkeeping, age limits, training and licensing requirements.

This year, like last, the industry is under increased fire from the anti-tanning coalition. In fact, salons reported that antitanning campaigns affected their season by 16 percent. More than 20 proposed antitanning legislations were introduced at the state and local level—the majority of which were aimed at restricting teen tanning. As of press time, the only states still in play were California, Pennsylvania, Michigan, New York and Ohio.

Of those, all eyes are focused on California’s AB 105 that seeks to ban tanning for teens under the age of 18. The ITA and the California Indoor Tanning Trade Organization (CITTO), along with California salon owners and operators, spent months lobbying against the proposed bill. As of press time, the bill was scheduled for an Aug. 20 hearing in the Senate Appropriations Committee.

Another concern is Ohio’s HB 230, which seeks to amend current state regulations—which require parental consent for tanners under age 18—to completely disallow minors to tan unless they provide a medical prescription for ultraviolet radiation treatments. Similar to anti-tanning legislation in other states, HB 230 only will add an overly-restrictive measure to the already-effective and well-enforced regulations in Ohio. This is a perfect example of local municipalities that are jumping on the anti-tanning bandwagon, as the Hamilton City Council drafted the original under-18 ban proposal in September 2006. The council tabled the issue a month later, however, leaving the matter up to legislators amid arguments from parents that such a measure would restrict the parental right to make decisions for one’s children.

Salon owners and operators need to pay close attention to proposed regulation changes at all levels—not only to make sure that compliance is met, but also to ensure a voice in the process. These proposals of additions or changes to regulations at the local, county and state level are multiplying at an alarming rate, especially with regard to teen tanning. It is critically important for indoor tanning professionals to be active in working together to keep watch of such tanning regulations.

Another issue to consider is the recent European tanning regulations that went into effect July 23. The European Commission of Health and Consumer Services approved the overly protective law, mandating that the erythema weighted irradiance of tanning beds cannot exceed 0.3W/m^2.

This means that the tanning exposure time schedule, which has been recently reduced due to the evolution of more powerful lamps, needs to be amended and exposure schedules increased to the 20-minute range. The new rules require all tanning equipment manufacturers to make future beds and standups to meet these regulations. Tanning units already in the market will have to change their lamps, filter glass, ballasts and other secondary components to be in compliance.

Some industry insiders question whether the U.S. dermatology community will make a concerted attempt to force the FDA to adopt the European standards.

Fortunately, the FDA’s Erythemal Action Spectrum (EAS) has served the clients of indoor tanning salons in the United States well since 1986 and the industry has a good safety record. Based upon 15 years of data received from the FDA, there was only one complaint made for every 100 million commercial indoor tanning sessions. One reason the U.S. safety record is so exemplary is because of the high degree of professionalism exhibited by the owners/operators of commercial indoor tanning salons.

Monitoring indoor tanning rules and regulations that begin at the local level is an enormous undertaking—which is the primary reason why the industry must band together to do so.

New laws are not always initiated through a traditional state agency, which adds to the challenges of tracking proposed rules. A range of departments including offices of cosmetology, radiation safety, health and consumer affairs oversee today’s active tanning rules.

Tanning critics will continue to target our industry; however, they can be countered largely by the mounting studies favoring sensible, moderate and responsible exposure to light in a controlled atmosphere. The ITA and salon operators are doing their best to fight state tanning legislations, but they need the help of other salon owners willing to step up to the plate and help at the local level.

In the late 1970s many naysayers labeled the indoor tanning industry a fad—something that would peak and fade in a few years. Thirty years later, the U.S. indoor tanning industry is generating $5 billion annually through the provision of controlled tanning sessions and relaxation to more than 30 million Americans.

Statistics indicate there are roughly 20,000 professional indoor tanning salons and another 20,000 locations— such as health clubs, spas, video stores and beauty salons—that house one or two tanning units. In keeping with tradition, the Midwest and Southeast have the highest number of tanning salons per capita, with Ohio, North Carolina, Michigan, South Carolina, Illinois, Indiana and Florida leading the charge.

The majority of U.S. indoor tanning facilities are small businesses, and more than 50 percent of them have female ownership, compared to 25 percent of businesses in other industries, according to the U.S. Census. Indoor tanning also provides jobs for approximately 160,000 employees annually.

Today’s salon owner is a professional with a long-term commitment to the future of the tanning industry. Statistics support that the average salon has been in business for about 10 years; however, some salons have experienced a turnover in ownership. The majority of growth is from individuals staying in the business longer, which equates to more maturity of ownership, experience and stability.

The majority of freestanding tanning salons have at least 10 rooms on average; of those, most have four to five levels of tanning and a sunless unit. In fact, 44 percent of salons surveyed for our 2007 Annual Top 250 Salons issue reported having at least five levels of services. A typical 10-unit salon may feature one big bed, two mid-range or premium beds, a UV standup, five entry-level beds and a sunless unit.

Survey statistics reveal that 63 percent of salons reported an average single-session price of $7 or more compared to 60 percent last year; only 3 percent charged $5 or less. Additionally, lotion sales in 2007 continued to shift to the mid-range price-points with 80 percent of salons reporting that lotion salons accounted for 10 percent to 30 percent of their monthly revenues. Only 14 percent of salons reported that lotions accounted for 30 percent or more of monthly revenues. This number is down from 45 percent the previous year and confirms the fact that consumers are looking for more affordable deals. However, only 6 percent of salons reported that lotion sales accounted for less than 10 percent. This number is down from 35 percent in 2005.

It seems as though the 2007 tanning season started in December 2006 and remained strong during the first quarter thanks to a number of factors including mild to balmy weather in December and January. Many salons—especially on the East Coast—were thrilled at the amount of traffic at the beginning of the year. A fair majority of salon owners also reported an increase in dollars-per-customer ratios and said customers are spending more on lotions, upgrades and packages than in years past.

Finally, the majority of salon owners we spoke with have growth plans to introduce new marketing ideas and ancillary services such as light therapy, sunless, hydrotherapy and spa amenities to drive more people into the tanning salons.

While everyone hoped that 2007 would mark a turnaround year, business across the board still leveled off during the summer months. In 2007, the industry experienced a significant amount of consolidation in the form of mergers and acquisitions. The industry also experienced change at the salon level with expansions, franchising and increased marketing to promote sensible, moderate and responsible tanning, while attracting new tanners through creative marketing.

As the 2008 season approaches, the industry as a whole needs to plan for the future and find innovative ways to cater to the needs of current and future customers.

For additional facts and figures regarding the growth of the industry, please refer to statistics in our 2007 Top 250 Salons issue or log on to www.lookingfit.com.