Franchising Coming of Age

Franchising Coming of Age
Mega Salons, Chains And Franchises Look To Take The Next Step

by Scott Hoover

Photos courtesy of Palm Beach Tan.

In 1971, Starbucks Coffee opened its first location in Pike Place Market, Seattle's legendary open-air farmer's market. At the time, no one involved had even an inkling as to what the future might hold. Today, Starbucks is a multibillion-dollar operation involving more than 1,900 locations worldwide. For ambitious indoor tanning salon operators everywhere, Starbucks often is used as a model. Mega salons, chain salons and franchises nationwide are striving to taste even a small amount of the success that has followed the coffeehouse giant. However, is there a Starbucks Coffee in the future of the indoor tanning industry? What have mega salons, chains and franchises meant to the industry, and what does the future hold for these prospective entrepreneurs?

Comparisons

When Starbucks Coffee opened its first store in 1971, few if any realized the success that a coffeehouse could have. Local diners had served coffee and food for decades in small-town America. It was not until 1983, when Howard Schultz, then the director of retail operations and marketing, traveled to Italy and discovered the popularity of espresso bars that the idea of a coffee bar materialized. Schultz later would acquire the assets of Starbucks and, in 1987, open its first locations outside Seattle in Chicago, and Vancouver, British Columbia.

Photo courtesy of Tan World.

Another comparison that has been made to indoor tanning is the video rental industry. Blockbuster opened its first store in Dallas in 1985. In less than one year it had opened or acquired 19 stores, and today has more than 6,300 stores worldwide.

Flash forward to the indoor tanning industry in 1999. Visit any major metropolitan area and you are sure to find at least one indoor tanning salon with various locations that considers itself a mega salon, chain or franchise. However, is it possible to find one familiar name with locations throughout the United States? As of today, the answer is no.

"The indoor tanning industry has evolved," says one industry manufacturing veteran. "It has evolved from main-street salons to strip malls to the new mega salons and chain stores. In addition, the evolution has occurred very quickly. However, there is not
that one name that everybody recognizes throughout the country like a Blockbuster in the video industry or a Starbucks in the coffee bar industry."

Stephen P. Smith, president of New Orleans-based Planet Beach Corp., agrees: "The comparisons to the video and coffee industries are right on track," he says. "We view our franchise as a community business, much the same way as Blockbuster or Starbucks might be seen as a community business. We also recognize that the large majority of tanners are not going to drive more than three miles to tan. Therefore, we have situated our salons strategically every two to three miles in many of the large cities in the South, much the same way as you would find a Blockbuster or Starbucks every two to three miles, creating a community tanning salon franchise."

Photography courtesy of Jacquin Studios.

However, in comparison to Starbucks, the evolution of the indoor tanning salon has been extremely slow. It took less than 25 years for Starbucks to become the purveyor of coffee and tea, rising to become the nation's leading roaster and retailer of specialty coffee. Each week, more than 5 million people visit a Starbucks outlet and, less than three years ago, the company expanded to offer coffee to supermarkets and recently introduced its perky beans to 10 additional supermarket segments nationwide.

In comparison, it has been nearly a quarter of a century since indoor tanning exploded across the Atlantic into mainstream America. What is holding the development of an industry-wide indoor tanning salon leader from emerging?

The most obvious answer is capital. Troy Cooper, president and CEO of Dallas-based Palm Beach Tan that has 11 salons in the Dallas area, says one of the biggest problems the indoor tanning industry has right now is raising money.

"Due to some of the connotations affiliated with tanning, banks have been reluctant to lend money and major investors have been hesitant to invest in the industry," he says. "In addition, because there is not a lot of information available to investors, most of the salons breaking into the industry are having to do it with cash. This is true for the mega salons, chains and franchises as well. Therefore, most of the regional chains that I have talked with also are limited to growing strictly by cash, and that confines them to adding only one or two new stores per year."

Photos courtesy of Planet Beach.

However, is capital the only aspect holding the industry back? "One of the aspects that has held back franchises in the indoor tanning industry from evolving faster is an organization with the right vision," states Smith. "Today, Planet Beach is selling approximately three franchises each month. If we continue to exponentially grow at that pace, in five years we will have more than 1,000 salons. In addition, it takes some time to file and complete all the legal work that is involved in owning and operating a franchise. It takes time and money to keep the Uniformed Franchise Offering Circular (UFOC) like it is supposed to be."

The UFOC is a document that discloses everything about the franchise and its members as well as defining all the expectations and criteria involved in being in business with the franchise. In addition, franchises are required to have a corporate store where their programs can be examined. All of these arguments can be used as a way of explaining why franchises are now just becoming commonplace in the industry.

"It's very complicated to establish a franchise," says Todd Beckman, president of St. Louis Tan Co. in St. Louis. "There are many legalities that need to be attended to and many things you can and can't do. It takes awhile to get a franchise legalized."

Additionally, many industry veterans believe indoor tanning is just beginning to scratch the surface of a huge consumer base. Furthermore, they believe as more business-savvy people are introduced to the industry, the faster the indoor tanning industry will grow.

"We are beginning to see more mainstream businesspeople coming into the indoor tanning industry," says another industry manufacturer. "For instance, more and more we are seeing people who have been in another industry coming to the indoor tanning industry. A number of people who have worked in corporate America and have retired early or have been bought out in corporate downsizing are using that money to finance salons and investing in the indoor tanning industry."

What does this mean? "Indoor tanning is no different than any other service-based industry," he adds. "For example, movie theaters 30 years ago might have had two or three screens. Today, they have 30 screens. Likewise, gas stations used to have three or four pumps; now they have 20 and offer food, beverages, etc. What is happening in tanning is that salon owners are realizing that they are selling time. Thus, the more units a salon has, either in one location or in a number of different locations, the more time a salon owner can sell. As more business-savvy people have come into the industry, this notion has proliferated. In addition, because the industry is based so much on an 'on' and 'off' season, it dictates salons having more equipment so that more money can be made in a shorter amount of time. It is the same concept that hotels in tourist areas use. They know that if they have 300 rooms and can keep capacity high for four or five months out of the year, they will make enough money to survive during the off-season. As more professionals have been added to the industry, the quicker this knowledge is put to use in the form of mega salons, chains and franchises."

Others believe it is the industry itself that has held back the growth of mega salons, franchises and chains. "I think the indoor tanning industry already could have been a franchise-dominated industry," says another manufacturer. "If some industry manufacturers and distributors would have been a little more honest with salon owners, I think it would have happened 10 years ago. As it is, like in any industry, the weak will die and the well-organized will dominate. I don't see any difference between the tanning industry and any of the other industries that are now dominated by franchises and chains."

Regional Base

Although the indoor tanning salon has not yet established itself on a national basis, over the past few years there has been a rise in regional brand recognition.

"Right now, there really is no big chain in the industry," says Cooper. "We have 11 stores. What the industry is beginning to see is the same thing that I saw when I was in the video industry--regional chains. Whether it's the Tanning Bed in the Buffalo and Rochester, N.Y., area, Palm Beach Tan in Dallas or Tan-N-Tone in Oklahoma City, there are approximately 15 reasonably sized regional chains nationwide with eight to 12 stores doing between $3 million and $5 million per year. In addition, there are a number of salons that have started selling franchises; however, I don't think these people have made a major impact on the industry yet. The industry mainly is still an independent salon-run industry."

The reason for the growth mainly is time, or lack of it. "The reason the trend has swung toward mega salons, chains and franchises is the consumer has changed," says Katie Burland, vice president of St. Louis Tan Co. "Consumers have less available leisure time and many of them want to be able to walk into a salon, tan and get home in the least amount of time acceptable. The larger salons have done a better job of offering this type of service."

Beckman agrees: "The larger salons allow people to tan year-round at an inexpensive rate because they can handle a lot more clientele."

Another reason for the growth of franchises in the industry is a lower risk of failure.

According to Cheri Cosgrove, president of Sioux City, Iowa-based Tan World, Inc., salon owners who turn to franchises for help in starting a salon trim the risk of failure immensely.

"Statistics show that 95 percent of franchises succeed where four out of five independently owned businesses fail," she says. "The real question for salon owners seems to be, do you want to go out and invest $200,000 in a 20-bed salon and have a four out of five chance of failing or would you like to have a 95-percent chance of succeeding?"

This demonstrated success of a franchise also helps when the prospective franchisee goes to the bank to get financing.

"It's not quite as hard to get financial backing because there is so much information available," adds Cosgrove. "If a bank wants to see the franchisor's audited financials, the company is able to provide that type of information."

With the growth in clientele, the demonstrated success rate and a stable financial partner, Cooper thinks that many of the regional-based salons as well as smaller salon franchises soon may be ready to expand. "Most of the chains in the industry that have eight to 12 salons have been in business for more than five years and have built their clientele and established good credit ratings with lending institutions as well as investors," he says. "Thus, over the next three to five years, the industry should begin to see regional chains with 20 to 30 salons. When this happens, investors will begin to come forward and begin consolidating salons in much the same way as Blockbuster has done in the video industry and Starbucks has done in the coffee bar industry."

Manufacturers also have seen the trend toward regionally recognized salons. Once again, many believe that as more professional people enter the business, the faster the industry will move toward more dominant chains and franchises. In addition, the good news for anyone who is considering starting a salon is the market has just scratched the surface as far as the number of people that are tanning. Because indoor tanning is one of the few forms of recreation that allow a person to look and feel better while doing practically nothing, its popularity should continue to grow as the baby boomer age group gets older and wants to see results quickly and painlessly.

"After working 60 hours per week and doing all the chores around the house, people are looking for something that is easy for them to find enjoyment from and still delivers results," says one industry manufacturer. "Indoor tanning is the perfect complement to this growing need."

In addition, the growth of mega salons, chains and franchises also may change the way that manufacturers and distributors do business in the indoor tanning industry.

"When you have a couple of people that have the money to make major purchases, it almost can eliminate the middleman," says Burland. "At St. Louis Tan, we go straight to who we want to purchase our equipment or product from. The manufacturers and distributors that are willing to work with the big corporate salons will be better for it in the long run."

Changing Times

For the independently operated salon, does all this news about the growing popularity of mega salons, chains and franchises signify impending doom? If the history of the coffee bar and video industries is any indication, the answer is a resounding no.

"Yes, I'm convinced eventually, a few dominant chains or franchises will step forward in the indoor tanning industry," says Cooper. "If you look at almost any industry in the United States, be it hair salons or video stores, they all started out the same way. Ultimately, there is a large chain or franchise that carves out a niche. However, this doesn't mean that they own the industry. In the video industry, the three or four major video chains only account for less than 50 percent of the market. The same is true in almost every industry in the nation where a few large chains or franchises have evolved. Even if that happens in the indoor tanning industry, there still will be plenty of room for independent operators to grow within our industry."

Similar to the video industry, independent salons may have to find their niche in the industry by continuing to build customer satisfaction and counting on customer loyalty.

Jon Dickman, co-owner of Video Vern's in Holladay, Utah, says he and other independent video owners have had to capitalize on their competitive advantages such as the flexibility they have to tailor their offerings to the communities in which they operate. "We can adapt and change quickly without having to go through all the red tape required by franchises and chains," he says. "However, the competition is fierce and never-ending."

According to Video Business, although Blockbuster's and competitor Hollywood Video's market share rose the last four years, independents still controlled nearly 60 percent of the video market. The magazine pointed out intense competition between larger franchises or chains prompts them to advertise more than they normally might, building the industry for large and small players alike.

However, unlike the video business where industry trends show the industry overall is losing ground (video-rental revenue fell 4.3 percent in 1997), the indoor tanning industry continues to grow.

Video industry observers say the video-rental market is mature. Nearly all households nation-wide already have a VCR, meaning video renters cannot rely on new business from new VCR owners as they once did. However, indoor tanning industry veterans agree there still is a large untapped tanning base and the industry's core tanners, females and males between the ages of 18 and 30, will never run out.

"What franchises, chains and mega salons do for industry manufacturers is make our job a lot easier," says one manufacturer. "The reason for this is we don't have to continually explain how to make money. Once the base knowledge is taught, the mega salon and franchise owners pass this information on and even expand on it. This allows the manufacturer to sell more equipment and focus on making each salon more money. More than 40 percent of most manufacturers' business is new salon owners coming into the industry for the first time. The other approximately 60 percent is repeat business from salon owners who are opening their second, third or fourth salon."

However, industry veterans agree as long as it is possible to make money in the tanning industry, there always will be independent entrepreneurs that are willing to take the risk.

Smith believes that the growth of franchises may seriously hurt independent salon owners; however, he still believes they can command a large share of the market.

"Many independent salons are going to have to be more cognizant of where they locate," he says. "It can be very difficult to compete with a franchise that is privy to a constant and focused effort to develop new and better systems. However, if they continue to evolve, update their equipment and meet the needs of the community, there should be room for independents as well as franchises."

That's the bottom line--although the amount of mega salons, chains and franchises is likely to grow, a well-run, consumer-oriented independent salon can be profitable anywhere in the country. That will never change.