The State Of The Industry Report ’05

The State Of The Industry Report ’05

The 2006 indoor tanning season started off strong during and, as of press time, was well on its way to one of the best seasons in a few years. Salons nationwide report that foot traffic is up, sales are strong and optimism is high.

With that said, it is important to examine the 2005 tanning season that saw the industry experience yet another soft year with everyone from salons to manufacturers and suppliers feeling the pinch. The following report takes an up-close look into a number of issues that influenced the industry as a whole and provides an in-depth look into what occurred at the salon level in 2005.

First and foremost, it goes without question that the $5 billion indoor tanning industry remains strong. The industry was born during recession in the early 1980s when gas prices were high due to the Iranian oil embargo, the prime interest rate was 20 percent, unemployment was high and consumer confidence low. Since then the industry has survived a couple of wars and a few more recessions and still is providing healthy-looking tans to nearly 30 million people each year.

Every industry experiences peaks and valleys; the key to survival is a solid business plan that can be adapted to the changing tide. War, weather, increased gas prices and an unstable economy all were cited as reasons for another soft season. On the flip side, the industry did a much better job of delivering a professional message about sensible, moderate and responsible tanning. While we endured the seasonal attack from the anti-tanning coalition, we also received probably the highest amount of positive press regarding the benefits of tanning in decades.

It’s no secret that the past few years have been make-or-break years for many salons nationwide. Many had high hopes that 2005 would be the rebound year, but a majority of salons reported that foot traffic was down and sales were flat to a little above par. (A fair number of salons did see a turnaround in 2005, reporting more customers and higher profits, and a good number expanded or opened additional locations.) In 2005 the pinch was felt across the board with equipment manufacturers, suppliers and distributors all vying for salon dollars. Decreased margins and intense competition made the season especially difficult for the smaller distributors. Large, full-service distributors were affected as well; however, they didn’t feel the pressure as badly as others because they maintained solid salon relationships and offered equipment, lamps, lotions and supplies as well as customer service and financing.

Some manufacturers also felt a squeeze as the majority of salons chose not to purchase as much new equipment as in years past. Manufacturers also incurred increased labor and transportation costs as well as a fluctuation in the euro for those that import equipment.

Of all the variables, salons cited weather and gas prices as the worst culprits.

The West Coast experienced an unusual amount of rain in January and February that caused flooding and mudslides. Heavy snow and ice storms pelted the Midwest and the East Coast. The Southeastern and Mid-Atlantic states still were feeling the sting of the ’04 hurricane season and the a very active ’05 hurricane season.

High gas prices contributed to less foot traffic because consumers were hit in the pocketbooks and forced to eliminate a few luxuries. However, a number of smart salon owners realized that you can’t market a luxury during a recession. They shifted to a value-driven marketing plan that basically said: “Can’t go on vacation this year? Take a break at my salon.” By doing this, they retain customers and can upsell them when the economy picks up.

While the indoor tanning industry is not recession-proof, it fares better than other industries because it is a vanitydriven business. It is a continually growing industry able to survive peaks and valleys because tanners will cut other lifestyle corners to maintain a healthylooking glow. Smart salons will succeed by upgrading equipment, adding ancillary services and attracting new customers. Experts agree that to be competitive, salons must invest back into their businesses and upgrade equipment.

The U.S. total economic impact of professional indoor tanning salons equates to $5 billion annually. There are approximately 25,000 professional indoor tanning locations and another 20,000 to 25,000 locations such as health clubs, spas, video stores and beauty salons that have one or two tanning units.

The majority of indoor tanning facilities in the United States 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.

The Midwest and Southeast have the highest number of tanning salons per capita, with Ohio, North Carolina, Michigan, South Carolina, Illinois, Indiana and Florida home to the most. Last year, Florida and the Northeast grew at record pace thanks to a population increase. This trend continued in 2005 with more salons opening or changing hands in New Jersey, New York, Connecticut and Florida. The Mid- Atlantic states also boasted significant growth while Washington state experienced a rebirth in the Northwest.

While the majority of freestanding tanning salons have at least 10 rooms, the trend is shifting toward larger salons with more space and services. In today’s tough economy, opening a salon requires a thorough plan and a large financial outlay.

It is estimated that it requires about $250,000 or more in initial investment to properly outfit a standard 10-room salon in today’s market. In 1982, the initial investment was about $30,000. This number is up a bit from 2004 due to increased construction and fuel costs, as well overall labor and staffing increases.

The trend of mega-salons, chains and franchises acquiring independent salons continued in 2005. There are a number of salons that control the marketplace and they continue to expand and update with new equipment. However, the same opportunity exists for new independents to step into existing salons for a reasonable price. The salon, equipment and customer databases already are in place; all they have to do is upgrade equipment, redecorate and retool. They also avoid large build-out costs and months of downtime by purchasing an existing salon.

Industry insiders predict that consolidation will continue in larger markets but not in smaller, rural markets that don’t have the populous to support bigger salons. They also agree that the number of first-time salon owners increased in 2005 and expect that to continue into 2006.

It is important to note that many areas are saturated with tanning salons, which makes competition harder. This means salons will survive or die. It’s a blunt fact, but it happens in every industry and is a natural “thinning of the herd.” Some salons will be sold or just close their doors. Industry experts agree that the indoor tanning industry traditionally has a 20-percent attrition rate.

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 9 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.

Veteran salon owners with sound business plans know how to ride out the wave and have diversified their businesses to include some sunless or day spa services. It is important to remember that tanning is first and foremost a vanity-driven business. It offers people a way to look good, feel good and relax while achieving that goal. Salons have to provide outstanding service with top-of-the-line equipment and be aesthetically appealing in order to retain customers and capture new ones for the next season.

Successful salon owners keep their fingers on the pulse of the industry and are in the salons to oversee the business. Too many salons have failed over the years because of absentee ownership. Statistics reveal that salon owners are taking a more proactive and professional approach to running their businesses. For example, six years ago only 64 percent of salons had professional certification; today, 97 percent are certified. Additionally, 99 percent of salons participate in ongoing education, provide educational material to clients and require parental consent. This amounts to a more professional and educated industry promoting sensible, moderate and responsible tanning.

Salon owners must identify customer demographics specific to their locations in order to capture sales. This is accomplished by analyzing the market to determine the potential number of tanners in an area and implementing a proactive marketing program that draws in customers.

As of press time, there nearly 300 million people living in the United States. As an industry benchmark, we estimate that 10 percent of the U.S. population will tan indoors annually. That means that 30 million Americans will tan indoors in 2006, up from 27 million in 2002. Traditionally speaking, the Midwest and Southeast have more tanning customers because of the large number of tanning salons located in those regions.

The average indoor-tanner profile has remained constant since the industry’s inception nearly 30 years ago. The majority of those who tan indoors continue to be in the 18-49 age group, 70 percent of which are women and 50 percent of which are women ages 20-39. There also has been a continued increase in tanning within women ages 40-49 as traditional tanners move into this age bracket.

Of particular importance is the baby-boomer tanner, as they have different tanning goals and skincare needs. Not to be overlooked is male clientele that accounts for about 30 percent of the market. While this percentage may not be the norm for every salon, it is a segment that is growing, as more men want a bronzed body and professional skincare products.

Today’s customer demographic also contains one of the highest service-based spending groups—a combination of the baby-boomer generation and the maturing Generation X group. Salon owners must have a specific marketing plan to attract these dollars.

Constantly evaluating your demographic is crucial. A prime example is the following: Salon A’s monthly report reveals that younger tanners who spend less on lotions and accessories are overtaking the 25- to 35-year-old category. The salon owner changes the marketing strategy the next month to attract that demographic with more disposable income. The result was increased profits and a wider audience to market.

To sum it up: Salons that sit back and wait for customers to come to them will come up short while salons that aggressively market to their demographic will reap rewards.

Tanning equipment, lamps and lotions probably are the top three components that affect the inner workings of the tanning salon. This section takes a look at a typical salon and examines how those components fared in 2005.

Today’s average tanning salon has on average a minimum of 10 pieces of equipment and provides three to five levels of tanning. Many salons also are marketing sunless as a tanning level and investing in either a stand-up spray booth or handheld system. 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. (These are conservative estimates since there are a large number of mega-salons that house 20 or more tanning units in one location.) Updated statistics for 2005 reveal that 60 percent of salons reported an average single-session price of $7 or more; only 3 percent charged $5 or less.

Equipment is the most important and expensive purchase a salon owner will make, with pricing ranging from $2,900 for entry-level units all the way to $40,000 and higher for high-end equipment such as combination beds, big beds or high-pressure units. Our research estimates that there are more than 250,000 tanning units operating in professional salons. Averaging the cost of a tanning unit at around $7,000 equates to approximately $1.75 billion worth of equipment in the U.S. market.

Choosing the right equipment mix can be overwhelming for the first-time salon owner, which is why it is so important to identify your customers’ needs and pick the proper mix of equipment to serve your clientele. Do they prefer 9-, 12-, 15-, 20- or 30-minute sessions? The choice is yours to make, but experts agree that salons should offer a variety to suit every customer. Keep in mind that the most popular session time continues to be 15 minutes since it allows clients to relax and enjoy the tanning experience.

Over the years, advancements in equipment technology provide a better tan in less time, and the industry continues to see commercial tanning units evolve from 32-lamp units to 50- lamp units and higher.

The 2005 tanning season also saw increases in improved technology and increased tanning performance and strikingly handsome units housing enhanced features such as ergonomically correct positioning, sound systems, cooling mists, aromatherapy mists and multimedia.

Equipment makers reported steady growth in 2002, 2003 and 2004 due in large part to new salons coming into the market and veteran salons upgrading equipment as technology evolved. The past few years also gave way to salons expanding locations; however, the soft economy affected many expansion plans in 2005. In fact, only 77 percent of salons reported that they planned to expand their facilities in 2005 and 2006. This number was down from 84 percent in 2004, but it does not mean salons didn’t purchase new equipment.

Some industry insiders suggest that in 2005 salon owners wanted more bang for the buck when it came to purchasing equipment. This meant that some opted for more entry-level and medium beds over the larger units so they could replace more units. That’s not to say the luxury beds didn’t sell in 2005—they did, especially to new salons and existing salons that realized they have to offer upgrade equipment with all of the bells and whistles to stay ahead of the competition. Additionally, many salon owners we spoke with are planning on adding high-end units for the 2006 season.

While we’ve focused on new equipment, used tanning units have their place in the market. The majority of used equipment can be found in the lower-end salons, nail salons and business that are not concentrating on tanning as their primary source of income. But one thing experts agree on is the fact that nobody is going to compete in today’s market with used equipment.

While lamp sales are steady every year, 2005 saw a healthy increase for two reasons: 1) salon owners replaced lamps more often instead of buying new equipment, and 2) salon owners finally realized the importance of rotating lamps for optimal tanning results.

Over the past few years, lamp suppliers have offered some new innovations including dual-phosphor lamps, twisted glass tubes, technology that virtually eliminates end blackening and lamps that produce never-before-achieved levels of performance. These technological quests continued in 2005 with makers focusing on balancing the distribution of heat in the lamp and extending the service life of the lamp. Suppliers also diversified their offerings to include more vertical applications for stand-up tanning units.

At the salon level, lotion sales did the lotion shuffle in 2005. For example, 45 percent of salons reported monthly lotion sales of 30 percent and more; in 2004 that number was only 12 percent. This is great because it means salons were increasing their dollar-per-customer ratio. However, there was a downside. In 2005, 35 percent of salons reported that lotion sales of less than 10 percent of monthly revenues; in 2004 that number was only 5 percent. So what is the reason for such a disparity? The answer is mixed. Many salon owners cited the poor economy while others noted that customers didn’t want to pay high price-points. This seems in line since 20 percent of salons reported monthly lotion sales of 10 percent to 24 percent.

Successful salons attributed increased lotion sales to better products, reasonable price-points, innovative packaging and more manufacturer and distributor training symposiums and in-store selling strategies.

They also raised the dollars-per-customer average by creating a reason for tanners to come to the salon. Savvy salon owners did this by offering well-constructed tanning packages—in other words, creating packages that require customers to adjust their schedules to you as opposed to the other way around. An example of a good package is 30 days of tanning for a certain amount of money; this requires a new purchasing decision in 30 days. Conversely, if you sell 30 tans for a certain amount of money, the customers feel like they have to use every single one of them.

Remember, the customers are yours to keep—not someone else’s to take. Retain them by being proactive and staying ahead of the curve.

In 2005, the sunless segment continued to roll on as a fast-growing area in the indoor tanning market. In 1999, we identified it as a segment to watch because it offers indoor tanning salons a new way to diversify their operations and reach new generations of tanning clients. In 2000, the market really began to take off when salon operators realized that sunless could open the doors to a limitless market. Six years later, sunless is still going strong because it offers a way for salons to satisfy the needs of their regular clientele who want a quick touch-up to their UV tan and a way to provide a cosmetic tan to those who choose not to tan or cannot achieve a tan indoors or outdoors.

Like it or not, changing customer demographics is another reason sunless has become popular. Baby boomers— who were some of the industry’s early-generation tanners—are beginning to reduce exposure indoors and outdoors. What was once an everyday or every-other- day customer now comes in once or twice a week. However, they still crave the tanning experience and want to look good and feel good. Salons that add sunless can keep these customers.

Sunless’ numbers are staggering, especially in light of—or perhaps because of—the struggles of the industry in the post- Sept. 11 economy: 40 percent of U.S. tanning salons offer at least one sunless booth, and 22 percent offer sunless airbrush or turbine tanning, according to results from LOOKING FIT’s 2006 Top 250 Salons survey. This number remains the same from the previous year.

Salons that added sunless services report an increase in traditional UVtanning sessions by as much as 30 percent after they introduced sunless services. In fact, many salons nationwide told LOOKING FIT that sunless services helped them overcome last year’s soft season. Especially in recent years, salon owners have seen an explosion of manufacturers offering affordable sunless stand-up equipment, sunless airbrush and high-volume/ low-pressure (HVLP) turbine equipment, sunless solutions, and sunless lotions and aerosol sprays.

The allure of sunless also is increasing from the customer’s perspective. There is a greater variety of retail sunless products that yield natural-looking, long-lasting tans. Also, session prices for booth and handheld applications are dropping, and the steadily improving technology of the solution is leading to more realistic results. However, salons must be careful not to undercut their profits by dropping prices too low. The cost of solution used per customer as well as labor, electricity and cleanup should be factored into the selling price.

It is important to state that there is a learning curve with sunless, and salon owners must understand the business and choose what is best for them. Is there enough space for a stand-up unit? Should a handheld unit be added? What is the return on investment? These questions need to be answered before making a purchasing decision.

Many salons are opting for stand-ups and handhelds because they complement each other. Many start with handheld, then add a standup to the mix. Additionally, a handheld unit can touch up hard-to-tan areas such as hands, feet, elbows and wrists that stand-ups don’t effectively address.

Stand-up spray booths continue to be the most widely used sunless equipment in salons. Consumers like them because they can get tan in a matter of minutes; salon operators like them because short session times means they can tan more clients per unit per day. Sunless stand-ups often take up the same space as a UV-tanning unit, so salons can maximize their space.

Technology in sunless spray booths is vastly improved. Some are fully automated including voice commands and touch-free technology; some have the option of carrying more than one type of solution at once, enabling salons to serve a wide variety of clients more easily. Additionally, many of today’s stand-up units are self-contained or require very little extra plumbing or electrical.

Manufacturers have had years to refine their products, and they know salon owners are shopping around for the best units at competitive prices. In the past, salons needed an investment of at least $30,000 to purchase a sunless stand-up spray booth. Times have changed. Today’s sunless stand-up equipment can still be bought for $30,000 equipped with all of the bells and whistles; however, more players have entered the sunless market offering salons high-quality booths at more affordable prices. Some units are available for as low as $12,000, which allows more salons to enter the sunless competition.

And as a finishing touch, today’s sunless booths have evolved on the outside too. Their sleek designs provide an attractive fixture in any salon.

Airbrush or turbine (high-volume, low-pressure) units allow salons an affordable way to enter the sunless market. These handheld units are priced as low as just a few hundred dollars to a thousand or higher for a turbine system.

These systems can be purchased at a fraction of the cost of stand-up units, making them affordable for a large number of salons. Salons also can get up and running quickly and easily, leading to a rapid return on investment. The salon also can charge a premium for the service because it requires the constant attention of a technician who applies the sunless solution to the client.

Sunless airbrush machines are driven by an air compressor and deliver a concentrated focus of spray solution. Airbrushing can take up to 20 minutes or more because the technician covers the client’s whole body, including delicate and hard-to-tan areas, with great detail.

Proper staffing is essential, however, if a salon is going to offer this service because airbrush is extremely labor-intensive. Many busy salons are forced to hire an additional employee because they can’t be airbrushing a client, cleaning beds and answering phones at the same time. Operator fatigue also comes into play if a salon has a steady airbrush clientele. Salons must take note to calculate the true cost of adding handheld. This includes the true labor cost and return on investment.

By contrast, turbine applications are much quicker thanks to the high volume of low-pressure “soft” airflow that allows solution to cover a greater area of the body in minutes. However, since these HVLP systems cover so much so fast, sometimes they aren’t suited for body detailing. Some turbine spray guns can be adjusted to spray to small diameters or can be switched entirely to a gun made for body detailing.

Also, manufacturers are beginning to create hybrid handheld units to blend the best of airbrush and HVLP/turbine.

Today’s handheld equipment is shrinking in size, making units more portable while maintaining their effectiveness. This allows salons more flexibility in terms of where to locate the airbrush or turbine, and also to use the freed space for other profit centers.

Cash has been king since 2001 because many salon owners have been cautious when it comes to large-item expenditures. Continued conflict in the Middle East, higher gas prices and another season of poor weather all converged to make the “perfect storm” for 2005.Yet, things are looking up as a whole, and many are predicting the 2006 season as one that will see salons parting with their much-coveted cash and an increased number of players entering the tanning market.

As mentioned earlier, it requires about $250,000 or more in initial investment to properly outfit a standard 10-unit salon in today’s market. Industry statistics reveal that the average equipment lease or loan transaction is approximately $50,000, higher than $15,000 five years ago. This number is up from last year by about $15,000 and can be attributed to higher costs and salons purchasing higher-end beds or sunless units to compete in their markets.

According to industry lending experts, 20 percent of all transactions are for startup salons. This number is historically accurate, as we estimate about a 20- percent attrition rate for salons each year. Interestingly, lenders noticed an upswing this year in the number of existing salons expanding locations and more salons opening with 15 or more units.

As in years past, approximately 85 percent of equipment sales are financed through banks, leasing companies, equipment manufacturers or personal savings. Nearly 95 percent of all funding is earmarked for new equipment, and about 50 percent of that number to a leasing option. In 2005, the average lease term jumped from 36 months to 60 months.

Experts cite pure economics for the longer terms: It is very difficult for a salon to pay back $100,000 in three years, and financing for five years is more realistic in a business plan.

Last year was an interesting year for lenders, as bad debt reared its ugly head thanks mainly to the multiyear economic slump that forced poorly-run salons to sell or close their doors, leaving lenders and customers out in the cold.

For the 2005 season, industry veterans agree that bad debt lessened due to a more professional salon operator making a long-term commitment to the industry with a sound business plan. There continues to be an influx of financially strong people entering the industry who have been successful in other businesses. Lenders examine a host of variables and dig deep into credit histories before doling out money.

Insider predictions for the 2006 season point to this trend continuing as the more professional salon owner enters the industry, bringing more stability within the economics of indoor tanning. Many will be financing for more equipment and build-outs because they realize they need to make an investment to make a profit.