Posted : 06/01/2001

Posted : 06/01/2001

Franchising:
A Continuing Trend In Indoor Tanning

by Scott Eric Barrett

It doesn't take a rocket scientist to conclude that the indoor tanning industry has exhibited an incredible amount of thrust over the last decade. Tanning salons are everywhere these days.

In the past, the industry consisted of thousands of "mom-and-pop" salons located in tiny strip malls throughout the country. Today, indoor tanning is a growing, sophisticated entity that has added terms like mega salons, chains and franchising to its vocabulary. Over the last five years, the industry has continued to report double-digit growth and is now larger than the gourmet coffee, bagel and smoothie industries.

Anthony Bonnani, president of Beach Bums Tanning Centers in Warren, Mich., says the boom is mainly due to the numbers.

"There are more tanning salons now than ever before, so people have become so much more aware of the tanning industry," he says. "We also are hearing all kinds of ads on the radio. It's just a constant promotion."

Cheri Cosgrove, president of Tan World in Sioux City, Iowa, believes it is important for the industry to continue to become more mainstream.

"We still have independent ownership, but for us to be looked at seriously from a banker's eyes and our community's eyes and just in general, I think it's important that we become mainstream and that includes franchising. Almost every other industry includes franchising as a method of expansion."

Franchises are not the same entities as chains. A chain is created when the successful owner(s) of a conventional salon decides to open an additional store (or stores) in a complementary area. A chain consists of two or more stores; however, it is not always a franchise.

Troy Cooper, president of Palm Beach Tan in Ft. Worth, Texas, says operators that have a good and profitable business concept actually can make more money if they just open their own stores, but chains are very capital and resource intensive from the standpoint of human resources.

"Operators are using franchising to expand their names and get more brand recognition at a more cost friendly rate than simply opening more and more chain stores," Cooper says.

What Is Franchising?

According to the International Franchise Association (IFA), franchising is a method of distributing products or services. At least two levels of people are involved in the franchise system--the franchisor, who lends his trademark or trade name and a business system; and, the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system.

Technically, the contract binding the two parties is the "franchise," but that term often is used to mean the actual business that the franchisee operates. Well-known franchises include McDonald's, California Pizza Kitchen and Boston Market.

"Franchising is basically signing up with a company that gives you all their years of experience the day you open the door," says Todd Beckman, president and chief executive officer of the St. Louis, Mo.-based mega chain and franchise St. Louis Tan Co.

In a franchise system, the franchisee is the owner and operator of the business, very much like a conventional salon owner. However, the franchisee also has a business entity (the franchisor) to show them the way. In many ways, franchises can be likened to "turnkey" operations with the franchisor offering the franchisee guidance on location selection, operation manuals to run the business, as well as customer service and marketing programs.

A franchisor has everything set and ready to go for the franchisee. From the advertising print work to computer programs to sales techniques, everything has been researched and is ready to go. Beckman says it's important for potential franchisees to know how much experience the franchisor has.

"I was a franchisee for 10 years, so I knew what I liked and what I didn't like," he says. "When we developed our franchise we developed it for the franchisee to be happy, not for the franchisor to be greedy and be the only one who makes all the money. That's what our concept is and that's why we have been so successful."

A Wise Investment?

According to the IFA, in 2000, most analysts estimated that franchising companies and their franchisees accounted for more than $1 trillion in annual U.S. retail sales from 320,000 franchised small businesses in 75 industries. Moreover, franchising is said to account for more than 40 percent of all U.S. retail sales.

According to studies conducted by the U.S. Department of Commerce since 1971, less than 5 percent of franchise outlets have failed or been discontinued each year. Of the 5 percent, many of the business closures were not due to business failure.

In other words, when franchising is done under the right circumstances, it is pretty healthy for any industry. Nevertheless, Leif Vasstrom, president and chief executive officer of Solar Planet, a nationwide chain based in San Francisco, doesn't think franchising is extremely important to the tanning industry.

"Franchising is just something that happens in America when an industry becomes mature. It happens in any service business whether it is fast food, coffee, beauty salons or whatever," he says. "It's either franchising or its internal capital where you expand an existing company to a more prime location."

How Does A Franchise Start?

Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to- day operations.

At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself, he may decide to "franchise" the store name and business system to an independent businessperson, a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee's sales. The business is now franchised.

The IFA says the franchisor must have some degree of distinctiveness, or the potential to achieve distinctiveness. Without distinctiveness the franchisor will have difficulty attracting high-caliber franchisees. The elements of success must be teachable to persons with capabilities that exist among prospective franchise buyers.

Palm Beach Tan's Cooper notes that the documentation required to start the franchising process is very extensive.

"From the uniform offering circular that has to be put together to the registration in all the states and the franchise agreements themselves, franchisors will spend upward in the neighborhood of $50,000 just on documentation alone," he says, so consulting an attorney who specializes in franchise law is a must.

Ed Chaney, owner of the Phoenix-based franchise and chain, Sunchain says a franchise attorney is tasked with ensuring that your franchise system meets with federally mandated standards and that you, as a franchisor, have addressed very important issues regarding the franchisor/franchisee relationship, such as protected territories, performance expectations and payment arrangements.

"Setting up the relationship correctly will help you avoid costly lawsuits in the future," he says.

Beach Bums' Bonnani agrees: "We worked with a franchise attorney and a franchise consulting group. We tried to do it on our own in the beginning, and it was a mess. We found out that we were running illegally and we weren't registered. We also found out that it is illegal to make an earnings claim. We didn't know that. We were showing potential franchisees our books to show them how well we were doing. That's against the law."

Even for the in the legal-know, seeking out professional advice is key. "My husband is an attorney, and I was a paralegal for 23 years, but we still hired a franchise attorney," says Tan World's Cosgrove. "I think its important and you need one to help us as far as your responsibilities as a franchisor. It's definitely important."

A franchise development firm is another option salon operators can consider. "Franchise development firms are instrumental in creating a franchise structure that is marketable and has all the necessary components to make it run smoothly," says Chaney. "When developing a franchise, the use of both the attorney and the development firm are important because they 'offset' one another. The attorney creates a legal and compliant atmosphere with contracts that favor the franchisor, which tend to reduce the franchise's marketability, so the development firm is used to bring the system back in balance."

Conclusion? It's very complicated to establish a franchise. All in all, it takes at least six months--if not longer--to get a franchise legalized.

James La Brake recently finished up most of the legal documentation required to start franchising his Sunfastic Tanning Centers, which are based in Huntingdon Valley, Penn.

"The franchise agreement has taken us roughly nine months to complete" he says. "The biggest headache was getting all the particulars in the document for the Federal Trade Commission. We're talking about a large questionnaire, a very particular, precise questionnaire that you have to fill out completely.

"We do everything in a wacky, goofy kind of style. Each store costs about $240,000 to build. They are very distinct, so our customers think we are a national chain. Each store has tremendous 'wow' factor."

He notes that to get prospective franchises to feature that 'wow' factor a franchisor has to have everything they don't want to be changed documented in the agreement, as well as the things the store must have.

"You have to include everything from the color of the carpet to the color of the logo to what kind of signage can be used," says LaBrake. "It pays off down the road because as you grow and get bigger there is no question what each one is going to look like or have. It's like going to McDonald's, you're going to get the same Big Mac in California that you are in Florida."

The Challenges

As with any type of business venture, there are challenges to being a franchisor and a franchisee. When you're a franchisor, you not only have to satisfy your own goals, but everybody else's as well.

For the franchisee, his or her biggest challenges are to keep up with the franchise system, make it better and be more productive. Franchisees don't have the same challenges as a chain store operator. They don't have to develop programs; they only have to make the franchisor's program better.

Franchising is not something you can just go out and do. First of all, a potential franchisor has to be in business one full year legally. Next, the franchisor needs to be able to show the franchisees how to open a business and make money at it.

"I think it's very important for anyone who is looking into buying a franchise to choose wisely," says Cosgrove. "If somebody boasts that their salons do $600,000 a year, you should run for your life because, first of all, they are not supposed to be discussing what they make."

She adds that franchisors do have to give franchisees audited financial statements when you present them with a franchise agreement. The audited financial statement gives the franchisee a clear picture of how that particular company is doing, beyond that you really need to do your own homework and figure out whether their market is conducive to what you are trying to do.

Vasstrom says the challenge is to not just go out and sell the name, give it away, or make deals to move some equipment and turn some cash. "The real challenge is to constantly have salons that make good money for the owners so the owners can get people to invest with them and grow the business in their exclusive territory," he says.

While it may be complicated for the franchisor to put together a franchise, it isn't difficult for a franchisee to own one. And, whether you are a potential franchisor or franchisee, the best advice you will ever receive is to do your homework.

"You really have to ask a lot of questions," Beckman says. "How many locations does the company own? What kind of unique items do they have that goes along with the franchise? How does the franchisor define why it's different from somebody else? Do they have operations manuals and an ongoing training program available? A franchisor has to have a good enough training program and facilities to fulfill the needs of the franchisee."

"One of the most important areas of information that a prospective salon operator must be aware of is that the brand and the system are there to service the customer, not to service the franchisee," says William Hoes, director of franchising for Fabutan Sun Tan Studios, a chain based in Edmonton, Canada.

Advantages & Disadvantages

Like everything else in life, there are advantages and disadvantages to owning a franchise. First and foremost, with a franchise, franchisees have the backing and knowledge of a corporation. They also will share in the advertising costs, and because the corporation is dealing in mass equipment purchases, they will get products at a discounted rate.

One of the biggest advantages of owning a franchise, or a chain for that matter, is name recognition. Name recognition is a huge advantage. However, the financial advantages also are tremendous.

"I was a franchisee in the hair industry in 1984. We started the tanning company in 1994," Beckman says. "You have to ask what the franchisee is getting with choosing your franchise? Franchisees get tons of advantages by being with us. There are large discounts on beds, products and lamps and we have a great track record."

According to Beckman, people want to buy a franchise because they want somebody to put them in a successful business overnight. Franchising is great for the industry as long as the franchisor is doing the right job. Franchisors have to provide support. Otherwise the franchisees aren't buying franchises, they're simply buying a name.

Another advantage for the franchisee is security--knowing that somebody else has worked through the majority of difficulties in running a business. That somebody, the franchisor, has been through all the hard knocks and has set up a program that has demonstrated success in the past. So, the risk of failure to the franchisee has been reduced.

Statistics show that 95 percent of franchises succeed where four out of five independently owned businesses fail. The real question 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?

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

As far as disadvantages, the annual fee that franchisees pay to franchisors can be classified as a disadvantage, but it is a necessity. Franchisors cannot support the franchisees entirely. So, the annual fee goes toward marketing and the franchisor's effort to continually fine-tune its program. On the other hand, it should be noted that the annual fee works out to be an advantage, as well, because the franchisor is there to increase the franchisee's productivity.

Another disadvantage exists when a franchisor wants to convert an existing salon. It might be difficult for an existing salon to buy into a franchise. Some companies have found that hiring employees from other tanning salons can be very difficult because of some of the bad habits they have acquired. It is much easier to start with a salon and do everything correct from the beginning.

"Business format franchising helps bring uniform standards to our industry," Chaney says. "Franchise systems are monitored by the FTC, state regulations, and mostly by the franchisees themselves for their compliance with regulations, their ability to meet the needs of the customer and to provide a safe and profitable business environment. Higher standards set by tanning salon facilities will lead to a smarter customer, which translates to a growing and profitable market."

Whether you are developing a conventional, mega salon, chain or franchise your top priority should be professionalism. That professionalism should be passed down to each and every location.

The bottom line is salon owners should not open their stores on shoestring budgets or hire barely living people to work behind the counter. In addition, whether you are a conventional, mega salon, chain or franchise owner, you need to make sure you emphasize education. As a professional that still is a major part of your responsibility.

Mega Salons Are A "Mega" Venture

No one should be surprised at the growing number of mega salons sprouting up throughout the country. If you look around today and see who's doing the business in computers, videos or office supplies, it's super stores. Everything is bigger, flashier and brighter. In other words, as an industry begins to develop and mature, offering more selection and more upgrades entices more customers into stores and generates more business opportunities.

The tanning industry is following this trend. According to Wayne Smeal, today there are three different concepts of salons.

"We have standard stores, super stores and mega stores," he says. "The standard salons have seven to 14 tanning units and occupy about 1,500 square feet. Super stores feature 15 to 25 units and occupy 3,000 square feet. The mega stores have 25 to 49 units and occupy about 6,000 square feet."

"It's quantity over quality, and customer service tends not to be as detailed," says Ed Chaney, owner of Phoenix-based franchise and chain Sunchain. "It's a matter of processing the service. At a mega salon 10 customers easily could show up in two or three minutes. They have an expectation when they walk in that they will get right in. Without a doubt, mega salons should be quick, easy and convenient."

Which brings us to the three most important features of a mega salon: location, location, location.

Yes, the term sounds like an overused clich, but location is still an all-star. Not only is location important, it is critical. Finding the right location for a mega salon is all about demographics. The location has to be able to support a mega salon. Mega salons are expensive to operate, and if they are not set up in a demographically correct area, failure is imminent.

There is no room for error in finding an appropriate location. Before opening, an operator should examine the general demographics of an area, as well as specific types of shopping centers.

Expense is another factor to consider when deciding whether to open a mega salon. The bottom line is that opening a mega salon is not an inexpensive proposition--in fact, the initial investment could be anywhere from $250,000 to $350,000. To do it right, operators need to invest in a quality electrical plan, which can cost between $30,000 and $35,000. It takes a lot of air-conditioning to keep a mega salon cool.

Other expenses include maintenance and repair on many more beds, lamps, acrylics, towels, not to mention that more employees are required. Basically, a mega salon has all of the expenses of a conventional salon, but with a mega salon the costs are doubled and, in some cases, tripled.

The goal of a mega salon is to service the public in large quantities. It should be convenient for customers and not require them to make an appointment because they need to get in and out quickly. It's also generally less expensive, but, again, mega salons should be very accessible to the public.

"Mega salons make tanning easier for customers," says Dan Humiston, president of Tanning Bed, L.L.C., which operates 16 salons in cities throughout New York. "Customers prefer the flexibility they get with a mega salon just like customers prefer the flexibility they get with a Home Depot vs. a 'mom-and-pop' hardware store."

However, customer service should not suffer. Perhaps the best advice for potential mega salon owners is to be able to cater to both their younger clientele, who might need little, if any attention, and their older clients, who want to keep abreast of the latest educational information, as well as get a healthy dose of "tender loving care."

Chuck Robinson, the chief executive officer of Four Seasons Sales & Service, a distributor in Paris, Tenn., says the return on a well-run mega salon is excellent and the customer service can be too.

"The very successful mega salons are able to maintain their managers over a long period of time," he says. "By being able to do that with a properly motivated management they can get very close to the kind of care a "mom-and-pop" shop can give. Knowing your customers is a necessity that a lot of folks overlook, but that is just one key element in properly operating a tanning salon."

Humiston agrees and says that while it may be impossible for his managers to give their customers the same quality that an operator who owns an eight-bed store can give on an everyday basis, the question of customer service really depends on how the term is defined.

"If you define customer service as always having a bed ready for people, having equipment changed on a regular basis, having new lamps installed all the time, offering bigger, brighter, nicer and safer stores, then I'd say megasalons do a pretty good job of serving customers," he says.

Employee Issues

In exploring mega salons, a repeated concern seems to be the difficult task of finding good employees. Yes, mega salons need more employees; however, that is not the problem. The problem is that because of their size, mega salons also need different levels of management skills.

Today's successful salon owners must do everything they can to entice good employees and keep them.

For mega salon owners, it won't be hard to pay your valued employees good money. Why? Because, apparently, the No. 1 reason for owning a mega salon is the possibility of mega money rolling in. Some operators claim their salons make 20 percent to 30 percent more gross revenue than the average salon owner.

However, interested parties should be cautious because everything involved in a mega salon is large and mega salons generally are forced into large marketing programs. Gross receipts are a lot larger, and mega salons do not have the 'grace period' that individual salons have.

After all, mega salons have large leases on equipment, large leases on property, and large payrolls for employees--everything is large. So, mega salon owners cannot sit around and wait for business to come to them.

Successful marketing methods include direct mail and well-placed signage on the building. Just seeing the sign is as effective and productive as anything else.

Todd Beckman, owner of the St. Louis, Mo.-based mega chain and franchise St. Louis Tan Co., says that it requires a lot of money to put a mega salon together.

"It takes hard work, good planning and good credit to put one of these stores together," he notes. "Do it properly, be sure to do your homework. And, if you have the right backing, you'll never look back."

One thing is for sure, the tanning industry will continue to grow.

"As public awareness increases in regards to the positive benefits of indoor tanning, and the fact that operators are much more educated about these benefits, we will see a continual growth in the industry for some time to come," says William Hoes, director of franchising for Fabutan Sun Tan Studios, a chain based in Edmonton, Canada.

The Advantages & Disadvantages of Owning a Mega Salon

Advantages:
Money.
Money.
Money.
As easy to run as a conventional salon.
More beds available to customers.
No appointments necessary.

Disadvantages:
Money (initial investment is extremely high).
Money (monthly expenses are high).
No room for error on location.
Less time to interact with customers.
Finding excellent employees.