The Head Shoppe

The Head Shoppe

Peter Mahoney had become director of operations of The Head Shoppe Limited in 1984. By early 1990, The Head Shoppe was the largest chain of hairstyling salons in the Canadian Maritime provinces, with salons in six major urban centres in Nova Scotia and New Brunswick and annual sales approaching six million dollars. The industry had matured, but unlike most of its competitors, The Head Shoppe was enjoying unprecedented sales and profits. The company had implemented a state‑of‑the‑art computerised accounting system in 1989, with a terminal in each salon, making it a leader of the industry nationally The terms of the contract with the computer software designer included an option to acquire exclusive Canadian distribution rights for this system and for others to be developed for other types of retail operations. The decision on whether the option would be exercised had to be made by March 31, 1990, six weeks hence. Mahoney knew that the software package was the best available in the hairstyling field, and preliminary research indicated that the designer's packages in other fields were also superior. He was convinced that, if properly marketed, distribution of these products could be very profitable. He also knew that the decision would have major strategic implications for The Head Shoppe.

This case was prepared by Professor Raymond Klapstein of Dalhousie University for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management. Some elements of this case have been disguised.

Copyright © 1992, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

The Company

Wayne Drew opened the first Head Shoppe in 1968. The son of a barber, he had grown up in a small Nova Scotia town and entered his father's trade at 18. He relocated to Halifax in 1967, and started a shop in partnership with another barber. Differences between the partners led to a split within two years and left Drew as sole owner of the Head Shoppe.1 By 1984, the chain had eight salons and a hairstyling school. However, Drew's entrepreneurial success had resulted in an operation too large for him to manage or control.

1 The partnership's first shop, the Golden Clipper, was opened in 1967. When the partnership ended, the other partner retained the original Golden Clipper. Within a short time, however, Drew had become owner of both names. The name "The Golden Clipper" had been retained for two of the early shops, but these were treated as part of The Head .Shoppe chain.

Drew hired Peter Mahoney to be director of operations in 1984. An MBA graduate of Dalhousie University, Mahoney brought his energy and organisational skills to the Head Shoppe. His first task was to examine the structure of operations, with a view to improving efficiency and effectiveness and to expanding the chain. He conducted a comprehensive internal study to determine the strengths and weaknesses of the corporate structure and to examine employee attitudes (see Exhibit I for Executive Summary and Recommendations sections of the study's report). The findings of this study formed the basis of the Head Shoppe's organisational strategy for the following years.

The most significant outcome of the 1984 study was the development of a formalised corporate structure with input from the managers of the individual salons, and Drew and Mahoney of central office. They prepared a policy and procedures manual which defined the roles of central office and salon managers and the relationships between them. Central office retained control over all matters of overall corporate policy, including standard personnel and accounting procedures, staff and management training, advertising, and site leasing arrangements. Individual salon managers were given authority over all matters associated with day‑to‑day management of their salons. In addition, employee satisfaction was given a high priority: a generous employee benefits package and attractive incentives for top performers were introduced, and the basis of remuneration for virtually all hairstylists was changed from chair rental to salary plus commision.2 As a result, the Head Shoppe's hairstylist turnover rate became the lowest in the industry.

2 These two systems of hairstylist remuneration are discussed further in the Industry section.

Franchising as a mechanism for expansion was introduced in 1985. By 1990, the chain included nineteen salons, seven of which were owned by franchisee‑operators, and two hairdressing schools.

Strategies

From the outset, The Head Shoppe had established a reputation for being aggressive and innovative. It had led a battle with civic authorities in the late 1960s to eliminate by‑laws prohibiting barber shops from operating on Saturdays. In 1972 The Head Shoppe become the first salon operator to open a hairstyling school to train men's hairstylists. However, the techniques taught were equally applicable to men's and women's hairstyling. This led to the establishment of the first "unisex" beauty salons in the Maritimes, which integrated hair and beauty services for men and women, and broadened the range of hair care services provided to men beyond the traditional "haircutting only" services of a barber shop. This, too, involved the Head Shoppe in legal battles which were fought and won.

Although it served the entire market, The Head Shoppe targeted the 18 to 45 age group. This group represented the largest and most profitable segment in the geographic markets served. In targeting this segment, The Head Shoppe created and jealously guarded an image of quality, with the primary focus on hairdresser skill and customer satisfaction.

Given its target market, Head Shoppe management arbitrarily established a minimum urban population of 15,000 for centres in which it would locate a salon. By 1990, there was at least one Head Shoppe in most of the urban centres of this size in Nova Scotia and New Brunswick (see Exhibit 2 for population figures for major urban centres in Atlantic Canada). Exhibit 3 presents location and activity levels for the salons in The Head Shoppe chain as of 1989.

The Head Shoppe's innovations in the industry also included attempts to broaden the range of services offered to its clientele, by what Mahoney referred to as "fashion merchandising." However, it quickly found that related services such as manicuring and beautician services could not be provided profitably, and The Head Shoppe returned to focusing on the basic hairstyling business. The exception to this rule was the retailing of a broad range of hair care products, which represented 16% of total sales by 1989.

The financial management of the Head Shoppe was conservative, largely because its management anticipated that the hairdressing industry would quickly reach maturity. Use of long‑term debt had been minimal, and expansion in recent years had been primarily through franchising. This, combined with a net income in excess of $200,000 in each year from 1985 to 1989, provided the solid financial base necessary for future growth (see Exhibit 4 and 5 for Financial Statements).

The Industry3

The size of the market for hairstyling services was directly related to the size of the population. In Maritime urban centres, traditional men's barber shops and women's beauty salons had been almost totally replaced by three types of salons, virtually all of which catered to both sexes as clientele: discount salons which targeted price‑conscious consumers; full‑line salons which targeted the mainstream of consumers; and up‑scale salons which targeted the small minority of consumers who were extremely conscious of personal image and concerned about being on the leading edge with changes in fashion and style.4

3 Information in this section was collected from Mahoney's 1984 comprehensive internal study, a market study conducted for The Head Shoppe Ltd by Corporate Research Associates, Inc in 1988, and interviews of other industry members in 1989 and 1990.

4 A second chain, TopCuts, based in Newfoundland, rivalled The Head Shoppe's size in the Maritimes, but it targeted the price‑conscious segment. The Head Shoppe had established one up‑scale salon, called the Estetica Hair and Beauty Clinic, in the new up‑scale Spring Garden Place mall in Halifax.

The establishment of customer loyalty was the single most important key to success in all segments. The fact that location was an important factor in attracting clients had stimulated a move by hairdressing salons into urban shopping centres and suburban strip malls. All Head Shoppe salons were located in shopping centres and malls. The 1980s had begun with 95% of the industry being comprised of single salon independent operations, but there had been a strong move toward consolidation into chains which brought with it economies of scale and professional management. It was anticipated that by 1995, 85% of hairstyling salons in the region would be chain members.

The most profitable segment of The Head Shoppe's target market, the 18 to 45 years age group, representing 60% of the total population, tended to be conscious of style and fashion, and had the shortest cycle for repeat business.5 Three quarters of the population in this age bracket were regular users of salon service in the full‑line salon category. Competition was strong in this segment and was expected to intensify even further over the next five years. As a result, a shake‑out was expected to occur, leaving only the well‑managed salons that provided high quality service to the client. Criteria used by clientele in selecting a hairstyling salon are presented in Exhibit 6.

One problem area faced by the industry was an ongoing shortage of qualified hairstylists. This was largely due to the low prestige associated with the profession and a relatively low average income level compared to other professions. Although a top hairstylist could gross as much as $70,000 per year, many earned little more than the minimum wage. Most had a high school education or less, plus training in a hairstyling school. Historically, barbers and hairdressers who did not own their own shop paid a fixed amount to the shop owner for rental of a chair and were paid directly by their clientele. In the years after 1985, though, a trend toward regular employee status, with payment on a salary plus commission basis, had begun.6 No significant change in the attractiveness of the profession was anticipated for the foreseeable future, and the supply of qualified hairstylists was expected to continue to lag behind demand.

5 The average cycle in this segment was slightly less than six weeks. In other segments it ranged as high as three months. The average client in the 18 to 45 category spent from $20 to $30 per month on hair care, including retail products. Three quarters had their hair shampooed and professionally dried when having it cut.

6 The Head Shoppe had established this trend for the industry. It benefitted junior hairstylists by ensuring a fixed minimum control over operations. It also reduced the likelihood of Head Shoppe hairstylists moving to a competing shop, and taking their clients with them. Senior hairstylists with The Head Shoppe were given the option of .operating on a chair rental basis, though few did so.

Strategic Options

Strategic options for the future under consideration at The Head Shoppe included further geographic expansion, backward integration and diversification out of the industry.

1. Geographic Expansion

Geographic expansion had a strong appeal for Peter Mahoney. The Head Shoppe had been very successful in developing the existing chain of shops. Management had proven capable, key success factors in the industry had been identified, and distinctive competencies had been developed. However, Mahoney felt that further geographic expansion would necessitate going outside the Maritimes. The market in large urban centres in the region appeared to be saturated and shops in smaller centres could not be expected to produce the level of return necessary to make them attractive. In addition, qualified hairstylists in the region were already in short supply in spite of the fact that The Head Shoppe operated two schools. Although Mahoney was confident about the Head Shoppe's ability to compete in markets outside the region, this would entail competing head‑on with chains targeting the same market segment. Further, qualified hairstylists elsewhere were in even shorter supply than in the Maritimes.7

7 The characteristics of the industry in the Maritimes were representative of those in the rest of Canada, except other regions had large established chains targeting the full‑line segment (although none were significantly larger than the Head Shoppe), a greater shortage of qualified hairstylists, and a larger overall market size.

2. Backward Integration

Backward integration, (ie becoming one's own supplier), appeared to be worthy of serious consideration. The Head Shoppe had already done this with regard to the training of hairstylists, through its establishment of two hairstyling schools.

Retail sales of hair care products had increased from 7% of total sales in 1994 to 16% in 1989 (the industry average was 10% of total sales). Average mark‑up was one third of retail price. As Mahoney jokingly pointed out, from a management perspective hair care products had three advantages over hairstylists: "the margin is better, there isn't a supply problem, and they don't talk back!" Retail product sales had become a major new emphasis in the industry and dramatic growth was anticipated for the future. Product lines were distributed through very few supply companies, and each line was exclusively available through only one supplier. Given that product loyalty among consumers was high, having the popular lines would be the key to success. Suppliers worked on a mark‑up of 40% of their selling price, making the distribution business even more attractive. Maritime Beauty Products, a privately owned company, was the biggest supplier of hair care products in the region, with 35% of the market. It carried most of the lines that The Head Shoppe retailed to its clients, and Mahoney estimated that The Head Shoppe represented about 18% of Maritime Beauty Products' sales. The Head Shoppe had always used, and retailed, Maritime Beauty Products' lines and had encouraged its clients to use them. Maritime Beauty Products had exclusive distribution rights for these product lines, which would make it very difficult for The Head Shoppe to secure distribution rights. Also, relations between The Head Shoppe and Maritime Beauty Products had always been extremely good. In fact, Wayne Drew and the owner of Maritime Beauty Products were dose friends.

3. Diversification