Retail News Update

Regis Corp. will renovate its Trade Secret stores to offer a wide selection of bath-and-body products in a move to grab market share in that category and turn around a sales slump.

Edina-based Regis will launch the updated concept at five Trade Secret salons in the Twin Cities later this year. The company eventually plans to expand the new product lines to all 630 Trade Secret stores nationwide, including its 27 stores in Minnesota.

Regis views the bath-and-body segment as a major opportunity, as revenue growth from haircuts and the hair-care products has slowed. Bath-and-body products account for just 2 percent of Trade Secret’s sales now, but Regis CEO Paul Finkelstein expects that share to grow significantly in the years ahead.

“Other companies are going more and more into bath, body, skin and face treatments, and there’s no reason why that category can’t be a 15 to 20 percent category for us,” he said.

Trade Secret stores, predominantly located in regional malls, sell more than 90 brands of products. The chain focuses primarily on hair-care products, but also carries a limited selection of skin-care and other beauty products.

Updated Trade Secret stores will bolster their selection of bath and beauty products, including face washes, skin moisturizers, lotions and bath products, similar to those offered at chains like Sephora and Bath & Body Works.

Finkelstein points to Encino, Calif.-based PureBeauty Inc. as an example of the bath-and-body segment’s potential. The 40-unit beauty-supply and salon chain generates 23 percent of its revenue from products similar to those that Regis plans to add at its Trade Secret stores.

Chain is product-driven

Trade Secret provides hairstyling and other salon services, but emphasizes product sales much more than Regis’ other brands. Product revenue accounts for about 88 percent of the concept’s total sales, whereas Regis Salons draw 83 percent of their revenue from styling, cutting, coloring and other services.

The hair-care industry has grown rapidly over the past 15 years, Finkelstein said, but the market also faces increased competition. Professional hair products, once sold exclusively at salons, are now found at discount stores like Target and Walgreens.

“The market has changed, the world has changed,” Finkelstein said. “We can’t limit ourselves to professional hair care anymore, because those boundaries are so broad today that professional hair-care products can be found in a lot of other places besides beauty salons.”

The increased competition has hit the product-driven Trade Secret more than Regis’ other service-driven brands. Regis’ overall revenue rose 8 percent to $2.6 billion in fiscal 2007, but Trade Secret’s sales slipped 3.7 percent to $253.3 million. Companywide service revenue jumped 9.8 percent, while product sales increased a more modest 4.6 percent in the face of increased competition.

The new product rollout at Trade Secret will begin in time for the holiday season at five stores in “some of the better malls” in this market, Finkelstein said, declining to name those sites. Regis is working with Minneapolis-based Shea Architects Inc. to create a more upscale, boutique design for the renovated stores.

Trade Secret’s core mall locations average about 1,200 square feet, with 80 percent of that devoted to product display. The company’s approximately 50 strip center locations average 2,500 square feet, with roughly an equal share of the store dedicated to products. Those breakdowns will remain the same in the new stores, but the product mix will shift to include fewer hair products and more bath-and-body products.

Finkelstein hopes to offer products at Trade Secret that are not available at discount retailers. A manufacturer “would have to be out of his mind not to do business with us,” he said, noting that more than a quarter of the company’s 850,000 loyalty-program members have incomes of more than $125,000.

Those affluent salon customers should provide a fertile base for the new bath and beauty products, Finkelstein said. “If our customers see it, feel it and like it, they’ll buy it. We have the locations, so we don’t really have to do a lot of advertising. The traffic is there.”

As a new product segment, any bath and beauty sales would have a material effect on same-store sales, Finkelstein said.

Analyst takes ‘wait-and-see approach’

The Trade Secret conversion is “an interesting and very compelling idea,” Piper Jaffray & Co. analyst Neely Tamminga said during Regis’ recent fourth-quarter earnings conference call. In a recent research note, however, she refrained from judgment.

“While we believe this strategy validates our view that female shoppers are increasingly opting for the specialty-retail format vs. the department-store format when purchasing beauty products, we are taking a wait-and-see approach with respect to this initiative,” she wrote.

Kathryn Moroz, founder of Spa Advisors Inc., a salon and spa consulting firm in Phoenix, agreed that many consumers are willing to spend more to purchase beauty products from professional salons.

“I think the customer overall has become more sophisticated, and I think they will seek those products out regardless of the price level,” she said. “There are people who buy those products at Walgreens, but others are looking for something different and will go to a specialty retailer for those items.”

The bath-and-body market is a logical growth segment for salon operators, Moroz said. “Large hair-care companies obviously need a way to increase their revenue. There are a lot of hair-care products out there now, but most [salons] haven’t focused on bath and body. I think they’ve learned from the spa industry how important that category is.”

Trade Secret should be able to draw bath-and-body product sales from its existing salon clientele, Moroz said. “I think a lot of those purchases will be impulse.”

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