The State of the Industry

Hair News Magazine

by: Damien Richard von Dahlem, CEO

DIVERSION - THE BIG JOKE

I feel ethically bound to begin this segment with the notion that not all salon product brands are diverted. Some manufacturers maintain very good control over their inventory and do protect our salons. This segment is targeted at the other manufacturers. We all know who they are, or at least we suspect certain manufacturers.

I recently read an article on product diversion in Salon News, a publication that I like, respect, and recommend to others. It is one of only two industry publications that I still read. The article was well written and very well researched.

In the following edition to the article, the writer admits that she might be a bit naive in her conclusions about diversion. I agree, her conclusions were a bit naive. Now let me tell you why.

If the manufacturers were really serious about combating diversion, they wouldn't have bar-coded the product. Bar coding is crucial to getting product into retail outlets. How many salons use bar-coding technology? Having said that, I do use bar-coding technology and I am damn glad the manufacturers added bar codes. It makes life much easier in the salon. Still, I suppose the manufacturer can argue they did this for the convenience of the salon owners. I just don't believe it.

Some manufacturers place secret codes on the bottles to help track diverters. What a crock in my opinion. True, some manufacturers do use secret codes, but I believe they do it for their own personal reasons to track counterfeit products, not diverters. Check the court records. How many companies have been sued for counterfeiting versus diversion? Again, I suppose they could make the argument that they do this to protect us from diversion, but again, I just don't believe it.

If the manufacturers are serious about protecting our salons, why don't they go out to the retail stores and buy all of the products back? After all, it was the manufacturer that let the product get out in the first place, not the little salons. In other words, why don't they put their money where their mouth is?

Now I'm not saying that the manufacturers intentionally let the diverters have a free go, I just don't think they are that eager to stop the cycle. After all, imagine that all diversion ended abruptly tomorrow. Now imagine what that means in terms of revenue to the manufacturers. It would be financially devastating. I believe that the manufacturers are far more motivated by greed than ethics.

No sooner did I finish this article, than I got the November issue of the other publication that I read, Modern Salon, and much to my surprise Modern Salon wrote a very critical article about diversion. Much along the same lines as we did. We hope to see this trend continue.

There have been suggestions made that salon owners should get more involved in the process of fighting diversion. I disagree for two reasons. One, its a bit like trying to hold the flood back by sticking your finger in a hole in the dam. Its a waste of time. The forces pushing against the dam are far too strong. Two, salon owners have enough to worry about in the daily operations of their salon, to be wasting valuable resources on fighting diversion. Put that same energy into running your salon and you will be far better off.

In a new development that I was not aware of, according to Modern Salon the Beauty Industry Fund for Consumer Protection (BIF) has asked Regis Ceo Paul Finkelstein to lead the group's efforts against diversion.

I don't think so. That's kind of like the kettle calling the pot black. Sure Regis would like to see salon products disappear from big retail outlets, but I will suggest that the reason is self serving. With the products out of Target, Albertsons, and the like, the next logical place consumers will purchase the product is from the Cost Cutters at Walmart or the Trade Secrets at the local mall. Driving the products from the diverters will probably benefit the brands of Regis much more than any other salon point of sales. The small trickle that would actually make it to the independent salon owner is negligible.

Manufacturers pointing the finger at salon owners for diversion is just plain obscene. Before I got involved in the beauty industry I owned a factory that made licensed products for the NFL, NHL, MLB, and the NBA. Shopko was our number one client. I know exactly how product gets onto the shelves at Shopko, Target, and the like. The buyer at Shopko for my product line was the HABA (health and beauty aides) buyer. The same buyer that would authorize and order salon products.

In order to get your product into Shopko they do a very extensive background check. Not only do you need to be able to supply every single Shopko with a start up order of between five to twelve cases per store, depending on store size, you need to be able to do it in a very tight window of time, and you need to be able to resupply the stores as inventory sells down. Thus, you need to be able to ship 4,000 cases of product within two weeks, not to mention that before the initial order has reached the last store, you have already begun shipping new orders to the other stores. I did this day in and day out for three years before I sold my company. It is a logistical nightmare. Now multiply that by all of the outlets of other chains that sell salon products and you can readily see that no diverter is buying a case or two, here and there from a salon and meeting that demand. It is a mathematical impossibility and manufacturers should bow their heads in deep shame for even hinting that the independent salon owners are to blame.

So who are the diverters. Simple. Either the stores are buying the product directly from the manufacturer, or they are buying from some pretty heavy distributors. That is as simple as it is. I believe it is largely from some distributors, companies that the manufacturer licensed to sell and distribute their products. Now folks, there are only a hand full of distributors that can fill that kind of demand, and there is no way in hell that they can do that without attracting attention from the manufacturers, if the manufacturers want to catch them.

Is there any way the manufacturers can stop this diversion? You bet, and its not that hard. One tool is Centralized Ordering. In this model salons would order directly from the manufacturer and the manufacturer would pass the order on to the local distributor. This process should take all of one hour with current technology and will immediately red flag any questionable order. The second model is Reverse Invoicing. For every order that is shipped to a salon by the distributor, the distributor faxes a copy of the invoice to the manufacturer. Again, orders would red flag immediately.

Both of these processes are easy to implement and fool proof for detecting diversion. The manufacturer doesn't need to verify every single invoice, just a sampling of invoices. One, does this salon exist? Two, does this salon have permission to sell our product? Three, did the salon actually make this order? Four, is it likely that a salon with its given demographics actually needs this order? Diversion would be arrested within days.

A few years ago I went into a local Shopko and read the cost code on the bottles. I know how to read these codes, but it is not my place to share their code with you. To my surprise Shopko was paying more for the product than the salons. Shopko was simply ready to settle for a much smaller markup than the average salon. Another way to fight diversion is for the salon to lower their prices and advertise it as such.

This all brings us to the question of why manufacturers sell to salons at all? Simple. Salon lines don't have to spend nearly the money on advertising that over the counter brands spend. You the salon owner and the stylist are their advertising. The reason salon products are in demand in chain stores is because we the stylists and salon owners created the demand. Without us there is no demand for the products and thus nothing to divert.

My suggestion is, instead of us signing contracts that say we won't divert products, lets have the manufacturers sign contracts with us saying that they will immediately buy back any of their product that appears on a shelf near our stores.

Ultimately, I don't think diversion matters one iota. I recently received a letter from a local booth rent salon to go to arms against Walmart in this regard. Why?

First of all, the Cost Cutters that is in that Walmart is a completely legitimate salon with the right to sell salon products. True, some shoppers will just go into the salon to buy product and then leave, but so what? Are we now saying that we only sell product if someone also gets their hair cut? How ridiculous. Is it any different than what that booth rental salon is doing? I think not. She isn't a hairstylist either. She does however make money on the products that her renters sell.

Look. We are a Market Economy. That means that those who bring the best product or service to market at the best price, are likely to win. When you purchased your last major appliance, did you buy it from that small downtown store, or did you save a few bucks and buy it at Sears, Best Buy or Walmart? If you aren't protecting your local small businesses, why should they give a hoot about you? Stop crying and grow up. If you want to reap the profits of being a business owner, be prepared to take the heat from competition, or get out. That is what makes this country great. If your salon depends on the income it makes from products, what does that say about the quality of your services. Carry products as a convenience to your clients. If you treat them right, they will usually buy from you. If not, its your own fault.

Alternately, stock your salon with smaller less known brands that the retail stores have no interest in, or have your own label products made. Either will work. Let the diversion go on. Who really cares? Certainly not the manufacturers in my opinion.

Bottom line, regardless of who is creating the diversion, I am sick of the manufacturers paying the subject lip service. Either, you the manufacturer do something effective to eliminate diversion, or shut up. Just shut up. Its tedious and embarrassing to us as an industry, not to mention that you aren't fooling anybody.

Reprinted from: Hair News Magazine October, 2002. All rights reserved.