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MONEY

The Cutting Edge

Profile of a start-up hair salon.
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As a hairstylist in someone else's shop, John Tramel built a sizable, loyal clientele. But turning that into a successful business of his own is proving to be not as easy

In 1983, after driving a truck for nine years, John Carl Tramel suddenly found himself out of work, a victim of hard times. He was 27 years old, a high school graduate with a family, a mortgage, and an uncertain future. But opportunity can knock in odds ways, as it did one day while he was getting a haircut.

It happened that the stylist, Bob Lavender, was a personal friend. Since Tramel had no other plans, Lavender suggested, why not get into the hairdressing business? Tramel had the kind of friendly, easygoing manner that would work well "behind the chair," as they say in the salon trade. If he could make it through beauty school, a nine-month program, Lavender promised him a job.

Beauty school? Tramel didn't quite know what to think. What would his softball team say? And his hunting buddies? He was, after all, a truck driver. Setting curlers and styling perms fell a little short on the machismo scale.

But as he mulled it over, the idea seemed somehow attractive. He had always wanted a job where he could wear nice clothes. And there seemed to be some money in the field, at least for an owner. Lavender, who had 12 salons, lived in a big house and drove a Mercedes.

It couldn't be all bad, and besides, nothing better was on the horizon. "It wasn't my great dream to become a hairdresser," Tramel says, but off he went to The National Academy of Beauty Arts, near St. Louis, his hometown.

By July 1984 he was a licensed cosmetologist, and he set out to build a clientele -- a slow, painstaking process. A hairdresser must win customers' trust before they'll become regulars. A haircut isn't a matter of life or death, but still, most people would prefer not to get a bad one. Tramel was competent. In fact, he considered himself a perfectionist. Even so, it was tough. During his first six months he grossed a mere $2,200. "We were thrilled if he made $100 a week," says his wife, Linda.

When Lavender sold his business, Hair Attraction, Tramel moved on to other salons, eventually landing in a place called Stop 'n' Style, a small salon near the town of Arnold, Mo., where he and his family lived. Despite the shop's modest accommodations, Tramel's business thrived. By 1989 he was earning $32,600 a year.

He did indeed seem talented in his new profession. And he liked it, particularly the artistic side. He enjoyed trying to make people look their best. As his reputation grew, he found his calendar booked solid for five and even six weeks in advance.

* * *

It's almost a tradition in the hairdressing world for popular stylists to branch out on their own. Tramel had planned to open his own salon all along, even when he was struggling. By late 1989 he felt secure enough to get serious about it. He had some 300 regular customers by then, a critical mass, and he was sure they would follow him to his own shop.

But building a clientele is one thing, and building a business is quite another. Technically, Tramel had been self-employed since 1984 -- he rented stations in the salons where he worked, keeping all his proceeds, instead of going on commission. But he had no real business experience. Neither did Linda. Her only stint outside the home had been as a supermarket checkout clerk.

She had, however, taken some practical steps. Whenever she saw a helpful article in a trade journal, she clipped and filed it. She'd also taken a course at a community college: How to Start Your Own Business. It wasn't M.B.A. stuff exactly, but it covered the basics -- taxes, the importance of customer satisfaction, the advantages of incorporation.

Then she did some demographic research on Arnold. With a population of 23,000, it was growing steadily. Baby-boomer families were migrating to it from St. Louis, 15 miles to the north, in search of a better quality of life. "We saw a lot of new developments with large homes and nice cars in the driveways," she says. "We knew people like that wouldn't be comfortable in these little hole-in-the-wall salons we had here."

Competition wasn't a major worry. A couple of salons in the area were respectable, and Great Clips, part of a big chain, was in an Arnold strip mall. But the rest were rather low-rent operations -- one was in a trailer. Clearly, the area could support a new, first-class establishment, which is what Tramel had in mind. He understood, for instance, that strangers disliked sitting too close to one another in waiting areas; his place would be roomy. He also knew that stylists need a place to get away from clients for a few minutes, for lunch or relaxation. Most "break rooms" he'd seen were glorified closets. His would be more spacious. And he didn't like the bowling-alley look so common in salons, with the service chairs all in a row. He envisioned eight stations loosely positioned around a large room.

Then he pondered the shop's atmosphere. That was key. The "emotional experience" that's created in the chair, according to salon consultants, is a huge factor in a shop's success. If customers don't feel at ease, they might not return, regardless of service quality. Tramel had worked in places where the prevailing colors were rose or mauve. Since his clientele was 40% male, he wanted something neutral. He settled on a black-and-white motif -- crisp and timeless.

In short, he wanted something with a little class. Nothing glitzy, mind you -- no Los Angeles-style number with MTV and wine coolers in the waiting areas. This was, after all, Arnold, Mo., ground zero of the American heartland. "I just wanted a place that looked professional," he says, "where the customers would feel comfortable, and where stylists would like to work."

* * *

In projecting start-up costs, the Tramels estimated that they needed $35,000. That would buy equipment and supplies, pay the up-front rent, and leave a little cash for initial operations. Their own resources, however, were virtually nil -- a small car and an old pickup were about it. After Tramel had lost his trucking job, they used up their savings and sold their house. In 1983, in fact, they and their son had to move in with Linda's mother. In 1989 they were still there.

The few bankers they saw were not amused. "We had put together a booklet for them, like a business plan, but they never even looked at it," Linda recalls. "Once they found out we had no assets, they showed us the door." One banker even rubbed it in. The rich got richer, he said with a laugh, and the poor got poorer.

The $35,000 never did materialize, but there were those who believed in Tramel. One was a brother-in-law who lent him $9,000. Another was Heil Equipment Co., a Kentucky-based salon-equipment supplier.

The hardware for the parlor -- the hydraulic-lift chairs, the hair dryers, the shampoo bowls, the tint-and-perm bar, the retail display cases, the manicure table -- that all came to $23,000. Heil normally sold the equipment outright, but a young Heil salesman who liked Tramel convinced his superiors that in this case a lease-purchase deal made sense. "He wanted to get me the whole thing with no down payment," Tramel says, "but I had to come up with $5,000. That cut hard into the $9,000, but after four years I'll own all the equipment."

Then there was Kent Zoellner, a former autoworker who had built a little shopping complex. It featured a pizza parlor, a doughnut shop, a convenience store, and a crafts shop. In scouting locations, Tramel had spotted Zoellner's tiny mall and liked it. It sat near the junction of a primary road and Interstate 55, which steams north and south through Arnold. It was easily accessible by car, with plenty of parking.

Strangely enough, Zoellner's wife, Pat, was one of Tramel's customers at Stop 'n' Style. One day as Tramel worked on her hair, he was musing that he'd like to have his own salon. In fact, he had even found a desirable site. As he described it, Pat turned around, stunned. "John," she said, "we own that!" On top of that, oddly enough, the Zoellners were looking for a salon to fill a 2,000-square-foot expansion space. And if Tramel needed a reference, who better than the landlady herself?

At $1,200 a month, the rent was more than he had planned on. But Kent sweetened the package by installing the walls, the plumbing, and the electrical work, all free of charge. He even put in the floor Tramel wanted, and the molding.

The pieces came together. And on June 25, 1990, John Carl's Hair Designs Inc. opened for business.

The name wasn't as cutesy as those plastered on some nearby salons -- Shock Waves, Sensational Cuts -- but Tramel didn't want cutesy. "It seemed to me that the really successful salons are named after the owners," he says. "So I figured I'd try that. And a lot of customers have thanked us for not calling it Cuttin' Wild or something like that."

As for a staff, Tramel had led a small insurrection at his last salon, the now-defunct Stop 'n' Style, bringing with him three stylists whom he held in high regard. Having worked with Tramel for a couple of years, they knew him to be a nice, mild-mannered guy, a family man who sang in the church choir. He'd be a decent boss.

His recruits liked the new salon, too. It had a bright, cheerful ambience, with ceiling fans and plants galore. Tramel kept the place sparkling and spotless. It featured a comfortable, secluded break area complete with a modest kitchen, a stereo, and lockers for personal belongings. Classy indeed by Arnold standards.

He filled out his crew with four young stylists. They had no following to speak of, but that could be developed. For starters, Tramel thought, they could catch his overflow.

(continued)

It wasn't long before the glow from the grand opening began to dim for the new owner.

Expenses, for one thing, were eating him alive. He had the $1,200 rent plus a $617 payment for the leased equipment. Electricity was running $400 a month, the phone $140, and insurance $150. Supplies (shampoo, conditioner, chemicals for perms and tints) were costing $800 a month. The $9,000 loan had to be repaid, too -- another $200.

Right there, Tramel had bills topping $3,500 a month. And that was before payroll, advertising, cleaning costs, and sundries. "Before you start a business, everybody gives you advice, and you try to prepare yourself mentally," he says. "But I learned real quick that I didn't know what I was getting into."

At the end of the 1990 tax year, after six months in business, John Carl's had grossed $49,300. Not bad, really. But deductions, including depreciation, came to $57,700. Tramel himself had largely kept the place afloat, cutting hair "like a madman" six days a week. Yet he was able to draw only $12,400. "We thought it would be pretty awful, and it was," says Linda, who didn't draw a dime.

By this past August, eight months into the salon's first full calendar year, things were brightening a bit. The start-up trauma had faded, and receipts were running about $2,000 a week. That was close enough to break-even that Linda, who handles the bills, could juggle expenses by "playing the float" with the withholding taxes. Still, Tramel was getting paid only when money was left over and never when the rent was due.

Part of the difficulty was the low level of retail sales. Tramel carries a full line of Matrix Essentials and other sold-only-in-salon shampoos and conditioners. With a 100% markup, they could be a nice profit center. In some salons they are 30% of gross, but at John Carl's they were at most 10%. Tramel had no trouble selling the products. But his employees, afraid of seeming pushy to their clients, some of whom were friends, didn't bother. And Tramel didn't want to force the issue. "I'm always on him to be harder, meaner, but it's really not in his makeup to be that way," Linda says.

Another snag was the unexpected departure of three stylists. One had a baby, and the others went seeking more lucrative work. Hairdressing would never rank up there with investment banking, but Tramel was doing what he could. He set his commission structure, for instance, at the upper end of industry standards.

"I think a lot of salons miss the boat on commissions. That's why we lose good stylists sometimes -- we are not fair with them," he says. "I want to keep people with me as long as possible, and I think I can if I'm not greedy." At John Carl's, a stylist whose work brings in up to $300 a week gets a 50% cut. From $301 to $500, commissions rise to 55%. They top out at 65%.

Not that his stylists are getting rich. His steadiest performer, Karen Scholar, makes about $250 in a good week. The others earn less, with the exception of 20-year veteran Fern Edwards, who was part of the exodus from Stop 'n' Style. Her strong following, however, doesn't help cash flow much. She rents her station for $75 a week and gets to keep what she makes.

Tramel hadn't wanted any rental stations. "I think salons should be commissioned, because as the owner it's the only way to keep control," he says. "With rentals, everybody needs a key, and stylists make their own hours. As a commissioned salon, you have employees as opposed to having people who just work there." But he broke his rule for Edwards, a trusted friend whom he values for her camaraderie and lively shop-room banter.

Tramel's commissions are high, but his prices are low. A haircut, with a shampoo and blow-dry, costs $9. A cut with a perm is $39, and a tint, $25. By comparison, at Robbie Olson's Hair-Em salon, in another town outside St. Louis, a haircut with a shampoo and blow-dry is $30, a cut with a perm costs $60, and a tint, $35. That averages $17 more per procedure. Tramel knows he is inexpensive. He sees that as a competitive edge as he builds the clientele. But he acknowledges that soon he'll have to boost his rates.

* * *

By last August John Carl's had about 700 regular customers -- 400 of them were Tramel's -- and was adding about 15 new ones each month, mostly by word of mouth. But attracting more business remains the highest hurdle to the company's success.

"I've got to get the whole salon to where it's like my station, to where it's constantly busy the whole year," says Tramel. His days are so packed that he can't squeeze in all his old customers anymore. Some of his stylists, meanwhile, are idle. Only Scholar is busy 40 hours a week. "I try to get my older clients to use some of the other stylists," Tramel says. "I try to find a personality fit. But not too many are interested."

His location, which he still likes, is not likely to bring relief. Situated on the minimall's rear face, the salon can't be seen from the road. And there's not the kind of walk-in traffic a large shopping center would generate. Those are significant barriers to growth.

"We give location a weight factor of around 70%," says Michael Cole, president of Salon Development Corp. and one of the industry's leading consultants. "It means that if you're in a bad location, you'll have to work your butt off to succeed. I've seen salons in high-traffic locations, and the owner had trouble walking and chewing gum at the same time but did relatively well in spite of it."

Linda's marketing campaign, such as it is, has yielded less than dramatic results. At $60 a month, a display ad in the yellow pages was out of the question. Ads in a local newspaper proved ineffective. And her placement of the company logo on shopping baskets in an Arnold discount mart hasn't unleashed any stampedes.

Her best move so far has been participating in The St. Louis Post Dispatch's welcome package for new arrivals. It includes a coupon good for a free haircut if the client also gets a perm. "That's the only thing that has brought in more than one person," she says. "The way we run the business all the time is trial and error, and that goes for our advertising. We're not sure what will bring people in."

But asked to name his biggest challenge, Tramel doesn't hesitate: personnel management. "That's been the hardest thing for me to learn," he admits. "I never want to hurt anybody's feelings. I'm not a crazy, off-the-wall, yelling type of person. I try to keep it undertoned. But you still find people who want to take advantage of you."

Linda is more direct: "It came as a surprise to John and me that not everyone has the strong work ethic we have." Even so, her attitude toward the business is almost perfunctory. She'll work hard to make it succeed, but if it fails, she won't be devastated. "We try to expect the worst, so if it happens, we won't be heartbroken," she says. "It's our livelihood, but it's not our life."

As for Tramel, he knows he could make more money someplace else; that's always an option. Still, he's glad he is taking his shot. "If we didn't try this," he says, "we'd always look back and ask ourselves why we didn't when we had a chance."


EXECUTIVE SUMMARY

THE COMPANY

John Carl's Hair Designs Inc., Arnold, Mo.

Concept: Operate a first-class hair salon in a growing, middle-class community south of St. Louis, capitalizing on the founder's strong personal following

Projections: Gross revenues of about $100,000 in 1991. Slow but steady growth thereafter

Hurdles: Building the customer base; increasing sales of retail products; maintaining a stable work force; motivating employees

THE FOUNDER

John Carl Tramel

Age: 36

Family: Married, one son

Personal funds invested: $0

Equity held: 100%

Salary: $19,400

Workweek: 40 to 50 hours

Education: High school; The National Academy of Beauty Arts

Other companies started: None

Last job held: Hairdresser

FINANCIALS

John Carl's Hair Designs Inc. -- First-Year Operating Statement

Six Months Ending 12/31/90 6/30/91 Total

REVENUES

Haircutting $43,803 $38,391 $82,194

Station rental 1,800 1,650 3,450

Retail sales 4,972 4,386 9,358

TOTAL REVENUES $50,575 $44,427 $95,002


EXPENSES

Payroll $25,047 $21,949 $46,996

Loans 4,908 4,908 9,816

Rent/utilities 15,282 10,264 25,546

Supplies 4,023 5,548 9,571

Advertising 566 482 1,048

Miscellaneous 100 100 200

TOTAL EXPENSES $49,926 $43,251 $93,177


PRETAX PROFIT
$649 $1,176 $1,825


WHAT THE EXPERTS SAY

CONSULTANT
MICHAEL COLE

President and founder of Salon Development Corp., in St. Paul, Minn., a company that specializes in management and marketing consulting for salons

We have a saying here that if you don't change your direction, you're likely to wind up where you're headed. And John Tramel is headed in the wrong direction.

I saw some real danger signs in his thinking on compensation. At his commission rates, he's giving away the store. I wouldn't be against his bringing somebody from 50% to 55%, but I would not tie that to volume. I would tie it to that stylist's repeat business.

The difference between a new client and a repeat client, in our paradigm, is $35 in advertising. So anytime a stylist converts a new client to a repeat, that income is residual. The business doesn't have to invest in marketing or advertising to make that happen. So now I can justify giving part of that savings back to the hairdresser.

One way of doing that is to pay 55% commissions on repeat customers and only 35% on new clients. That gives an incentive for stylists to convert the daylights out of the new business.

He could also improve his situation with multilevel pricing. It's based on the law of supply and demand. In the beauty business, as in any personal-service business, you are selling units of time. That's your supply, and demand equals repeat business. As repeats start consuming more of your time, you have a license to raise your price.

He's charging $9 for a haircut and $39 for a perm -- let's call that level one, for new clients. But once a stylist is generating a lot of repeat business, she should be promoted to level two -- call her a master stylist. And her price structure would be 20% higher than level one. If you don't do that, there's only one other way of increasing a hairdresser's potential, and that's to give her a piece of the action.

OBSERVER

ROBBIE OLSON

Owner of Hair-Em, a salon in Florissant, Mo. With two full-time stylists and an apprentice in a 1,000-square-foot shop, she expects to gross $200,000 this year

I myself was in the same position as the Tramels a number of years ago. There was less cash intake than outgo. What made the difference for me was incorporating systems in every area of the salon.

First, I'd recommend he establish a mission or value statement -- what do we stand for? -- and involve the staff in that. That inspires a sense of teamwork. Then training programs need to be incorporated to support the value statement. I'd put the training in three categories -- customer service, technical expertise, and personal development.

Staff development is the foremost responsibility of the salon owner or manager. Working 50 hours a week behind your own chair does not help your staff members grow and prosper, although I understand why Tramel needs to do it. But people are looking for leadership. If they didn't want it, they'd have their own salons.

I get a real conflicting message here. John Tramel spent a fair amount of money setting up the salon. He attended to the ambience and the customer experience. But then his rates seem designed to appeal to the price-sensitive market. His haircut price, for instance, never should have been $9. If he is going to be unique in his marketplace, his prices need to reflect that. They are nowhere near in line with his expenses.

There are a number of no-cost or low-cost things he could do to bring in more business. Do free clinics and shows wherever they'll let you in -- clubs, schools, businesses, sororities. We had tremendous success doing that, and it gets your name out into the community.

CONSULTANT

STEVE COWAN

President of Professional Salon Concepts, based in Joliet, Ill. A $6-million company, PSC distributes salon products and is a consultant for the industry

Labor is the single biggest expense a salon has. In the industry nationally, the amount paid as compensation is typically about 60% of all costs. That includes wages, payroll taxes, and fringe benefits. General and administrative expenses average 32%. That leaves a pretax profit of 8%. To see raw commissions at Tramel's levels -- from 50% to 65% -- is kind of scary. By the time you add taxes and all to that, you're wiping out your profit margin. I would never recommend a commission structure like that.

His rent is disproportionate, too. Rents in this industry range from 5% to 9% of expenses, and his is closer to 15% because he has twice as much space as he needs. That's a big differential, especially with those high commissions.

There's also a need for an identifiable training program. He needs to train his people in the concept of quality control, how to communicate with clients, how to step a customer through the salon from the front door to the rebooking desk. That comes naturally to proficient hairstylists who start their own salons, so it's probably natural to him but not to his employees. Tramel has to establish what his quality standard is and what the client is entitled to in his salon, then train his people to that standard and continually measure against it. That will be the test of whether he can ultimately build his business.

Last updated: Nov 1, 1991




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