Not long ago, the beauty salon business was virtually moribund. But, in the last few years, business has been as hot as a hair dryer, thanks in part to dress-for-success baby boomers who want more controlled-looking hair.
That suits Redken Laboratories just fine. Based in Canoga Park, Redken is the biggest seller of hair-care products marketed exclusively to (and through) beauty salons. With stylists both using and selling the products, the company has captured about 14% of that lucrative $650-million wholesale market.
The market is profitable in part because the styling business is growing at an impressive clip. Total salon revenue has almost doubled since 1979, to nearly $20 billion, according to Mary Atherton, editor of the trade journal Modern Salon. Sales of women's hair-care products rose 43% to $3 billion from 1980 to 1984, according to Product Marketing magazine.
Higher Profit Margin
But the market is also lucrative because products used and sold in stylists' shops cost more and have a higher profit margin than store brands. As a result, Redken's gross profit margin is 60%. Its business throws off so much cash that Redken had to borrow only half of the $17 million it spent on facilities and equipment during the last 20 months.
Redken still has $10 million left and now is seeking acquisitions. It is also aiming to expand overseas, where it already generates 18% of sales but as yet almost no profits. It particularly has hopes for Japan, the world's largest hair-care market after the United States.
Toward that end, Redken named its international vice president, Solomon R. Mester, president of the entire company in July.
Mester's background would seem to qualify him to lead the new push. His grandparents were Russian Jews who emigrated after the revolution to Manchuria, where the family was trapped during the Japanese invasion in 1931. Solomon was born during the occupation, learned Japanese and later immigrated to Canada. Before joining Redken, he was president of the Japanese unit of Max Factor, which remains one of the largest cosmetics companies in Japan.
Nearly 1,000 Employees
Mester heads a company with nearly 1,000 employees worldwide, about half in Canoga Park, including 11 scientists with doctorates in the company's new research laboratories across the street from its Variel Avenue headquarters. Redken spent $2.4 million on research during the fiscal year ended July 31. Earnings were $8.4 million on revenue of $108.5 million, for a record $3.05 a share.
'A Bad Business'
"It's a good company in a bad business," said Brenda Lee Landry, a cosmetics industry analyst with Morgan Stanley in New York. The problem with the business, she said, is that hair stylists are generally unsophisticated.
"They're not educated," Landry said. "Redken has taught hairdressers how to run their salons, keep track of income and how to increase their income."
The company has come a long way since Paula Kent mixed up her first batch of shampoo with a wooden paddle in a tub in her Van Nuys home 25 years ago. Now married to company Chairman John E. Meehan, Paula Kent Meehan and her husband hold 44.5% of the company's stock.
With another 6.2% in an employee stock plan, outsiders are left in a minority position no matter how much they buy. And, although Redken is a classic target for a takeover--lots of cash, little debt and a firm foothold in its profitable market--the Meehans aren't selling.
But not everything smells shampoo-sweet at Redken. Earnings plummeted 45% during the first quarter ended Oct. 31, contrasted with the same quarter a year ago. That was an especially good quarter in 1984, but the most recent quarterly earnings of 50 cents a share were lackluster, both historically for Redken and contrasted with results of competitors.
"There's been a little bit of drop this year all across the board, but not as much as Redken," Atherton said.
Factors in Recent Problems
Lee Quaintance, the company's senior vice president for administration, said excess inventory in the hands of distributors and a staff expansion of about 4% worldwide were partly to blame for the recent problems. But he also said that the hair-care business is a fickle one and that it is difficult to say what makes people go to the hairdresser more in one quarter and less in another.
Fickle or not, the hair-styling business is booming, and so are sales of hair-care products. Atherton said the industry is growing by 15% a year and that total revenue of U.S. beauty salons is now about $20 billion.
"The baby boom has passed 30," according to a research report written by Alice Longley, who follows Redken for Donaldson, Lufkin & Jenrette, a New York securities firm. "Advertisers are responding by popularizing the more controlled, more polished looks that most flatter women of all ages over 30 and that are most acceptable in workplaces."