Management make over

Beauty may be in the eye of the beholder, but it is clear to see that there are too many hairdressing salons in Australia. Competition is fierce and many salons are run inefficiently, resulting in many closing and changing hands every year. Day spas have emerged and grown in popularity over the past five years and opportunities exist for franchises to become established and expand within the market.

Demand for hairdressing and beauty salons industry services is sensitive to changes in household disposable income, fashion and social trends. Also important is the rate of population growth, currently at a record level of about 2.0% per annum (or an additional 406,100 people every year), through a climbing birth rate and escalating immigration.

Also ageing of the population tends to increase demand for higher-value services, such as hair colouring and beauty services. The health spa concept is a segment that is growing strongly, assisted by the expansion in health resorts.

The industry tends to operate with a fair degree of price-based competition, resulting in a high rate of salon closure. More professional operators concentrate on providing quality service and results to clients, with high levels of customer satisfaction and repeat visits, rather than attracting clients through price only.

The mainly small business and fragmented nature of the industry, together with relatively low barriers to entry, including little regulation, is the main driver of price-based competition. Apart from providing consistent quality services and results, having the skills to manage a small business is also vital, and often leads to failure in this industry. Like all small businesses, the industry also involves significant input of working hours by owners, which translates to a low effective hourly wage rate.

Expansion of franchise and chain operators is continuing, offering significant support to owners, but for a share of revenue to cover marketing and management support, and sometimes a royalty payment for use of the brand name. Also there is a requirement to only stock franchisor products for retail sale. This segment of the industry will continue to expand, with the strong possibility that an international company will enter the Australian market over the next five years.

It is anticipated that the industry will generate revenue of $3.4 billion in 2010-11, representing solid real growth of 3.5% compared with the previous year. Growth in this industry is expected to be positively influenced by solid economic and household disposable income growth, as unemployment continues its gradual decline, but still tempered by more from expected spikes in interest rates. Demand for higher priced, value-added industry services and products will rise, but some households will still remain both value and budget conscious.

Establishment numbers are forecast to rise at a rate of 2.1%, the same as the rise in industry employment. Of the 71,960 employees, many will remain as casual and part-time staff, as full-time staff, particularly salon owners, increase their working hours.

Key success factors:

• Having links with local health professionals. Beauty salons can benefit from client referrals from local doctors and dermatologists.
• Use of specialist equipment or facilities. Having specialist equipment enables salons to provide value-added, higher priced services.
• Proximity to key markets. It is an advantage to be located in a high profile, preferably wealthy area with significant passing pedestrian traffic and easy parking.
• Having a loyal customer base. It is important for a salon to build up a base of satisfied clients, to ensure repeat visits and attract new customers through good word-of-mouth.
• Ability to control stock on hand. Controlling stock levels, particularly haircare and beauty products, is important to maintain the liquidity and cashflow of the business.
• Superior financial management and debt management. Financial and business management skills are vital to ensure cashflow and the survival of the salon.
• Access to highly skilled workforce. A salon depends on the skill of its hairdressers and/or beauticians. Maintaining and updating skills is important to stay abreast of new hair styles and beauty treatments.
• Marketing of differentiated services. Salons can move away from price based only competition by offering quality, value-added and higher priced services.

Robert Bryant is the general manager of business information firm IBISWorld.