Ann’s Beauty Parlor: What does a small business owner do with a dying business?

Written by: Partha Ayyanger Linda Fang Jodie Hirsch Debbie Lew Lennix Lewis

Table of Contents I II III IV V VI VII VIII Executive Summary …………………………………………………………………… Background ………………………………………………………………… .. Current Situation ………………………………………………………………………. SWOT Analysis ………………………………………………………………………… Critical Issue / Feasible Alternatives ……………………………………………….. Recommendations ………………………………………………………………….. Contingency Plan ……………………………………………………………….. Implementations ……………………………………………………………………..

Appendices ……………………………………………………………………………………..

I. Executive Summary
Ann’s Beauty Salon is an old-fashioned, traditional salon located in the heart of Williamsburg Brooklyn, an area that has transformed from being low-key to a trendy neighborhood of artists and musicians. Most of Ann’s clientele are women aged 65 to 85, but the median age in Williamsburg is now 30.8. Almost all of the new businesses now serve the newer tenants, whereas many of the businesses that served the population before the drastic change in demographics, such as Ann’s, have left the neighborhood. Ann’s sales have progressively declined in recent years and three years ago, it started to operate at a loss. Rita Quillo, who purchased the business 13 years ago, is at a point where she has to make tough decisions about the business.

II. Background
Ann’s In 1955 in a recent-immigrant, family-oriented neighborhood in Williamsburg, Brooklyn, Rick Seranno, who had a passion and talent for hair styling and coloring, opened Ann’s Beauty Salon. Seranno, a pioneer in hair services, was known for his innovative hair coloring and styling skills. As his happy clients spread the word, the salon’s business grew, and local women, as well as actresses and models knew of and were patrons of the well-known salon. At the peak of its business, Ann’s operated 10 busy stations and the salon was incredibly successful. When he retired in 1980, Seranno sold the business to one of his operators. The business then changed hands two more times—first to another operator, Dave Thomas, who later sold it to one of his operators (and cousin) Rita Quillo, in 1993. Quillo operated the salon at a profit until three years ago, when, for the first time in 50 years, it began to lose money. Furthermore, in February of this year, Quillo’s lease expired. Simultaneously, Williamsburg, which is one subway stop from Manhattan, emerged from the sleepy neighborhood it was, to an extension of Manhattan. An influx of artists and trendsetters poured in and the real estate market skyrocketed. As a result, Quillo’s proposed new rent increased almost four-fold, from $1,200 to $4,200 per month. Unable to cover the cost of the new rent, Ann’s relocated to a new space that was two blocks away for $1,400, but it was at less than half of the original size. Rita Quillo Quillo, a 58 year-old mother of two and grandmother, has owned the salon for 13 years. Quillo has been a hairdresser since graduating from the Eli Whitney Vocational High School and obtaining her cosmetology license. For 25 years prior to acquiring the salon, Quillo was the only breadwinner in her family, and was therefore less able to take financial risks so she worked at other salons. Then, while working at Ann’s, her cousin wanted to sell the business. Quillo’s children by then, ages 22 and 24, no longer depended on their mother financially. Thus, Quillo,

who was now able to take a risk, welcomed this a golden time to achieve financial independence. She paid $6,000 for the business name, its chairs, and supplies and took over the business. She financed the business through a loan from a “local’ money lender. Business was good for a decade after acquiring it. Quillo was able to pay her rent and build a small savings with the profits. In addition, there were non-monetary benefits. The salon served as a hub for the community and for family gatherings because of its central location and large space. It was used for birthday celebrations and life-changing event gatherings like after her husband’s funeral, as well as a baby shower when she was about to become a grandmother. It was also a community social hub. Still today, there is a small table at the front of the salon where she has Entenmann’s pastries and a coffee machine. Staff and clients are welcome to indulge.

III. Current situation
Operation Ann’s provides hair services to both women and men, but the vast majority of its clients are women. Quillo and her staff provide haircuts, coloring, frosting, color touch-ups, styling, washing, perms, and eyebrow shaping. (Exhibit II) Ann’s is a walk-in, no appointments operation. It does not accept credit cards. It is located on a bustling main street in Williamsburg, Brooklyn where grocery stores, cafes, and other retail businesses also reside. The salon is two blocks from third stop on the L train, one of only two subway lines that service the residents. The current space allows for four salon stations and four helmet hair dryers plus a washing area in the back. Over the past 18 years, Ann’s operating days have been Wednesday through Saturday. However, since the customer base has been decreasing, its hours of operation on those days have also been decreasing. Ann’s now opens four days per week as follows: Wed: Thu: Fri: Sat: 9:00 am to 4:00 pm (7 hours) 9:00 am to 6:30 pm (9.5 hours) 9:00 am to 6:30 pm (9.5 hours) 8:00 am to 4:00 pm (8 hours)

Customer Base Ann’s customers are mostly local elderly neighborhood women who have been loyal to the salon since it opened. The only marketing tool is word-of-mouth. As the majority of customers are retirees on a fixed income, they are highly price sensitive. Therefore an increase in price would lead them to consider going to a competitor. Currently, Ann’s services 50-60 repeat customers weekly, versus the more than 200 repeat customers weekly when Ann’s was at its peak, as recently as a few years ago. The age demographics of its customers are as follows: 5% --40 and under

5% -- 40-70 10% --70s 75% --80s 5% --90s Revenue • The 50-60 customers a week spend an average of $14 each. • The revenue per week is as follows: 1. 50 X $15.50 = $775/week (regular services) 2. 10 X $37 = $370/week (premium services) • • • Many patrons have a weekly wash and set schedule; color and haircut every four to five weeks; and perm, if applicable, every three months. Income from non-operating activity is $600/month Of the four chairs at the salon, it rents one out at: $640/month Most profitable business services: 1. Perms at $55-70 per customer, costs for perm = $2.5 for supplies 2. Coloring at $25 per customer, costs for supplies = $2.15 3. Highlighting at $60 per customer, costs for supplies = $4 4. Color & cut $37, every 4-5 weeks Expenses Rent = $ 1400 Electricity = $ 160 Water = $ 112 Phone = $ 36 Laundry = $ 96 (@ $48/every 2 weeks) Supplies = $ 350 (@ $175/every 2 weeks) Cleaning = $200 Insurance = $ 67 per month Total = $2,354 Staff structure Staff structure: 4 part time workers and 1 chair rental Linda (1day) – $ 100/wk Jessica (1 day) – $ 80/wk Martha (1 day) – $ 100/wk (non-chair worker) Florence (2 days) – $ 140/wk Rita (4 days) – $300/wk Weekly Total: $700 Monthly Total: $2800 Monthly Revenue $1145*4+$640 = $5220 Monthly Expenses $2354+$2800 = $5154 Net Income = $66/month Competition

Ann’s has several competitors in the immediate neighborhood. La Bella and Yvette’s provide the same services to the same declining client market as Ann’s. La Bella rents its space, has six stations, and is larger than Ann’s new space. It is four blocks from Ann’s on the same street, charges slightly higher prices, and is farther away from the subway. Yvette’s owns its space and charges lower prices as a result of lower fixed costs. Yvette’s has six stations. Yvette’s does not have to pay rent and does not have any employees; it is operating with a low break-even point. All three are able to adjust their pricing strategy relatively fast and easily since it has a flat organizational structure and is flexible. . Two indirect competitors in the immediate area are Aldo’s Unisex, Inc., and Lora’s. Aldo’s is more of a one-stop full service salon that offers haircuts, hair color, scalp treatment, perms, waxing, hair straightening, manicures, and pedicures. Aldo’s is located at a corner on Metropolitan Avenue, which is perpendicular to Graham Avenue, but also has a lot of traffic and many retail stores. It services a younger crowd, 40- to 60-something, and is more spacious and modern in decor. Aldo’s has four stations, like Ann’s. They also have a senior citizen day, where discounts are offered to the neighborhoods 65 and over crowd. Angie’s charges $13 to $15 per haircut, $8 for children, $15 for a wash and set, $18 for hair conditioning and styling, $40 and up for perms, $18 for a scalp treatment. Lora’s is a retail shop that is spit into two sections by a wall. On one side it has one service station; on the other side, it sells expensive single-piece clothing from a local fashion designer. Lora’s has been featured as an-up and-coming salon on the Internet and this is prominently displayed on the front door. They charge a high-end price of $40 to $50 per cut as compared to the $10 to $15 dollar cuts at the other four salons. Lora’s services a younger, 20- to 30something crowd. Other indirect competition comes from north Williamsburg and other commutable distances, and includes 1) salons catering to the young, trendy newcomers and 2) salons catering to Hispanic and African American women. These salons are on the Bedford Avenue train stop and are near the subway, in high traffic areas, and are open everyday, and open much later than the “elderly salons.”

IV. SWOT Analysis
Strengths
Ann’s is a landmark in the neighborhood with a reputation that people still speak about today. This brand image differentiates it from other salons and has high name-recognition among the older people in the neighborhood. It has provided reliable and courteous service for 50 years and this is what keeps customers coming back. Coffee and snacks are offered to longtime customers, who are now in their 70s to 90s, many of whom started coming to the salon since their 20s. It is still centrally located, within easy walking distance for the majority of customers, on a main street, and is just two blocks from the L train.

Weaknesses

The owner is not aggressive and is resistant to change. Quillo has not adapted to changes in the industry. The salon focuses on servicing its existing customers without making an effort to replace them as they leave the neighborhood (via moving, nursing homes, or death). The demographics in Williamsburg have changed dramatically, and with it, the needs of the newcomers (see Exhibit 4). Ann’s has ignored many of the (high-margin) new opportunities for additional revenue, such as hair straightening, which generates more revenue than perms. Perms have remained the style for older customers, but younger customers are more conscientious of following the new trends. Quillo has not updated the salon, or her services offering. Furthermore, Ann’s lacks a strategy to address its critical situation. Ann’s has excess capacity. Nearly all monthly expenses are fixed. However, Ann’s operates only 4 days per week; 7 hours on two days and 9.5 hours the other two days. Thus it has high break-even point and low flexibility on price. Consider its high rent and short open days and hours, the salon has over capacity and the space is not utilized economically. Ann’s current perception is unfavorable. Unlike its reputation in 1950s to 1970s under Seranno, the current perception of Ann’s is that it is a salon for old people and is out-of-touch with the latest styles. The salon lacks visibility, both in the new marketplace and on the street. It is a retail business, yet the ‘Ann’s’ name is barely visible to passersby. The salon lacks a sufficient sign to communicate that it is a beauty salon. Inside, the space is no-frills and lacks ambiance. The store appearance looks dated and displays images of out-dated hairstyles. A stock window decal advertises hair services to men and women. The business lacks a communication and advertising strategy. For example, when Ann’s relocated, Quillo relied strictly on word-of-mouth to communicate the information. She did not update Ann’s listing in the yellow pages or internet. When a customer dials the old number, an automated message comes on saying that the number has been disconnected with no other information available. The owner does not keep records on activity or financials. Trends cannot be charted, customer activity and spending cannot be tracked, and operating efficiency cannot be monitored. Further, Ann’s lack of documented financial history prohibits Quillo from getting financing for upgrades or improvements.

Opportunities
Pursue new market segment. The age 65 and under segment represents 91% of the population in the neighborhood. Ann’s only focuses on customers 70+, which represents less than 9% of the population. Younger customers have more purchasing power and desire to spend more money on fashion and beauty. The younger customers also are more open to other services such as nail polishing, facial treatments, and massage. In addition, most people do not switch hair stylists too often once they find someone they are comfortable with. Ann’s has experienced that first-hand as they still service the same customers 50 years later. Unless Ann’s replaces their old customers as they move out of the neighborhood or go to a nursing home, they will continue to lose sales.

Threats

Younger customers’ bargaining power is very high because they have high mobility. They can have their hair done in the neighborhood, in Manhattan or anywhere. Their purchasing power is not too high (avg. household income is $27K). Younger newcomers move frequently and are unlikely to be loyal customers. In addition they are more demanding: require new styles, new services and use credit cards on purchases. Current customers are leaving without replacement. The current customers are highly price sensitive since they are retirees who depend on fixed income. As such, the threat from competitors is high as some of them have a low break-even point, own their buildings, or are younger and much more aggressive. The threat of new entrants is high. Any hair specialist who has access to some capital can open a salon. The haircut and hair care business in the U.S. generates $45 billion each year. It has low entry and exit barriers, so competition is fierce. Employees’ bargaining power can be very high. In the salon business, customers are loyal to the specific hair stylist, not the salon itself. For example, many customers come for Linda only on Saturdays. For example, Linda could leave Ann’s, rent a chair at a competing salon, and make more money than her $100/day salary. Also, four years ago, Linda reduced her work schedule to Saturday only in order to take a full-time position at the police department, which provides health benefits. Since approximately that time, Ann’s began to operate at a loss. The threat from substitutes is moderate. At-home products may also take customers away from the salon. The booming real estate market is a major threat. Remember, Quillo rents her space. The landlord could refuse to renew her lease once it expires in Feb 2010 or raise her rent exorbitantly. She would have a maximum of 4.5 years to recoup any investment in the salon.

V. Critical Issue & Feasible Alternatives
Critical Issue: Ann’s is going under mainly because of its shrinking customer base. Ann’s has a fundamental flaw – it has done nothing in 13 years to nurture or grow the business.

Alternative 1: Shut down/ Sell the business
In a declining market, one of the options is to sell the business. Under this alternative, the owner, Quillo, would have to find a job since she does not have enough savings on which to live. Quillo has not had any other work experience aside from styling hair. Furthermore, she has not obtained any new training since receiving her cosmetology license 38 years ago. She has also never operated a computer. She would have few job opportunities. A barrier to exit is Quillo’s commitment to her clients and her staff. Quillo is reluctant to close the salon for a variety of emotional and moral reasons. Her resistance to closure and divestment arises from pride in the salon, and loyalties to employees and the local community. Most of Quillo’s hairstylists have worked with her since she herself was an employee at Ann’s or even before. Martha, 80, Florence, 72, Jessica, 55, and Linda, 58 are all career hairdressers. Their age is a factor. If she closes the shop, the older stylists would have little alternatives. At the informal hair salon workplace, they are like a family. Staff’s children, grandchildren, and husbands often stop by.

Alternative 2: Increase current customers spending.
This alternative only requires minor changes in its current operation. It would cost very little and has no risk. However, it only a short-term solution and doesn’t solve the fundamental problem. In addition, Quillo should approach Linda about working on Sundays in an attempt to get back Linda’s previous customers. (Customers left because the wait time for Linda was too long and they did not want to go to another operator.)

Alternative 3: Maximize space utilization.
The strategy is to find operators to rent the shop space that is not utilized. It can produce additional revenue and possible synergies. The only additional costs associated with this alternative are electricity, water, supplies, and efforts to find the operators. The risk level is medium.

Alternative 4: Attract New Customers.
This alternative, if implemented successfully, can solve the critical issue and is the best longterm game plan. Ninety one percent of the population in the neighborhood is currently out of Ann’s reach. However, this alternative involves re-branding Ann’s, acquiring new skills, expending new services, and hiring staff that can attract younger clientele. It is currently costprohibitive. It is effort-intensive to the owner, both mentally and financially, and is high risk, particularly since the lease may not be extended. Quillo is highly unlikely to obtain a small business loan and she does not have enough savings to invest into the business. Therefore Alternative 4 would be implemented once the cash flows from Alternative permitted.

VI. Issues Impacting a Contingency Plan
Existing and/or new salons may also target boomers and younger customers.

The closest competitors might target boomers too in order to stay in business since they are likely facing exact the same problem. There is a HIGHER THAN AVERAGE likelihood of this happening. Younger customers may not patronize a former “old lady” salon. Even after Ann’s invests substantial amounts of capital upgrading the salon’s appearance and launching a marketing campaign, younger customers may still not patronize Ann’s. There is an AVERAGE likelihood of this happening. The landlord may refuse to renew the lease in 2010 If real estate prices continue to increase, the $1400 rent may increase again once the lease is up in 2010. There is a HIGHER THAN AVERAGE likelihood of this happening.
(See Exhibit 5 for Praxis)

VII. Recommendation/Decision:
1) Implement Alternative 2 immediately, and on an on-going basis. 2) Implement “Alternative 5”—Alternatives 3 and 4 simultaneously. The “original” strategy was to implement Alternative 3, then finance/implement Alternative 4 with cash, once the cash flows permitted. However, a thorough financial analysis revealed that doing so would completely bleed the business of all positive cash flows. Therefore the final recommendation is “Alternative 5.” In addition, the investments will not be financed with cash. Instead they will be financed using a low-interest rate credit card. This way, the business is not bled of cash and the recommendations can be implemented nearly immediately. In addition, the capacity analysis (Exhibit 6) reveals that Ann’s can support both strategies simultaneously.

VIII. Detailed Implementations:

• • • • • • • • •

Shorten current customers’ premium services cycle by suggesting touch-up s, hair cuts, etc. more often. Ask Linda to work on Sundays to get back previous customers. Upgrade owner’s skills with classes. Correct address and phone number in phone book. Send press releases to local papers and websites Find other beauty service providers who need space. Advertise online, ie. Craigslist/Brooklyn-Williamsburg and in local newspapers. Develop and implement user-friendly system for owner to keep records on sales activity “Re-brand” the salon: • Outside store sign (extending sign, not just the flat name sign) • Update interior and window décor (make business look like it is in business) • Hire younger hair staff • Expand hours and days of operation (for younger, working customers) • Expand new services for boomers • Take appointments for new customers • Accept credit cards • Offer “new customer” specials/promotions • Promote unisex services: stimulate trial by male clients (with promotions • Offer fashion magazines & play music that appeal to boomer segment • Make existing services more visible, by posting a list of services in window • Launch marketing communication campaign, including print advertisements, flyers, website, logo.

Reference
Data Collection Primary data was obtained through on-site interviews with Quillo and by visiting the salons in the neighborhood. Secondary research is cited below.

Exhibit 1: Price Lists
Type of Service Ann’s: Target customers: women 50-85 La Bella customers: women 50-85 Yvette’s Aldo’s Target customers: Target customer: women 50-85 women 40-65 Lora’s: Target customer women 20-40

Wash and Set Wash and Blow Wash and Cut Wash, Cut, Blow Cut, Wash, and Set Touch up Touch up and cut Up hair do (twist) Perm Frosting Double process Mousse Rinse Eyebrow

$14.00 $14.00 $14.00 $27.00 $27.00 $25.00 $37.00 $15.00 $55.00 $60.00 $35.00 $ 1.00 $ 2.00 $ 4.00

$13.00 $13.00 $13.00 $30.00 $30.00 N/A N/A N/A N/A N/A N/A N/A N/A N/A

$12.00 $12.00 $12.00 $25.00 $25.00 N/A N/A N/A N/A N/A N/A N/A N/A N/A

$15.00 $15.00 $15.00 $29.00 $29.00 $27.00 $40.00 $17.00 $60 $65 N/A N/A N/A N/A

$25 $25 N/A $40-50 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Exhibit 3: DEMOGRAPHIC DATA: Williamsburg, Greenpoint http://realestate.nytimes.com/Community/profiles/Brooklyn-Williamsburg-Greenpoint.asp

Exhibit 4: Age trends ZIP code 11211
Age Bracket Age 1 to 18 19-34 years 35 to 44 years Total persons 45 to 54 years Total persons 55 to 64 years Total persons 65+ Total % of 1980 population 37% 27% 9% 9% 9% 9% 100% % of 1990 population 37% 26% 13% 8% 7% 9% 100% % of 2000 population 35% 28% 12% 10% 5% 9% 100%

Source: Infoshare database, courtesy of Baruch College library Exhibit 5: Praxis

Praxis
Likelihood Shout Down Ann’s

Competitors also target Boomers. High Neutral. There is no effect on Ann’s when it shouts down. Neutral. This does not affect its current customer base. Neutral. Since the risk has switched to the alliances who rent Ann’s space, there is no effect on Ann’s own operation. Bad. This is again headto-head competition. The efforts to acquire the segment will be much greater than expected.

Younger customers just don't come in to salons perceived for aging ladies. High Neutral. There is no effect on Ann’s when it shouts down. Neutral. This does not affect its current customer base. Neutral to bad. Have to find out the reason in order to make improvement to attract alliances.

Landlord refuses to renew the lease in 2010 High Neutral. There is no effect on Ann’s when it shouts down. Neutral to bad. This alternative doesn't have long term effect on operation. Bad. If Ann’s still operates in 2010, it must be profitable. This will negatively affect its current operation. Bad. All the effort and investment in the current location will be in vain.

Increase current customers' spending Maximize space utilization

Acquire new customers

Terribly bad. All the effort and investment in the current location will be in vain.

Exhibit 6: Capacity Analysis
Wednesday Thursday Friday Saturday Sunday

Monday

Tuesday

Chair 1 Chair 2 Chair 3 Chair 4

$50 $50 $50 $50 $200 N/A $200 $50 $150 $50 $100 $50 $100 $50 $50

$50 9:00-4:00 4:00-10:00 9:00-6:30 6:30-10:00 9:00-6:30 6:30-10:00 $50 9:00-6:30 6:30-10:00 9:00-6:30 6:30-10:00 9:00-6:30 6:30-10:00 $50 $50 9:00-6:30 6:30-10:00 9:00-6:30 6:30-10:00 $50 $50 $50 $50 $200 $100 $50 $50

8:00-4:00 8:00-4:00 8:00-4:00 8:00-4:00

4:00-10:00 4:00-10:00 4:00-10:00 4:00-10:00 $0

$50 $50 $50 $50

New Current Subtotal

N/A $200

$200 N/A $200

Total income from chair rental: $1,000/week @ 4 weeks = $4,0000/month Rita Tina Florence Jessica Linda Capacity left for new customers…or shift worker

Existing Rental (Tina):$640/month Uses the space 4 days/week @ 4 weeks Each day is worth approximately $40; This chart assumes raising Tina’s rent $10/day and charging new tenants $50/day, which is still very reasonable—each operator still has a very low break even point. More research is needed on “market” rents for salon chairs. Quillo may be able to command a higher rent.