FDD Talk 2018: Merle Norman Cosmetics Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Merle Norman Cosmetics franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Merle Norman Cosmetics franchise, based on Item 7 of the company’s 2018 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Merle Norman Cosmetics franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned Merle Norman Cosmetics outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD

• Section V – Presentation and analysis of Merle Norman Cosmetics’ financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• 2017 average, median, high, and low dollar amounts of purchases of Merle Norman Cosmetics products, and the retail value of those purchases, by franchised Merle Norman Cosmetics studios that operated in regional mall locations in the United States under the New Design during the one-year period from January 1, 2017 through December 31, 2017

• 2017 average, median, high, and low dollar amounts of purchases of Merle Norman Cosmetics products, and the retail value of those purchases, by franchised Merle Norman Cosmetics studios that operated in non-mall locations in the United States under the New Design during the one-year period from January 1, 2017 through December 31, 2017

• 2017 average, high, and low dollar amounts of purchases of Merle Norman Cosmetics products by company-owned Merle Norman Cosmetics studios that operated in regional mall locations in the United States under the New Design during the one-year period from January 1, 2017 through December 31, 2017

• 2017 average, high, and low dollar amounts of purchases of Merle Norman Cosmetics products by company-owned Merle Norman Cosmetics studios that operated in non-mall locations in the United States under the New Design during the one-year period from January 1, 2017 through December 31, 2017

Section I – Background Information

14 Things You Need to Know About the Merle Norman Cosmetics Franchise

Poised for Rapid Expansion

1.  Around the beginning of May, Merle Norman Cosmetics announced that it was ready to push its expansion efforts. In the announcement, the brand said that it had recently launched a new franchise website and recruiting campaign aimed at growing Merle Norman Cosmetics by hundreds of franchise units in the coming years. At the time, Merle Norman Cosmetics said that 13 new studios would be opened and that its goal for 2018 was to sell 42 new franchises.

2.  Steve Jolton, director of franchise sales for Merle Norman Cosmetics, said, “Merle Norman Cosmetics has had an incredible start to 2018. We’re excited to open new studios across the country, and we’re honored to have earned a spot on Entrepreneur’s Franchise 500 list. We’re always looking for passionate entrepreneurs who would like to partner with us as franchisees. Now we have engaging videos and informative articles at our new franchise website, where they can research the Merle Norman opportunity. We’re really proud to offer that to prospective franchisees. All of this helps us ramp up and focus our recruitment and growth efforts.”

3.  When it comes to potential franchisees, Merle Norman Cosmetics said that its franchise development team is looking for one primary characteristic in its studio owners: an enthusiasm for their work and helping others. Jolton added, “I want somebody who’s got passion. Passion for helping people and passion for doing something that they can build and be their own. I think that’s really going to be the key to success.”

Revamps Look and Offers New Spa Services

4.  Over the summer of 2017, Merle Norman Cosmetics said that it was in the process of updating its look. The brand has invested money into new designs, products, technology, and merchandising programs in an effort to improve its image.

5.  According to Travis Richards, vice president of franchising for Merle Norman Cosmetics, “You’re going to start seeing a new Merle Norman Cosmetics look and level of engagement. We’re going to reclaim the consistency of our brand. We’ve always had exceptional products and training. Now we’re tackling our distribution model to create a cohesive look. We’re not going to change who we are but we are becoming more modern.”

6.  One of the company’s biggest challenges with updating its look is how some of its franchisees merchandise their studios. Many locations have a “look but don’t touch” vibe with clear display cases that do not allow customers to interact with any of the products. Richards wants to change this by replacing the clear cases with open “play tables.” Customers will be able to freely test and touch products at the updated stores.

7.  Other enhancements include subtle contemporary wood grain cabinetry, tile flooring, LED lighting, glass shelves, tables and chairs with chrome accents, and new color schemes. The new merchandising acrylics were tested in select studios in 2017 and rolled out in early 2018.

8.  Richards said, “We haven’t completely changed the design of the studio but we’ve added enhancements and have evolved it. It’s got a really different look and feel, it begins the discussion about our products with customers in a manner the younger customer is accustomed to. We’re really excited about it.”

9.  In addition to updating its stores and products, Merle Norman Cosmetics introduced five new spa-grade products, as well as a robust spa program. For an initial investment of $1,200 to $4,000, depending upon the equipment selected, its current franchisees can add a spa to their existing Merle Norman Cosmetics studio.

10.  Franchisees will receive marketing and training materials, as well as business support in the form of comprehensive guides. They will also receive in-store, social media, advertising, and PR product materials.

Company History

11.  The history of Merle Norman Cosmetics can be traced back to the late 1920s when a young woman named Merle Nethercutt Norman began sharing skin care products of her own creation with family and friends. To ensure the quality of her products, Norman offered product demonstrations. This concept is the origin of the “Try Before You Buy” slogan. Additionally, according to the company, Norman was the inventor of the “Before and After” makeover.

12.  Demand for Norman’s products grew and she opened her first store in 1931 in Santa Monica, California with the help of her nephew J.B. Nethercutt, who assisted with the development and manufacturing of Norman’s products. From the beginning, Norman gave women the opportunity to own and operate their own Merle Norman Cosmetics studios, which was uncommon for the time period.

13.  After Norman passed away in 1972, the company remained in the family and continues to be a family-owned business today. Norman’s family started franchising the Merle Norman Cosmetics concept in 1973 and today, there are locations across the United States, Canada, Bahrain, Guatemala, Hong Kong, Taiwan, Dubai, and the United Arab Emirates.

Entrepreneur’s Franchise 500

14.  Merle Norman Cosmetics ranked No. 421 on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Merle Norman Cosmetics franchise costs, based on Item 7 of the company’s 2018 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Merle Norman Cosmetics’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2015

• Outlets at the Start of the Year:  1,225
• Outlets at the End of the Year:  1,172
• Net Change:  -53

2016

• Outlets at the Start of the Year:  1,174
• Outlets at the End of the Year:  1,146
• Net Change:  -28

2017

• Outlets at the Start of the Year:  1,146
• Outlets at the End of the Year:  1,090
• Net Change:  -56

Company-Owned

2015

• Outlets at the Start of the Year:  2
• Outlets at the End of the Year:  2
• Net Change:  0

2016

• Outlets at the Start of the Year:  2
• Outlets at the End of the Year:  3
• Net Change:  +1

2017

• Outlets at the Start of the Year:  3
• Outlets at the End of the Year:  3
• Net Change:  0

Section V – Financial Performance Representations (Item 19, 2018 FDD) and Analysis

• Merle Norman Cosmetics (MNC) does not receive from its Studio Owners any statements regarding the dollar amount of a Studio Owner’s retail sales of Merle Norman (MN) products, nor does MNC receive from its Studio Owners any statements regarding a Studio Owner’s total sales, expenses, costs, or profits.

• Since MNC does not have this information, this financial performance representation only provides information as to the dollar amount of purchases of MN products by New Design Studios and the retail value of those purchases.

• Studio Owners are permitted to sell other merchandise (in addition to MN products) and to offer other services (in addition to free makeover lessons using the lesson material provided by MNC). While MNC has not formally surveyed its Studio System, MNC believes that virtually all Studios sell merchandise in addition to MN products and/or offer other services.

• Accordingly, the dollar amounts listed below as the “Retail Value of Purchases from MNC” are not intended to represent the total sales volume of any New Design Studio(s). MNC is unable to estimate what percentage MN Products comprise of a Studio’s total sales.

• In 1998, MNC completed the development of the New Design, the most significant elements of which include an “open-sell” layout where merchandise is displayed for easy viewing and access; a design that supports either customer self-service or beauty consultant-assisted service; perimeter wall fixtures; consultation areas consisting of tables and stools; a tester area; a graphic image display; large screen digital monitor with preformatted video and audio content; and a cash wrap area in matching finish.

• Existing Studios are not required to implement the New Design; however, as of December 31, 2017, 660 franchised U.S. Studios had implemented the New Design.

• A total of 644 franchised Studios (47 Studios in regional malls and 597 Studios in non-mall locations) operated in the United States under the New Design during the one-year period from January 1, 2017 through December 31, 2017. This financial performance representation relates only to those 644 New Design Studios.

• 43 franchised Studios (5 Studios in regional malls and 38 Studios in non-mall locations) are not included in the financial performance representation as they closed during the 12-month period. Of those 43 Studios, none closed after less than 12 months of operation.

• Additionally, no Studios within an existing business operated in the United States under the New Design during the one-year period from January 1, 2017 through December 31, 2017.

• For each cosmetic product MNC sells to its Studio Owners, MNC establishes a suggested retail price. The wholesale price paid to MNC varies from product to product, ranging from 40% to 50% of the suggested retail price so that the gross profit percentage on individual products ranges from 50% to 60%.

• The percentage gross profit that a particular Studio will realize during any period of operations from its sales of MN products will depend on whether the Studio Owner adheres to the suggested retail prices and on the mix of products the Studio sells.

• The information for “Retail Value of Purchases from MNC” is based on the assumption that sales of all MN products by the 644 New Design Studios included in this financial performance representation were at the suggested retail price, and that the mix of sales of each such Studio was the same as the mix of sales by MNC to its Studios during calendar year 2017.

• Based on these assumptions, each Studio would have a gross profit percentage of 48%.

• Studio Owners are not required to purchase any specified amount of MN products from MNC, other than the initial order of MN products.

• A small number of Studio Owners who operate multiple Studios may regularly, or frequently, order MN products for all of their Studios through one Studio, so that the purchases recorded on MNC’s records for each of these Studios do not accurately reflect the purchases of MN products for each Studio.

• With respect to the New Design Studios included in this financial performance representation, where MNC has determined that such activity is occurring, the purchases of each such Studio are, for purposes of this financial performance representation, calculated by aggregating all purchases by that Studio Owner and allocating purchases of MN products to each Studio owned by that Studio Owner in the ratio of the purchases of all United States Studios of the same type and location to total purchases of all Studios in the United States.

• The Studios included in this financial performance representation that are located in regional malls include Studios in super regional malls and regional malls. The Studios included in this financial performance representation that are located in non-mall locations operate in a variety of retail settings, including community shopping centers, neighborhood centers, strip centers, office complexes, and central business districts.

A.  Franchised

1.  Regional Mall Locations

a.  Purchases from MNC Per Studio