FDD Talk 2018: Cost Cutters 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 Cost Cutters franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Cost Cutters 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 Cost Cutters franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned Cost Cutters 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 Cost Cutters’ financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• average, median, highest, and lowest gross sales during the 12-month period ending June 30, 2018 for the top third, middle third, bottom third, and all 357 franchised Cost Cutters Businesses operating throughout the United States that were open for at least 1 full year as of June 30, 2018

• average, median, highest, and lowest gross sales during the 12-month period ending June 30, 2018 for the top third, middle third, bottom third, and all 217 Cost Cutters-owned Businesses operating throughout the United States that were open for at least 1 full year as of June 30, 2018

• average service sales, product sales, total revenues, labor, occupancy, product costs, continuing franchise fees, advertising, other expenses, total expenses, and operating cash flow during the 12-month period ending June 30, 2018 for the top third, middle third, bottom third, and all 217 Cost Cutters-owned Businesses operating throughout the United States that were open for at least 1 full year as of June 30, 2018

Section I – Background Information

17 Things You Need to Know About the Cost Cutters Family Hair Care Franchise

Parent Company Appoints New Senior Vice President of Merchandise and New Chief Technology Officer

1.  Regis Corporation, the parent company of Cost Cutters Family Hair Care, made some changes to its executive leadership team over the summer of 2018. In June, Regis Corporation appointed Laura Alexander as senior vice president, merchandise. During that same month, Regis Corporation announced the appointment of Chad Kapadia as executive vice president, chief technology officer, and head of product engineering.

2.  Alexander most recently served as vice president, Walmart relations and SmartStyle franchise administration at Regis Corporation, a position she held since July 2017. In her new position, Alexander will lead Regis’s merchandising activities, including e-commerce and franchise product sales, and will maintain overall responsibility for the company’s Walmart relationship.

3.  Alexander joined Regis in 2012 and has advanced through positions in the legal, franchise, and Walmart relations departments. Prior to joining Regis, Ms. Alexander held marketing and communications roles in retail healthcare, including MinuteClinic/CVS, as well as The Auckland Museum.

4.  Hugh Sawyer, president and CEO of Regis Corporation, said, “Laura has excelled in the positions she has had at Regis and proven herself as a talented, progressive leader within our company. One part of our strategy to transform Regis is to increase our product sales and capabilities we provide our franchisees. Laura will lead a talented merchandising department to ensure we have the strongest assortment, procurement and fulfillment structure to meet the needs of our franchisees and consumers. Laura’s experience with our franchise business and Walmart will enable her to further leverage our merchandising business across franchised and company-owned stores and e-commerce websites.”

5.  In his new position, Kapadia will lead Regis’s product engineering and information technology departments. Kapadia brings nearly 25 years of technology experience to Regis. Most recently, Kapadia served as head of engineering at Target Corporation’s new ventures and accelerators. Prior to Target Corporation, Kapadia served in technology positions of increasing responsibility, including chief technology officer and product head, at Swissclear Global, Inc. and as an engineering leader and founding member of Netflix, Inc.’s content platform engineering and media pipeline.

6.  Sawyer said, “We have discussed that a key element of our multi-year strategy is to utilize technology to transform our business. Chad has been a leader in deploying disruptive business technologies at consumer-oriented companies, and he is the right executive to drive this initiative forward at Regis. I am confident he will be able to accelerate our use of technology to support our stylists and franchisees and improve our customers’ experience.”

VP of Biggest Cost Cutters Franchisee in Wisconsin Discusses State’s New Regulations and New Hair Trends

7.  At the end of August 2017, Dolly Norris, who had just been appointed as the new vice president of operations at Cost Cutters of Madison Inc. — one of the largest Cost Cutters franchisees in the entire system — discussed concerns over Wisconsin’s recent deregulation of the beauty industry.

8.  Last spring, legislators in Wisconsin introduced bills to ease state licensing requirements for cosmetologists and barbers and allow them to perform services outside of licensed shops. While the measures didn’t propose to get rid of barber and cosmetology licenses altogether, they would eliminate licenses for cosmetology managers and instructors.

9.  According to Norris, who’s been in the cosmetology business for over 15 years and is the former lead examiner for state Cosmetology Examining Board testing sites in Madison, Onalaska, and Wisconsin Rapids, “I just feel the quality of the work that we do will drastically diminish. There has been an underlying rumbling regarding deregulation of the cosmetology industry in the state of Wisconsin for a few years now. It seems that complete deregulation is off the table for now, which is good news.”

10.  Norris believes that licensing beauty industry workers is important. She said, “I feel that consumer protection should be a priority. I would absolutely want anyone working on my hair, skin or nails to be required to obtain a certain amount of education and accountability.”

11.  In the same interview, Norris discussed the latest beauty trends. According to Norris, one of the biggest trends is men experimenting with changing the color of their hair for fun. She added, “We are seeing so many new and exciting color trends. Freehand hair painting, balayage (hair lightening), ombres and shadow roots are very much on trend right now. The more nontraditional colors are very popular, from rose golds to vibrant pinks and teals. We offer great value pricing so our guests can experiment with new looks at affordable prices. For shorter cuts and men’s cuts, we are seeing more of the classic barber styles coming around, including really tight fades and hard lines. And with access to the Internet, people share everything — new ideas — so quickly.”

12.  Norris also talked about how Cost Cutters was seeing an increase in product sales because the economy is up and unemployment is down in Wisconsin. According to Norris, “Any time the economy is up and unemployment is down, we see increases in product sales. Cost Cutters tends to have the best prices on professional retail products, so when we have consumers who are looking to switch from their grocery store shampoo to professional products, we are one of the first places they go. We also carry one of the largest varieties of professional brands, so we can meet the needs of almost every consumer.”

13.  Norris also talked about what Cost Cutters of Madison Inc. has been doing to attract and keep qualified employees. Norris said, “As our industry continues to grow at such a fast pace and with new salons opening, there are certainly more positions available than stylists to fill them. This has led us to look at how we can retain our existing staff and hire the best qualified new stylists. I feel it is so important to let our team members know how valued they are. We have recently changed our mission statement to include treating our team members with the same respect that we expect them to provide to our guests. This belief has always been a part of Cost Cutters, but we have highlighted it and made it a priority.”

14.  In conclusion, Norris said, “I am also very much aligned with the concept of servant leadership. Servant leaders are very involved with their team members’ feedback, opinions and ideas. This concept helps us to continue to grow our team, be able to provide our guests with exceptional service and achieve personal and professional success.”

Company History

15.  Cost Cutters Family Hair Care was started in 1982 by Joe Francis in Minneapolis, Minnesota. Francis had already been in the hair salon business for many years and in 1963, he opened the first The Barbers Hairstyling for Men salon also in Minnesota. Five years later, The Barbers started styling and cutting women’s hair. With Cost Cutters, Francis wanted to offer haircare services to the entire family.

16.  Francis started franchising the Cost Cutters Family Hair Care concept immediately and during the first year, he opened 12 locations. Within six years, Cost Cutters had grown to 300 locations across the United States. Around 1998, Regis Corporation, one of the world’s largest owners of hair salon chains, acquired Cost Cutters Family Hair Care. Today, Regis Corporation still owns Cost Cutters Family Hair Care, as well as City Looks, Regis Salons, Supercuts, and We Care Hair.

Entrepreneur’s Franchise 500

17.  Cost Cutters Family Hair Care ranked No. 385 on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Cost Cutters 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 Cost Cutters’ 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

2016

• Outlets at the Start of the Year:  394
• Outlets at the End of the Year:  395
• Net Change:  +1

2017

• Outlets at the Start of the Year:  395
• Outlets at the End of the Year:  377
• Net Change:  -18

2018

• Outlets at the Start of the Year:  377
• Outlets at the End of the Year:  370
• Net Change:  -7

Company-Owned

2016

• Outlets at the Start of the Year:  269
• Outlets at the End of the Year:  258
• Net Change:  -11

2017

• Outlets at the Start of the Year:  258
• Outlets at the End of the Year:  241
• Net Change:  -17

2018

• Outlets at the Start of the Year:  241
• Outlets at the End of the Year:  217
• Net Change:  -24

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

Part 1 – Average and Median Store Gross Sales Information

• For purposes of this financial performance representation, “gross sales” is defined as total gross revenue (net of customer discounts) derived from operating a Cost Cutters Business (including merchandise and services sales), whether from cash or credit sales, and without regard to the payment source or collection costs, but excluding taxes added to the sales price and collected from customers and less bona fide refunds.

A.  Gross Sales of Franchised Cost Cutters Businesses

• The first portion of the following financial performance representation discloses historical average and median Cost Cutters Business gross sales during the 12-month period ending June 30, 2018 for 357 franchised Cost Cutters Businesses operating throughout the United States.

• The franchised Cost Cutters Businesses whose gross sales were included in order to calculate the average and median were open as of July 1, 2017, the beginning of the period for which the numbers were calculated (meaning that these franchised Cost Cutters Businesses were open for at least 1 full year as of June 30, 2018, the end of the 12-month period for which the numbers were calculated).

• As of June 30, 2018, there were an additional 13 franchised Cost Cutters Businesses operating throughout the United States. However, those Cost Cutters Businesses’ gross sales were not included in this calculation because they were not open at all as of July 1, 2017, the beginning of the 12-month period for which the numbers were calculated.

• The following information has been compiled from the figures reported on sales and royalty statements submitted by the franchisees of these 357 franchised Cost Cutters Businesses. While Cost Cutters believes this information to be accurate and complete, it has not independently audited this information or otherwise verified its accuracy.

• The numbers reported for these franchised Cost Cutters Businesses do not include the operating results of any of the 217 Cost Cutters Businesses owned and operated by Regis Corp., the franchisor, as of June 30, 2018.

• The 357 franchised Cost Cutters Businesses included in this financial performance representation are located in the following states:

1.  Alabama (9)
2.  California (8)
3.  Connecticut (15)
4.  Florida (1)
5.  Iowa (51)
6.  Idaho (3)
7.  Illinois (21)
8.  Indiana (5)
9.  Kentucky (20)
10.  Massachusetts (12)
11.  Michigan (10)
12.  Minnesota (26)
13.  Missouri (9)
14.  Nebraska (23)
15.  North Carolina (3)
16.  North Dakota (5)
17.  South Carolina (9)
18.  South Dakota (9)
19.  Tennessee (10)
20.  Texas (18)
21.  Virginia (8)
22.  Washington (1)
23.  West Virginia (3)
24.  Wisconsin (78)

Top One-Third (119 Stores)