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 2019 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 2019 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 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD
- Section V – Presentation and analysis of Merle Norman Cosmetics’ financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:
- 2018 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, 2018 through December 31, 2018
- 2018 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, 2018 through December 31, 2018
- 2018 actual dollar amount of purchases of Merle Norman Cosmetics products by the company-owned Merle Norman Cosmetics studio that operated in a regional mall location in the United States under the New Design during the one-year period from January 1, 2018 through December 31, 2018
- 2018 actual dollar amount of purchases of Merle Norman Cosmetics products by the company-owned Merle Norman Cosmetics studio that operated in a non-mall location in the United States under the New Design during the one-year period from January 1, 2018 through December 31, 2018
Section I – Background Information
17 Things You Need to Know About the Merle Norman Cosmetics Franchise
Franchise Growth Up 56 Percent in 2018
1. In mid-January 2019, Merle Norman Cosmetics celebrated a year of growth with the addition of 47 new studio owners to its franchise network in 2018. That number is up 56 percent from 2017, when the company signed 30 new owners.
2. Travis Richards, vice president of franchising for Merle Norman Cosmetics, said, “We’ve had an incredible year of growth. We’ve worked really hard this year, and it’s paid off with a 56 percent growth in our number of new franchisees over last year. There’s so much energy and excitement around our brand right now: we’ve updated our studios with a new design and new look, we rolled out Merle Norman spa services, and we launched a new franchise recruitment website. All of these positive changes have trickled down to every area of the company, including our franchise sales department, which translated into record-setting expansion.”
3. In the same press release, Merle Norman Cosmetics said that it expects to continue its upward trajectory in 2019 in the form of more franchisees, more studios, and more sales for the brand overall. According to Richards, “2019 is the final evolution of Merle Norman for the next decade. We’ll usher in the last pieces of the interactive selling initiative through play tables and our new merchandising, and we’ll continue adding Merle Norman Spa services to both new and existing studios. You should also see e-commerce, in partnership with our franchisees, launch in 2019, which everyone is excited about.”
4. The company’s goal for franchise growth in 2019 is 65 in new and resale studios. There’s a great opportunity for continued growth with resales, as seasoned, tenured owners are ready to retire. Merle Norman Cosmetics said that it’s seeing new franchisees buy these existing studios, update them, and are doing four to six times more in a year than the previous studio ever did. The company added that it’s eager to see established studios flourish when new owners take over. Merle Norman Cosmetics also hopes to see more owners operating several studios, so the brand plans to offer more incentives for multi-unit ownership.
5. On a final note, Richards said, “This is a really exciting time to be part of Merle Norman. Merle Norman Cosmetics has a rich legacy but is always reinventing to remain current. We’re more relevant now than ever before. I can’t wait to see what the future holds for our company and everyone who is a part of it.”
Announces New E-Commerce Platform
6. At the beginning of May 2019, Merle Norman Cosmetics announced that it was introducing another tool for franchisees to serve their customers well: e-commerce. In the press release, Merle Norman Cosmetics said that the much-anticipated platform was set to roll out by Fall 2019 and be fully functioning by 2020.
7. According to Travis Richards, vice president of franchising for Merle Norman Cosmetics, “We’re so excited about this new development for Merle Norman Cosmetics. We’ve been working with our studio owners on creating just the right tool that will accomplish our goals. We believe our e-commerce system will help franchisees better serve their customers. Investing in customer relationships is still primary for studio owners, and this is just another way to do that better.”
8. Salesforce is building the new e-commerce platform, which will offer two ways for customers to purchase Merle Norman products online. The customer who has an existing relationship with a studio will be able to choose that location and studio owner when placing the order. That designated studio will be credited with the sale and notified of the purchase.
9. E-commerce is designed to drive customers to their local studios, so the studio owner will be able to follow up with the online customer to consult on their latest purchase. Every package will include trial samples of exclusive Merle Norman products, with instructions for how to purchase the full-size product at the nearest studio. Local studios will not be able to accept returns, but they can help facilitate the return processes back to MN Home Office and consult the customer towards another product.
10. Products ordered online will have costs that are slightly higher than what customers will find in their local studios, and studios will be the exclusive carriers of seasonal “gift with purchase” promotions. Customers who want the best prices, promotional gifts, and hands-on consultation will still choose their studio over “self-serve” digital ordering. One benefit of the new e-commerce platform is that customers will be able to get products that may be out of stock or not carried at their local independently-owned and operated studio.
11. The second way a customer may order Merle Norman products is without affiliation with a local studio. These customers will be served through the home office. The new e-commerce platform will help the corporate office identify Merle Norman’s “lost customer” — and possible future studio owners. E-commerce will widen the availability and accessibility to Merle Norman products, helping boost brand awareness and increase overall sales.
12. Richards added, “Trust is paramount, and our new e-commerce platform is intended to fortify that trust. Our focus has always been and will always be on relationships. That makes our company and brand strong — and our studio owners successful. This new capability will make us stronger and help us continue to achieve that.”
13. Merle Norman Cosmetics was founded in 1931 by Merle Nethercutt Norman and her nephew J.B. Nethercutt in Santa Monica, California. Norman had a background in medicine and chemistry and set out to create her own skin-enhancing products. She often shared her creations with friends and family and finally decided to establish a proper business to manufacture and sell her products.
14. Demand for Norman’s products grew and the company grew to 94 locations within three years. Many of the earliest (and current) Merle Norman Cosmetics Studios were owned by women, which was rare for the time period. Additionally, Merle Norman Cosmetics developed one of the first franchise models.
15. One of the biggest selling points of Merle Norman Cosmetics is that all of the brand’s products are produced and tested in the United States.
16. Over the next few decades, Merle Norman Cosmetics continued to grow and has always been run by members of Norman’s family; Norman passed away in 1972, but her family continues to own and operate the company.
Entrepreneur’s Franchise 500
17. Merle Norman Cosmetics ranked No. 450 on Entrepreneur’s 2019 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 2019 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 2019 FDD.
Section IV – Number of Franchised and Company-Owned Outlets
- Outlets at the Start of the Year: 1,174
- Outlets at the End of the Year: 1,146
- Net Change: -28
- Outlets at the Start of the Year: 1,146
- Outlets at the End of the Year: 1,090
- Net Change: -56
- Outlets at the Start of the Year: 1,090
- Outlets at the End of the Year: 1,064
- Net Change: -26
- Outlets at the Start of the Year: 2
- Outlets at the End of the Year: 3
- Net Change: +1
- Outlets at the Start of the Year: 3
- Outlets at the End of the Year: 3
- Net Change: 0
- Outlets at the Start of the Year: 3
- Outlets at the End of the Year: 2
- Net Change: -1
Section V – Financial Performance Representations (Item 19, 2019 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, a total of 628 franchised Studios (41 Studios in regional malls and 587 Studios in non-mall locations) operated in the United States under the New Design during the one-year period from January 1, 2018 through December 31, 2018. This financial performance representation relates only to those 628 New Design Studios.
- 43 franchised Studios (2 Studios in regional malls and 41 Studios in non-mall locations) are not included in the financial performance representation as they closed during the 12-month period. 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 closed during the one-year period from January 1, 2018 through December 31, 2018.
- 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 628 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 2018.
- 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.
1. Regional Mall Locations
a. Purchases from MNC Per Studio