FDD Talk 2020: Great Clips 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 Great Clips franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Great Clips franchise, based on Item 7 of the company’s 2020 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Great Clips franchise, based on Items 5 and 6 of the company’s 2020 FDD

• Section IV – Number of franchised and company-owned Great Clips outlets at the start of the year and the end of the year for 2017, 2018, and 2019, based on Item 20 of the company’s 2020 FDD

• Section V – Presentation and analysis of Great Clips’ financial performance representations, based on Item 19 of the company’s 2020 FDD, including information on the:

• 2019 average service sales, product sales, labor, occupancy, product costs, continuing franchise fees, advertising, other expenses, and operating cash flow for the 2,494 units that were open one year or more as of January 1, 2020, and operating as of the date of the 2020 Franchise Disclosure Document

• 2019 average sales, labor, occupancy, all other expenses, and cash flow for Great Clips units based on sales range (<$250,000; $250,000 to $300,000; $300,000 to $350,000; $350,000 to $400,000; $400,000 to $450,000; $450,000 to $500,000; >$500,000; and all salons in sample)

Section I – Background Information

20 Things You Need to Know About the Great Clips Franchise

Announces Multi-Year Partnership with NCAA, Turner Sports, and CBS Sports

1.  In mid-January 2020, Great Clips announced a multi-year marketing partnership with the NCAA. The partnership designates Great Clips, the world’s largest salon brand, as the “Official Hair Salon of the NCAA.” The partnership covers NCAA March Madness, NCAA Men’s and Women’s Final Four, as well as marketing, media, and activation rights surrounding all 90 NCAA Championships. Great Clips’ partnership with the NCAA is through a joint agreement with Turner Sports and CBS Sports.

2.  Lisa Hake, vice president of marketing and communications for Great Clips, Inc., said, “With more than 4,400 salons, Great Clips is always evaluating new ways to connect and engage with customers surrounding their passion points and in the communities in which we operate. Through our partnership with the NCAA, Turner Sports and CBS Sports, we’ll be able to tap into the electric fandom that our customers have for college athletics and NCAA Championships, while also reinforcing how we make it easy to get a great haircut whenever and wherever our customers are getting ready for game day.”

3.  Through the partnership, Great Clips will have the opportunity to extend its brand presence through advertising and exclusive content spanning NCAA and Championship broadcasts on Turner Sports and CBS Sports platforms and create onsite engagement opportunities at Championship and NCAA-related events. Additionally, Great Clips will create national and local-market promotions that offer customers unique experiences and tickets to NCAA events and Championship games. Great Clips was set to introduce its first national marketing campaign in support of its NCAA partnership ahead of the 2020 NCAA Men’s Basketball Tournament.

4.  Dan Gavitt, NCAA’s senior vice president of basketball, said, “We are delighted to have Great Clips as a partner across all 90 NCAA championships. As a corporate partner, Great Clips helps support providing a world-class experience for student-athletes across the country as they compete at the highest levels.”

5.  Great Clips’ affiliation with the NCAA, Turner Sports, and CBS Sports marks the fourth significant sports partnership that the salon brand has. Adding to a portfolio that also includes the X Games, NHL, and Monster Jam, Great Clips’ partnerships provide the brand with more national and local-market opportunities to grow brand awareness and connect with customers where they live and have fun.

Raises Over $850,000 for Children’s Miracle Network

6.  At the beginning of March 2020, Great Clips announced that more than 1,600 Great Clips salons participated in the 2019 Children’s Miracle Network Hospitals fundraising campaign. The salons raised more than $850,000 for local CMN Hospitals to help sick and injured children in the salons’ communities. This grows the total amount that Great Clips salons have raised to-date for Children’s Miracle Network Hospitals to nearly $9 million since 2004.

7.  Children’s Miracle Network Hospitals raises funds and awareness for 170 member hospitals that provide 32 million treatments each year to kids across the U.S. and Canada. Donations stay local to fund critical treatments and healthcare services, pediatric medical equipment, and charitable care. Since 1983, Children’s Miracle Network Hospitals has raised more than $7 billion, most of it $1 at a time.

8.  According to Steve Hockett, CEO of Great Clips, Inc., “Children’s Miracle Network Hospitals has been a valuable part of our Great Deeds program for 15 years. Great Deeds is how we challenge everyone at Great Clips – franchisees, salons, corporate staff and friends – to remember what makes us great: the people and the communities where we live and work. Through that loyalty and support, Great Clips contributes millions of dollars to great causes every year, including CMN Hospitals.”

9.  Some Great Clips markets held events outside of their salons to spread the word about this cause. For example, Great Clips franchisees and stylists from the Dallas-Fort Worth market visited Children’s Health in Dallas, Texas on Sept. 11, 2019. The Haircuts for a Cause event – a first for Children’s Health – brought the salon to children and their families while they were in the hospital, giving them an opportunity to enjoy some self-care.

10.  Antonia Etcheverry, director of corporate partnerships for Children’s Miracle Network Hospitals, added, “We’re grateful each year for the support from Great Clips franchisees and their customers that participate in the annual campaign. Funds raised are used to buy specialized equipment, building new treatment facilities, conducting ground-breaking research and helping families that cannot afford lifesaving care for their children.”

Released Message from CEO Regarding COVID-19

11.  At the end of March 2020, Great Clips released a message from CEO Steve Hockett regarding the ongoing COVID-19 situation and what the company was doing to ensure employee and customer safety in its locations across the U.S. and Canada.

12.  According to the message, proper sanitizing of all tools and equipment between customer haircuts has been the standard for Great Clips since the start. Licensed Great Clips stylists are well-trained, disciplined, equipped, and prepared with current skills for proper sanitizing and prevention.

13.  In addition to the company’s long-standing practices, Great Clips is taking additional precautions. Across the system, Great Clips is adhering to the guidance provided by the U.S. Centers for Disease Control and Prevention (CDC), the Public Health Agency of Canada (PHAC), and state/county/province/local public health authorities.

14.  In the salon, Great Clips franchisees and salon teams are:

• Thoroughly and frequently washing hands with soap and water;
• Thoroughly cleaning and disinfecting frequently-touched objects and surfaces, such as station countertops and chairs;
• Avoiding close contact with people who are sick;
• Avoiding touching their eyes, nose, and mouth;
• Covering coughs with a tissue, then throwing the tissue in the trash and washing hands with soap and water;
• Avoiding shaking hands.

15.  The message also noted that Great Clips franchisees independently own and operate salons and are making thoughtful business decisions for their staff, customers, and communities in which they operate. Some franchisees have decided to close their salons for the near future.

16.  Hockett ended the message by saying that Great Clips would continue to monitor guidance from the CDC, Public Health Agency of Canada, and state/county/province/local public health authorities and share updates as they are available.

Company History

17.  Great Clips was founded in 1982 by David Rubenzer and Steve Lemmon in Minneapolis, Minnesota. Rubenzer and Lemmon wanted to shake up the hair salon industry because at the time, people could only get haircuts in pricey full-service salons, barbershops, or at home. The business partners developed a unique concept by only offering a select list of hairstyles that could easily be taught to stylists and replicated. Great Clips was also the first salon to allow walk-ins. Lastly, Rubenzer and Lemmon wanted the haircuts to be affordable and accessible to anyone.

18.  Rubenzer and Lemmon’s concept was an immediate success and the first Great Clips was quickly followed by two more locations. In 1983, Rubenzer and Lemmon sought out a third partner in Ray Barton to spearhead Great Clips’ expansion and franchising. The first franchised Great Clips opened later that year in Brooklyn Center, Minnesota.

19.  Great Clips grew rapidly over the next decade and by the end of the 1990s, the chain had 1,000 salons open across the United States. In 1997, Barton bought out Rubenzer and Lemmon’s shares of the company to become the majority stakeholder. Today, Great Clips has locations all across the U.S. as well as in Canada.

Entrepreneur’s Franchise 500

20. Great Clips ranked No. 15 on Entrepreneur’s 2020 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Great Clips franchise costs, based on Item 7 of the company’s 2020 FDD.

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

• Please click here for detailed information on Great Clips’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2020 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2017

• Outlets at the Start of the Year:  4,091
• Outlets at the End of the Year:  4,261
• Net Change:  +170

2018

• Outlets at the Start of the Year:  4,261
• Outlets at the End of the Year:  4,371
• Net Change:  +110

2019

• Outlets at the Start of the Year:  4,371
• Outlets at the End of the Year:  4,473
• Net Change:  +102

Company-Owned

2017

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

2018

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

2019

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

Section V – Financial Performance Representations (Item 19, 2020 FDD) and Analysis

Average Operating Cash Flow of Certain Great Clips Units

• The following statement (referred to in the Disclosure Document as the “Average Operating Cash Flow Statement”) consists of the average sales, expenses, and operating cash flow of certain Great Clips units. The statement is based on a sample of 2,494 units that were open one year or more as of January 1, 2020, and operating as of the date of the 2020 Franchise Disclosure Document.

• The total eligible sample of units opened for one year or more as of January 1, 2020, consisted of 4,131 salons. The sample was reduced by eliminating any unit for which Great Clips had insufficient data to be reasonably assured of having accurate and complete expense information (1,637 units).

• In addition, six franchised units were excluded from the sample of 4,131 entirely because they permanently closed during the time period covered by the Average Operating Cash Flow Statement. Each of these six franchised units was opened more than 12 months prior to the time each permanently closed. There were no other excluded units that permanently closed during the relevant time period that were less than 12 months.

• As to the 1,637 units eliminated due to insufficient data, these units were not distributed evenly over the database, based on total sales. Of the missing salons, 673 had total sales at or above the median for the total sample and 964 had total sales below the median for the total sample. If all 1,637 of these salons had been included in the sample, it would have reduced the median total sales in the sample by 4.7% and the net operating cash flow by a somewhat larger percent.

• The sales and expense data used in the preparation of this table was taken from actual unit operating statements, provided by the franchisee, for each unit in the sample. The time frame or accounting period of these operating statements was the most current available to Great Clips, but, in some cases, did not match the exact time frame from which sales figures were drawn. Therefore, some information was annualized to extract a full year worth of data.

• The methodology used was to calculate each unit’s reported expenses as a percentage of total sales, then to apply this expense percentage to the total sales for 2019 to compute the operating cash flow figure. Great Clips feels that this is the method that produces the fairest representation of the current operating averages for these sample units.

• Where sales and expense data was reported by franchisees to Great Clips in Canadian dollars, Great Clips converted the reported Canadian dollars into the U.S. dollar equivalency by using a conversion rate of 0.75 (i.e., Great Clips took the average of all months’ conversion rates for 2019 as reported on the last day of each month by www.oanda.com).

• The following average operating cash flow information is based on operating results of units in operation since at least January 1, 2019.

Revenues