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Get Four
|  | DECEMBER 17, 2004
A Way to Turn Gray to Green The founders of Profound Beauty discuss their innovative strategy for keeping sales of their hair-care products strictly in salons Five years ago, Bob Salem, a former marketing vice-president for Aveda, the high-end hair-care manufacturing subsidiary of L'Oreal, and beauty industry veteran Nikos Mouyiaris made a discovery. The key to solving the embarrassing and pervasive problem of products designed for salons ending up in drugstores and supermarket chains wasn't with the manufacturers. It was with salon owners (see "A Gray Streak for Hair-Care Goods"). "The salon owner and hairdresser weren't making it as businesspeople," so they tried to boost profits by selling, says Mouyiaris, who teamed with Salem to change the system drastically with the launch of their new company, Profound Beauty, based in Long Island City, N.Y. Industry sources estimate that losses from so-called "product diversions" amount to $800 million annually. So manufacturers have an urgent need to remove the temptation for salon owners and hairdressers to sell salon-only products out the back door to rogue distributors, who then resell them to mass marketers. ANATOMICAL RECOMMENDATION. While rivals such as John Paul Mitchell Systems have been unable to effectively prevent product rip-offs, Salem and Mouyianis have devised an innovative product and marketing incentive system that seems to work (see "'This Is Robbing Us of Millions'"). Their shampoos, conditioners, and styling products, available since April, are identified by formula number (not name), and carry distinctive co-branding. The names of the salon and manufacturer are featured prominently in the packaging. So client purchases of Profound Beauty products are solely at the discretion of the salon owner or hairdresser, who makes a professional recommendation based on the client's hair "anatomy," Salem says. The product's labeling doesn't give consumers any clues about what it does. Profound Beauty also has received approval from the Securities & Exchange Commission to sell Class A stock rights to salon owners and their staffs who sell their products. That will give them an extra incentive to make a sale themselves instead of reselling to a rogue distributor, because they're increasing the company's value. The result? To date, as far as the founders can tell, none of the company's products have been diverted. "Ask us in 10 years, and I expect the answer will be the same," says Mouyianis. The two executives recently spoke with BusinessWeek Special Correspondent Ann Therese Palmer. Here are edited excerpts from their conversation: Q: Why did you found Profound Beauty? Mouyianis: I've been in this industry for 30 years. I saw how the business was evolving. The salon owner and hairdresser weren't making it as business people. I looked at the weaknesses of the brands. We determined that if we were to somehow help the salon owners stop diversion, that would help them quite a bit [by allowing them to sell] more shampoos and conditioners through their salon. With...Professional Brands, we [also] put the name of the salon on the product [so] the products can't be diverted. Salem: We've also accomplished two more objectives with this idea. Some salons want to sell a global brand. Other salons want to market their own name. By co-branding, we're providing one product that does both. Q: How did you come up with the idea of giving your customers stock options? Mouyianis: I'm a Greek Cypriot. Growing up in a small town in Cyprus, I talked to my uncle who was the president of the village cooperative. Many of the residents have shares in the local market. So everyone shares in the creation of wealth. But the only way that they create wealth is by all buying from the co-op. Everyone works within the co-op to make it stronger. I borrowed this idea for Profound. Salem: Twenty percent of the company will be actually owned by the salon owners and their staffs through a Regulation A securities offering that became effective May 18, 2004. We will make the first grant of options on Jan. 8, 2005 to these participating salon owners and their staffs. Q: Tell me about the products' names. Salem: They were designed so that only a professional would understand their application and relevance to the client. It was my idea to use only numbers on the shampoos, conditioners, and treatments. Our styling products do have some names. The [labels] mean nothing to the client. That's by design to avoid [consumer] self-selection of the product. Q: How much more does this cost than other comparable products? Salem: All I can tell you is that it costs more, but it protects the integrity of the professional recommendation of the hair stylist. That's not for sale in the mass market. We don't want our competitors to know exactly how much more. Q: Since you launched this line, has any product been diverted that you know of? Salem: No. It can't be. Every saleable bottle that leaves this company has the salon's name. There's no expression of features and benefits. We tell the client to ask the professional in that salon if this product is appropriate for the client. The hairdresser is recommending our product for a special use, the client's specific hair. Q: What feedback are you getting from the salon owners? Salem: They love this system. The clients love the products, they report. That's the cost of entry. We don't [yet] have [definitive] results of first-time customers as repeat buyers. [But] indicators so far are that our repeats are close to 100% based on anecdotal evidence from salon owners and their reorders. Q: Have you been contacted about your approach by other companies, such as Aveda or Paul Mitchell? Mouyianis: No. Q: Why is it that no one came up with this before you? Salem: It took us five years to come up with this. We began the project by looking at the hairdresser and the salon owner, not the brand. We built the company around the trust that their clients place in them. That's how we built the company. Q: How much have you produced and distributed, so far? Salem: In April, the company started manufacturing and shipping a line of 20 shampoos, conditioners, and styling products to 15 salons nationwide. Today, our business is growing exponentially. We're in hundreds of salons. I've never seen any product line in direct distribution grow this quickly. The secret is, we don't go through distributors. We build our relationships directly with salons. Because the brand, Profound, is given value through the recommendation of the professional, the professional is involved intrinsically in the worth of the brand. This is the first-ever branded product that systemically ends [product] diversion before it can begin.  Edited by Thane Peterson
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