Area Developer 50: Supercuts

A Different Franchise Strategy

In the $150 billion worldwide hair-care industry, Regis Corp. rules the roost. Regis has 55,000 corporate and 33,000 franchise employees in its more than 11,000 salons worldwide. Company brands in North America include Regis Salons, MasterCuts, Trade Secret, Supercuts, and Cost Cutters. (The company has about 60 brands gloally.) Regis owns a four percent domestic and two percent worldwide market share and predicts $2.4 billion in revenue in fiscal 2006.

Its Supercuts brand salons, located in open-air centers, target mainly males looking for an affordable, contemporary haircut. As of 2006, there were 952 franchised and 1,039 company-owned Supercuts salons.

Supercuts was founded in 1975 in the San Francisco area and began franchising four years later. After a decade of well-chronicled ups and down beginning in the mid-1980s, Supercuts was acquired by Regis in 1996. At the time of the purchase, franchised salons accounted for about three quarters of the 1,200 Supercuts stores. Today they make up just under half of the company's approximately 2000 stores. What happened?

One of the reasons brands franchise initially is to raise cash. "We're on the opposite side of that. We have lots of cash," says Mark Kartarik, president of the franchise division of Regis Corp.

Theoretically, he says, franchising has an infinite return on investment. (Since there is no investment, you're dividing by zero.) And for its no-investment, the franchisor receives fees and royalty income of 6 or 8 percent off the top. (The overhead is the franchise organization, so the investment is not truly zero.)

For a corporate store, build-out costs are $100,000 to $150,000. "The returns as a percentage are lower, but the dollars are bigger, because we get them all," says Kartarik. For example, 18 percent of a $300,000 store instead of 6 or 8 percent royalties. "The long dollar is in corporately owned stores."

So why franchise at all? Why not just keep existing franchisees and expand solely through corporate stores? "We need franchises to grow the brand. We can't make our numbers without them," says Kartarik.

And for franchisees, he says, the brand's ongoing acquisition strategy is a "huge benefit" for anyone seeking an exit strategy. "We pay a very fair price and the deal is done quickly." Franchisees considering the brand see they can build a business of 3, 10, 50, or 80 stores and know there's an exit strategy, he says.

"Most of our franchisees have now become multi-concept franchisees," he says. "Historically, franchisors have said they don't want franchisees to become too big. We are not intimidated by a strong franchisee. We love the multi-unit franchisees that are stronger and smarter based on experience."

Franchisees also provide the parent with invaluable feedback and information. "The neat thing about it is that they're owners, and you relate differently to owners than you do to associates that are sort of line management," says Kartarik.

"And probably the greatest value--and I will say sometimes the greatest headache, but the value far outweighs it--is that an owner is going to tell you stuff that your mid-level managers won't say to you." That goes for all franchisees, down to those with one or two stores, he says. And he cites the advice Jim Collins in his book Good to Great, who advises companies to "confront the brutal facts." Says Kartarik, "Franchisees make any company better because of that. I'm a huge believer in that."

Regis achieves this through about half a dozen active franchisee representative councils. "I get people I could not afford to hire as consultants--and since they're franchisees, I get them theoretically for free--and if you push that issue, they pay me," says Kartarik. In exchange, he says, "I have to add a lot of value to them, because they have to be willing to serve on these councils and get something in return that's of as great a value."

What they get is access to current information and participation in discussions with key executives, where they can ask any kind of questions or put dilemmas on the table and attempt to resolve them at the highest levels. "We can disagree, but we have very healthy conversations and mutual respect--and we get a lot done," says Kartarik.

Supercuts Franchisee Mark Muscatello

"If you're not having fun in what you're doing, get out. I wasn't having fun working for somebody else," says Mark Muscatello. Looking for a way out, he bought his first Supercuts salon in 1989, with his wife Sandy. Today they have 20 salons in Massachusetts, New Hampshire, and Maine. They are about to open their 21st salon, and he's predicting 25 by the end of 2007.

"It seems like we've grown slowly. We're pushing 20 years now, about one a year average. But for me that made sense. We'd open three or four and take a breather," he says.

"The biggest thing as a Supercuts franchisee is that so much of our growth is dependent on operational structure and our ability to put people in place to run the stores. We are only as good as our worst manager," says Muscatello. "I could open 10 locations a year, but I don't have the people or the management to operate them."

This holds at two levels: for the corporate office in North Andover, Mass., where a good employee is apparently hard to find, as well as for the stores themselves. "For every store you open, you have to have a staff and someone to run that store for you--that is the more difficult of the two," he says.

Still, they have managed to find good people who have stayed. "One of the beauties about our business is that it's family. We have people with us 14 to 15 years as stylists and managers," he says. And their bookkeeper is not far behind in the longevity column. One reason might be his favorite quote (see "Up Close" profile, below).

Their approach to the business could be called cautious, but perhaps prudent would be more accurate. For the first four years of opening stores, he worked full-time sales jobs. "We did not take a paycheck from the business until we had five stores, and my first salary that year was $30,000 gross. We put money right back into the business. Anything we were able to make, we kicked back into opening stores."

Their working philosophy, he says, is to have no partners. "Many of the Supercuts franchisees from the beginning started with limited partnerships and expanded with other people's money--which was smart business," he says. Muscatello invokes his Italian upbringing and being very conservative in his attitude toward business, and is fine with the results.

"Knock on wood, it's worked out wonderfully for us, and we have a very, very strong, financially solid business. We can make decisions at the drop of a hat. We don't have to go to partners, we just do it. We can rob Peter to pay Paul if a store isn't coming up as fast as we'd like."

His wife Sandy is a 50/50 partner, but her presence wasn't a slam-dunk, according to Muscatello. "I dragged her kicking and screaming into it with a baby in her arms and a toddler running around doing payroll in our back bedroom for the first few years in our house that we refinanced to pull the first $100,000 out to get the whole thing started," he laughs.

Today Sandy still oversees purchases for all 21 stores. A lot of this function is automated now through Regis, which Mark says makes it easy to do from afar--a good thing, since they now live in southern Maine.

They had considered buying Cost Cutters salons some years back, but after Regis took over Supercuts, the brand slowly integrated color, waxing, and additional services. "We were nothing but haircuts," says Muscatello.

Although he was the first one in his large, Vermont family to attend college, "I was not a great academe in any way, shape, or form," he says. He worked his way through school, bartended, ran restaurants. "I always enjoyed working with people," he says. "It just fell into place for me to want to have my own gig. It doesn't hurt that both my grandparents ran their own businesses." One was a butcher and had his own shop, and his father, grandfather, and uncle were all... barbers.

"They told me we were out of our ever-livin' minds when they found out what we were going to do. My grandfather got on the phone and was swearing at me in Italian like you would not believe. He said I was wasting my and he never made a dime, this is a lousy business," says Muscatello.

"He was behind the chair for over 70 years, and that was his perspective. He just looked at it and said, 'What are you doing?' He didn't understand the business from anywhere but behind the chair, and that's not where we were going. A few years later, I dragged him from out of Vermont, stood him in one of my big stores, and he stood there with his mouth grinning from ear to ear for an hour at the back of the shop, watching a hundred people go through the door. He got it."

Mark Muscatello: Up Close

Memorable first job: Ice man. I delivered ice from sixth grade through high school in Rutland, Vermont.
Professional tip: Go for it.
Key education: Working in the business, because you do everything--basically the customer service aspect of it.
Role model: My father, the barber
Currently reading: I am probably the worst guy in terms of reading books. I read magazines all the time. What's sitting on my desk is Inside Lacrosse. It's a beautiful magazine, phenomenal. I read it cover to cover.
Others say you are: I don't know--because I don't care.
Business news sources you regularly read: All types of business magazines, from Forbes to anything I can get my hands on--Time, Business Week. I like small snippets as opposed to books.
Favorite web site (besides your own): I go there at least once a day. It's my what I do instead of Three years ago I founded an organization called New England Select Lacrosse League ( It's a nonprofit that runs 42 youth teams on the select level throughout Massachusetts, New Hampshire, and Rhode Island. We've got over 900 kids in the program.
Franchise systems (besides your own) that are creative: I have always admired, believe it or not, Dunkin' Donuts. Because it doesn't matter what kind of competition comes their way, they will figure out a way to grab any threat and capitalize on it.
Favorite quote: It's posted in my office on the wall, and it's how we run the company. It's from Mary Ann Allison, and I have no idea who she is: "Hire the best. Pay them fairly. Communicate frequently. Provide challenges and rewards. Believe in them. Get out of their way--they'll knock your socks off." We've had that up for years. I also like, "There is always a bull market somewhere," from Jim Kramer.
Best advice anyone ever gave you: Keep the ball forward. It may slow down to a crawl every once in a while, but as long as it's moving forward, you'll be fine!
Best advice you ever gave anyone: Ditto above--all the time!
Biggest project for the year: Keeping the ball moving forward!
What you do to unwind: Spend quality time with my business partner--my wife.

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